Report Of The Independent Review Of CentrepayBy Anna BudulsReport To The Secretary Of The Department Of Human Services, Australian GovernmentJune 2013Kathryn Campbell Secretary of the Department of Human Services PO Box 778 Canberra BC ACT 2610

Dear Ms Campbell

It is with pleasure that I present to you the final report of the Independent Review of Centrepay.

The Review involved talking with stakeholders from across the country, and from many different sectors. We met with stakeholders in Melbourne, Sydney, Canberra, Mildura, Mossman Gorge, Yarrabah and Cairns and had numerous other telephone conversations with stakeholders in capital city and remote locations. Additionally, we received 34 written submissions from consumer advocacy bodies, government authorities, community service providers, businesses using Centrepay and individual customers of Centrepay.

During the course of the Review I received extensive assistance from Departmental staff, particularly in the provision of data about the current operations of Centrepay, and would like to acknowledge the many hours they took in briefing me on the minutiae of how the current scheme works.

The report enclosed contains recommendations based on the Minister’s Terms of Reference for the Review, as well as a range of additional recommendations about improving the business model and risk management practices of Centrepay. These have been informed by submissions and presentations made to us throughout the Review process, and through independent inquiry into relevant business and regulatory practices elsewhere in Australia and overseas.

It became clear early on in the Review process that Centrepay is a highly valued service offered to low income households across Australia, however at present it is only utilised by less than 10% of the total Centrelink customer base. The concerns of many consumer advocacy groups about the practice of, and potential for, exploitation of financially vulnerable people by some

unscrupulous operators have been addressed within the report’s recommendations. Importantly, with the investment of additional resources and reform of some existing practices, notably in risk and compliance management, contract management and monitoring, and education about and promotion of the scheme, it could be of significant financial and social benefit to even more of the Centrelink customer base.

Thank you for the opportunity to contribute to improving the wellbeing of Centrelink customers across Australia through improvements to the Centrepay scheme.

Sincerely,

Anna Buduls

Acknowledgements

Thanks to Dr John Falzon of the St Vincent de Paul Society National Council of Australia for his assistance during stakeholder consultation forums and contributions to reviewing the report. Also, special thanks to Chris Black for her work in summarising the written submissions received, and her great assistance with the drafting process.

This report could not have been written without the deep, positive and freely given cooperation of the Department of Human Services, and it draws on a wide range of operational data held by the Department. I would like to particularly thank those officers at the Department of Human Services who assisted in the compilation and provision of this data, and the many hours they took in explaining the historical development and operational processes of the Centrepay scheme.

The development of the report and its recommendations would also not have been possible without the guidance and cooperation of staff at the Australian Securities and Investment Commission, the Australian Competition and Consumer Commission and the Australian Federal Treasury.

Finally, thank you to all those who took the time to prepare submissions to this Review and attend the consultation forums and meetings arranged in metropolitan, rural and regional areas and over the phone. Your input has been invaluable.

Executive summary

Today’s Centrepay The Centrepay scheme has grown significantly since it was first conceived in 1998, and is likely to be a $2 billion a year operation by the time this report is read. There is very strong support for it from customers, community services and welfare agencies and also from a broad range of service providers. By and large, the majority of deductions processed through Centrepay are in line with its original intent, which was to help Centrelink customers to budget and pay for their rent and utilities: in 2011/12 some three quarters of all revenues passing through Centrepay were for housing and utility service reasons.

As a financial capability tool, Centrepay impacts on the lives of almost 600,000 Australian residents and their families. And it has potential to be even more widely used by the great proportion of Centrelink customers that currently don’t know of its existence, as well as by those that currently use it but want to understand it better in order to use it for more purposes.By its nature, an independent Review such as the one carried out here concentrates on what can be improved and made better. So, despite the Centrepay scheme being popular and working well for most customers, what follows in this executive summary and in the report as a whole concentrates on shedding light on what hasn’t always been done as well as it might have, and on how to improve Centrepay’s operations and effectiveness.

The Review was called for by the Minister of Human Services as a result of growing and widely publicised community dissatisfaction with how Centrepay has sometimes been accessed by operators whose service offerings, and the manner in which those offerings were packaged and marketed, were causing financial harm to Centrepay customers. This has occurred in part because of the lack of a contractual requirement for providers to adhere to the objectives of Centrepay, as described below. However, perhaps more importantly, it has also been driven by the intentionally disconnected contracting arrangements within the scheme which have meant that there is no nexus between, on the one hand, the contractual relationships between the Department and the service providers and, on the other, the contractual relationships between the service providers and Centrepay customers. If there was a problem in the latter relationship as regards the manner of delivery of goods or services, it was up to the customer to sort it out with the service provider or to seek help from some other regulatory body.

However, at the same time, most customers saw the Centrepay service offerings and those authorised to deliver them as being endorsed by Centrelink and, in turn, the government. Payments made to service providers via Centrepay for goods and services have been associated in the minds of many Centrepay users as effectively having been approved by the government. Thus there has been a mismatch between the Department’s hands-off approach to arrangements between the customer and the provider, and customers’ expectation of there being a tacit government endorsement of those same arrangements. This hands-off approach has at times left highly vulnerable Centrelink customers worse-off through their dealings with Centrepay, uncertain how to raise concerns about service provider practices or how these concerns would be handled.

The Centrepay scheme today is multi-layered, extensive in its offerings and operationally quite complex to administer. However, the evolution and expansion over the years of what started as a simple budgeting tool has not always been strategically driven or closely controlled to ensure that the original policy intent of the scheme and its objectives were preserved in all circumstances. This is in part due to the fact that in order to get Centrepay up and running, the Department needed to encourage businesses to participate in the scheme, as without business participation there would be no service reasons for which deductions could be authorised. The encouragement of business participation was not, however, associated with strong messaging to businesses around the purpose of Centrepay as a budgeting and financial capability tool for Centrelink customers, and contracts with participating service providers were silent on the matter.

While the operational bias of Centrepay was overtly business friendly, there has been a lack of strong, specialised financial services and experienced commercial acumen within the Centrepay program to help guide the administration of the scheme. Such skills, while not the norm in government program administration teams, could have driven the development of more sophisticated risk management frameworks and compliance activities to match and deal with the increasing complexity of the scheme and the growing variety of service reasons and providers. They could also have better matched the skills of commercial service providers in contract negotiations. The effects of this specialised skills omission were magnified by more general under-resourcing in personnel numbers (and in their seniority) for both policy development and administration of the scheme, and equally, by a lack of investment in infrastructure and IT systems.

Centrepay is not a profit generator for the government, but it was intended that the deduction fees levied to service providers cover the costs of administration. However, there has been inadequate commercial rigour exercised around capturing costs and fixing fees at levels to cover those costs. Current internal expenditure assessments around Centrepay are estimates of the marginal extra costs associated with the running of Centrepay within the larger Centrelink universe. Examination has revealed that the marginal costs identified to date understate the true cost of the activities and systems involved.

Further, the current resources allocated to, and the activities involved in, the administration of today’s complex Centrepay scheme have not been sufficient to ensure that all the activities that should come with the safeguarding of a government branded service such as Centrepay were adequately carried out. So not only are existing administrative costs inadequately accounted for, but costs which should be incurred for the provision of the service are at times not contemplated, and hence not included, in the current cost recovery model. These uncaptured costs relate to adequate human resources, IT systems and infrastructure investment, including for risk management. The cost recovery formula currently employed by the Department achieves its break-even aim, but it involves non-commercial fee setting for revenues and inadequate expense recognition. This revenue and cost recovery model needs to be revisited, particularly in circumstances which might result in future expansion of the Centrepay scheme.

Recommendations for the Future In the first instance, the Department needs to determine if it wants to deliver a diverse and complex bill paying and budgeting scheme such as Centrepay is now, with all the associated activities and costs that that would involve, or if it wants to pare back Centrepay to a simpler, less administratively burdensome and costly scheme, that may only involve services provided by highly regulated essential services providers such as the utility companies, and by government or registered not for profit housing providers. The responsibilities associated with, and the activities and infrastructure required for delivering these two very different versions of Centrepay are poles apart. This is a matter for government policy consideration.

The Review has taken the stance that as a complex and diversely used Centrepay already exists, and as it has great acceptance by the large majority of its users, it should be improved and then further expanded. As a financial capability tool, Centrepay has great further potential, and it is the view of the Review that

having set it up and let it grow, the government should now fine tune it, rather than restrict it. Hence the report is written on the assumption of continuing with a Centrepay scheme that allows customers to pay for a wide range of products and services from a broad range of providers. The recommendations in both this executive summary and throughout the report are aimed at making Centrepay more robust from both a policy and operational perspective, and ensuring it continues to be promoted as the government’s preeminent financial inclusion and financial capability tool.

The way forward The Government should revisit and then restate the objective behind Centrepay and then however the restatement is formulated, the agreed objective should drive all policy and operational reforms leading out of this Review.

The Department needs to treat the operations of the Centrepay system as if it were a discrete ‘business’, set up to deliver the vital government objective of helping its Centrelink customers better manage their finances. For this ‘business’ to be successful and for the objective to be delivered, the government needs the cooperation of external commercial service providers. These providers gain tangible benefits from participating in the Centrepay scheme, but in exchange they need to acknowledge that certain responsibilities come with participation in the scheme. To date, the scheme has been administered in a manner that, despite good intentions, has at times resulted in laissez-faire commercial practices harming Centrelink customers. Certain policy settings within the scheme have also sometimes inadvertently resulted in sub-optimal outcomes for customers. The Department now needs to take greater control of the Centrepay ‘business’, of the Centrepay brand and its value proposition. It needs to reorient the operations of Centrepay to better cater for and safeguard the financial welfare of its customers, particularly those that are vulnerable.

It is vital that the Department takes this opportunity to significantly increase the resources it applies to administering and developing the Centrepay scheme. The Centrepay operations require greater policy attention being paid to the ‘rule’ setting around the scheme; increased senior personnel (preferably with some outside financial services operational expertise) dedicating their time to ensure its smooth, coherent and transparent operations; a more sophisticated and tailored risk management and compliance system; and increased investment in IT and other infrastructure. The costs of this recommended more focussed and intensive administrative effort and the increased investment in infrastructure potentially could be covered through capturing the revenues that are currently foregone through the fee discounting and special conditions certain providers enjoy.

More specifically what is recommended is:

• That a thorough review of the scope, breadth and usage of current service reasons is undertaken to ensure both strategic policy intent is being furthered, and resources for ensuring both risk management and operational efficiency are appropriately deployed. The Department needs to undertake an audit of all existing service providers to ensure that the services they provide Centrepay customers are in line with the purpose of Centrepay and the Department needs to formulate

transition strategies for any customers that have contracts with service providers that might need to be exited from the scheme.

• That participation in the Centrepay deduction scheme by service providers needs to be recast as a ‘privilege’ which comes with a responsibility to help the Department deliver on Centrepay’s core objective of enhancing customer well-being through their involvement in the scheme.

• That service provider contracts are tailored in relation to their terms and the included conditions, and to the specific risk attributes of service reason categories and provider characteristics.

• That the Department devise clear and prescriptive Codes of Conduct to which all would-be providers need to voluntarily subscribe, as a means of bridging the nexus between the Centrepay contract with the provider and that of the provider contract with the customer. These Codes of Conduct would provide the Department staff with the proverbial ‘stick’ with which to threaten providers who are not abiding by the core objective of Centrepay or who, worse, are exploiting the system. Providers’ adherence to the Code would be monitored in addition to monitoring compliance with their contractual obligations to Centrelink, and any consistent or egregious breaches of the Code could be immediately acted on by the Department. The Codes could include such commitments by service providers as, for example: to treat the customer with respect and at all times to have the customer’s financial welfare at the forefront in any dealings; to ensure that the customer understands the contract with the provider and how it works; to never approach new customers via door knocking, texting or other random, uninvited solicitation methods; and to ensure that the provider’s activities in relation to Centrepay customers will not bring the Department into disrepute.

• That certain service reason categories, such as household rental goods and funeral benefit plans, have additional specific sub Codes of Conduct developed for them to which those service reason providers would need to subscribe in order to be part of the Centrepay system.

• That a combination of amendments to a variety of the current Centrepay operational rules, a more tailored and risk specific approach to provider contracts in combination with increased compliance monitoring around those contracts, and the introduction of specific service reason Codes of Conduct will greatly reduce, if not eliminate, the need for limiting the available service reasons back to essential services only.

• That an examination is undertaken as to whether the current policy directive around banning credit products but allowing leasing products is improving the financial inclusion and capability of customers, or whether the blanket ban on accumulating debt via Centrepay should be revisited.

• That measures are implemented for improved client feedback and complaints mechanisms (which will enhance the risk management function), including increased transparency and public accountability.

• That given the relative overweighting of Indigenous and remote area residents’ usage of Centrepay, special attention is paid to ensuring that the unique characteristics of these populations in terms of

culture, language and literacy levels are catered for in Centrepay operational practices and policy setting.

• That the scheme is expanded through significant improvements around the promotion of and education about Centrepay, and targeting increased uptake among the most financially and socially vulnerable Centrelink customers.

How to fund the recommended initiatives Currently there are in excess of $5 million in revenues foregone annually as a result of special service provider contract conditions. These include discounts on published deduction fee levels and monthly invoicing of fees rather than deduction at source.

It is recommended that the Department review all contracts that include either one or both of the special contract conditions of discounted fees and monthly invoiced payment of fees, to establish: if the economies of scale purported to exist in association with the contracts actually exist as far as the Department is concerned; that there are real systems impediments at the provider end to necessitate monthly invoices; and, most importantly, that from a policy perspective, if encouraging some providers over others with reduced fees is helping to facilitate the objectives of Centrepay.

Implementing recommended initiatives A range of the recommended initiatives were under consideration by the Department prior to the commencement of the Review, but were put on hold pending the findings of this Review. Through the course of the Review the lines of communication between the Department and the Review have been very open and transparent. As a result, it was gratifying to have observed that the Department has already commenced on a variety of activities and investigations in preparation for implementing some of the recommendations contained in this report. It has also already restructured the divisional ‘ownership’ of the Centrepay scheme and how the scheme’s reformulation will be driven in the future.

Implementation of many of the more substantial Review recommendations will require careful planning, testing against policy and commercial considerations, and the marshalling of resources from within a Department that is undertaking many other large reforms, including the four year service delivery reform.

In conclusion Australia is lucky to have a comprehensive, free bill paying and budgeting system such as Centrepay. Its introduction has helped many, many individuals to run more ordered and less stressful lives and to be more in charge of and on top of their financial affairs. It is now time to reformulate and refocus on the Centrepay scheme’s objectives, and to introduce policies and systems that will reinforce and expand on the reformulated intent. Such reforms will enable an even wider cohort of Centrelink customers to participate in the significant benefits presented by this flexible and valuable financial capability tool.

Introduction The Minister for Human Services, The Hon. Senator Kim Carr, announced on 12 November 2012 that he had asked the Department of Human Services to initiate an independent review into the operations of Centrepay, the Government’s bill-paying service for people receiving a Centrelink payment. The Minister noted that it was timely to review the operations of Centrepay given it had not been reviewed since commencing operations in 1998, some fourteen years earlier. Following this announcement, Ms Anna Buduls (Non-Executive Director of various organisations including SAI Global and the Foreign Investment Review Board, and Member of the Australian Government’s Social Inclusion Board) and Dr John Falzon, (Chief Executive Officer of the St Vincent de Paul Society National Council of Australia) were appointed by the Secretary of the Department of Human Services to undertake the Review. The terms of reference required the Centrepay Review to:

• Examine the controls, risk management and administrative processes in place to ensure the Centrepay service is used in a way that protects people’s entitlements.

• Examine the approaches taken to ensure Centrepay is used to distribute money to legitimate organisations providing services to people on a fair and reasonable basis, and the associated contract management approaches used.

• Provide suggestions about which businesses and services should have access to the Centrepay service, and services that might be excluded.

• Look at ways in which Centrepay can be used to build the financial capability of its customers and to assist them to manage their money in the best way possible.

• Examine the complaints and feedback mechanisms associated with Centrepay to ensure that issues are resolved in a fair way.

• Examine how Centrepay relates to other financial products and services available to the Department’s customers.

• Suggest future opportunities and directions for the Centrepay service.

Input was to be sought from relevant government agencies, welfare and financial peak bodies, and community agencies as appropriate. Specifically it was requested that the Review should consult people who have used Centrepay. The input of companies, service providers and third party organisations was also considered important, as was ensuring a broad geographical range given the extensive use of Centrepay in regional and remote locations. Appendix B provides details of the consultation process undertaken with stakeholders, and Appendix C identifies the 34 organisations and individuals that provided written responses.

What is Centrepay?

Establishment and objectivesCentrepay is a free direct bill-paying service offered to customers receiving Centrelink payments. Through Centrepay you can choose to pay bills by having a regular amount deducted from your Centrelink payments. (From Centrelink website, 2013)

Origins in Indigenous housing sector Centrepay was originally developed in 1998 to provide Centrelink customers in the Indigenous housing sector with a voluntary, free, rent deduction scheme. Its establishment was announced by the then Minister for Community Services, The Hon. Senator Jocelyn Newman, at a Commonwealth State Housing Agreement meeting attended by Commonwealth, State and Community

Housing organisations and the Real Estate Institute of Australia. The intention was for Centrelink to develop a ‘self-funded’ direct deduction facility to address the ‘non-payment’ of rent and ‘rent arrears’ situations, particularly for tenants in Indigenous housing properties.

The prime driver for the Minister’s announcement was to provide a debt prevention strategy to ensure these Centrelink customers had their rent prioritised for payment from their Centrelink benefits. Problems reported in this area were considered responsible for an increase in debt levels and financial difficulty for households, often directly attributable to high bank fees and penalties and fines associated with overdrawn accounts.

In response, protocols were set up for Centrepay deductions to be made before the Centrelink payment was paid into the customer’s bank account, thereby reducing the possibility that direct debits would result in the bank account being overdrawn.

Extending Centrepay The Department of Human Services (hereafter referred to as the ‘Department’) reports that following its establishment, Centrepay was trialed for a six month period in 22 Indigenous communities across NT and WA. The scheme was considered so successful, from both a customer and community perspective, that there were numerous requests for the facility to be extended to a broader range of customers, services and businesses. This resulted in the Centrepay scheme being extended to customers wishing to establish regular deductions for other essential services such as electricity, water, gas and telecommunications.

Since that time, the Centrepay scheme has continued to develop and expand to include a greater range of essential and non-essential services under the following broad headings (or ‘service groups’):

• accommodation • education • employment

• financial • health • travel and transport • utilities • professional services • social and recreational.

Only those goods and services that meet a defined list of ‘service reasons’ in each of these groupings can be paid for under the Centrepay scheme. For a full list of the 41 currently approved ‘service reasons’ and descriptions, see Appendix D. This list may be amended from time to time, with the approval of the Secretary of the Department.

The Department states in the Centrepay Policy document that its primary objective in establishing and maintaining the Centrepay scheme was to enhance the well-being of Centrelink customers by improving their social capacity and encouraging their movement towards financial self-management (Department of Human Services 2013, p.3). They claim this objective is achieved through enabling and assisting their customers:

• to access a fee-free method for payment of their household and associated living expenses • with a means to budget and plan for their household and living expenses; and to meet their financial

commitments through the use of regular payments.

In effect, Centrepay is a direct deduction facility similar to that offered by many banks and other financial institutions. However, unlike these other direct deduction facilities, Centrepay:

• is only available to people who receive a regular Centrelink payment; • is provided ‘fee free’ to its customers, pertinently including the attribute that if the total value of

deductions exceeds the income available to be disbursed, there is no associated fee (i.e. it has no equivalent to a bank dishonour fee);

• charges most service providers a service fee of 90c plus GST (99c maximum) for each customer transaction, and this fee cannot be passed on to the customer;

• requires service providers to sign a comprehensive contract to mitigate the risks to the Department, and by implication, the customer;

• has a Centrepay Policy (published on the Department website) as it relates to participation; • restricts the types of deductions to the 41 approved service reasons which are a mix of essential

services and regular, ongoing, household living expenses.

Current service offer Components of the current service offer that provide customer ease of service and flexibility include:

• Centrepay registration or changes can be made online, via mail, on the phone or in person, either with Centrelink or with a service provider;

• Deductions can be varied by customers in the following ways; • suspend deduction amount temporarily for a maximum period of 13 weeks

• nominate a target amount and deductions will be made until that amount is reached • change the deduction amount from a specified future Centrelink payday change the

deduction amount for a specified period up to a maximum of 13 weeks cancel deductions at any time.

Providers of goods and services that wish to participate in the Centrepay scheme must formally apply and are assessed for eligibility before being approved by the Department. Once accepted, they are determined to be Centrepay ‘participants’ or ‘service providers’. Eligibility and approval criteria are outlined in more detail in Chapter 5, Centrepay Operational Processes, and may include Special Conditions, at the discretion of the Department.

No service fee for customers A key component of the Centrepay scheme is that the customer is not charged a fee for establishing or using the deductions facility, but that the provider of goods and services will pay a fee of up to 99c (including GST) per customer transaction. On the basis of deductions taking place fortnightly and the full fee being paid, a service provider would currently pay approximately $26 per annum per customer for the deductions made for a full year on their behalf. As outlined in Centrepay policy and in contracts with service providers, this fee is not allowed to be passed on to the Centrelink customer.

The Department’s Centrepay contract is with business It is important to note that the Department needs the participation and cooperation of external businesses and agencies in order for it to deliver the Centrepay objectives. The implementation and operation of Centrepay therefore requires different skill sets and competencies to those required to carry out the income distribution services more generally provided by Centrelink. The Centrepay model involves Centrelink staff interaction with the private sector in the form of Third Party Organisations (TPO’s) or service providers. As part of the application and assessment process, there are negotiations between the Department and service providers around the terms and conditions of their participation in Centrepay, collections of fees (either directly debited from the deduction made from the customer’s income payment or via a monthly invoice to the service provider), contract administration and conduct of compliance activities to ensure that service providers are complying with their contracts.

The Centrepay Contract negotiated between the Department and a service provider provides protection for the Department, but it is claimed that it also provides a level of protection for the customer, through the ‘Objective of the Centrepay Scheme’ (Department of Human Services 2013, p.6). However, no mention of the ‘Objective of Centrepay’ is included in the actual contract between the service provider and the Department. The Centrepay Policy also highlights that there is an additional and unrelated contractual relationship between the customer and the service provider, and any dispute between these two parties is one for them to resolve. The only grounds on which the Department would become involved are where there is a breach of Department’s contract by the service provider, or if the Department itself makes an error in administration of deductions.

Growth and evolution of Centrepay

Getting providers on board Since its establishment, Centrepay has evolved from a being a service that Centrelink needed to encourage service providers to participate in, to one that has been widely embraced for the benefits it offers them. In order to offer customers a national service, Centrelink staff had to actively encourage service providers to participate in Centrepay. The tone of Centrelink’s Centrepay website pages aimed at service providers is one of ‘selling’ the benefits of using Centrepay to business, with less emphasis in the messaging about the purpose of Centrepay as a money management and budgeting tool, particularly for vulnerable customers on limited incomes. The service provider web pages includes advertising of a 1800 telephone number specifically catering to helping service providers deal with any issues they have with the administration of Centrepay (while there is no easy-to-find equivalent dedicated 1800 number for customers advertised on the main Centrepay customer web page.)

While service providers have been encouraged to participate in the Centrepay scheme, its role as a budgeting tool and the effective use of the scheme has not been as widely promulgated amongst the broader Centrelink customer base. Despite Centrelink staff members’ deep commitment to looking after their customers, the overt external messaging around Centrepay has been much stronger on the service provider side of the equation than it has been on the customer side.

Internal administrative resource capacity lagged scheme growth The significant growth of the scheme both in size and in scope does not appear to have been matched with additional internal capability or resources to effectively manage the associated increase in business volume and complexity of risk management. Concerns have been expressed throughout this Review of the failure of the scheme’s rules to be consistently applied or enforced across the board, and with the growth of the scheme, some focus may have been lost on always meeting its original intent. The process of growth, while well-intentioned, appears to have been reactionary and evolutionary, rather than strategically planned and tightly controlled.

The size of the internal unit managing and administering Centrepay is 60 staff, including the national Account Management team and 35 processing staff in Hobart. Not all these personnel are dedicated to solely working on Centrepay as other deduction service responsibilities (such as Income Management) are also covered by them.

Effectively, through the growth and evolution of Centrepay, a government agency that traditionally distributed money to vulnerable customers and wanted to provide a low cost tool for those customers to budget, grew into a large new business stream that required not only strategic policy oversight and control, but also commercial insight and expertise, and even a quasi-regulatory or watchdog focus, due to the assumed ethical obligations that came with a Centrelink endorsed service.

The following sections outline the current scope and recent growth within Centrepay, based on financial data from the last three years, highlighting the importance of having comprehensive and robust business practices within a scheme that at the end of the 2011/12 financial year administered $1.8 billion of deductions for over half a million low income households.

Centrepay customers

Customer numbers In September 2007, there were some 280,000 Centrepay customers. By contrast, as at February 2013, there were 557,690 customers in the Centrepay scheme, effectively doubling the customer base in just over five years. Further, compared to two years earlier (February 2011) this represents an increase of over 14% in customer numbers, reflecting the strong growth of Centrepay usage in recent years.

Based on the Department’s 2011/12 annual report, Centrepay had 545,512 customers at the end of June 2012. Over the 12 months to the end of June 2012 there were a total of 20,864,167 deductions (or an average of 1,738,681 deductions per month) (Department of Human Services 2012a). This equates to, on average, each Centrepay customer having approximately three deductions processed from their Centrelink payments through Centrepay per month. However, the average figure masks customer behaviour that varies considerably, with one deduction per customer per month not uncommon, but some customers having 12 and 16 deductions taken out of their fortnightly payments.

Profile of Centrepay customers The following analysis of Centrepay customers is based on data provided by the Department for the purposes of this Review

Currently only 9.3% of all Centrelink customers use Centrepay and 63% of these are female. While this is a very low participation rate amongst Centrelink customers, it is an improvement on early 2011 participation rates of only 6.7%.

Separated and single people represent 67% of all Centrepay customers. When divorced and widowed people are added in, the ‘single’ person proportion of Centrepay customers grows to over 77%. It is not known if these demographics mirror the larger Centrelink population demographics.

In terms of raw numbers, the States in which the largest numbers of Centrepay customers reside are NSW, Queensland and Victoria (in that order), but the penetration of Centrepay as a budgeting tool is highest in the Northern Territory at 17.2% of all Centrelink customers in that Territory, then Tasmania at 11.7% and equal NSW and South Australia at 10.6%. Due in part to low Centrelink client usage of Centrepay in Victoria (6.8%), the national penetration of Centrepay among all Centrelink clients is only 9.3%. The penetration of Centrepay amongst Centrelink customers is also greatest in very remote and remote regions in Australia, 25% and 17% respectively, and then declines progressively through the outer regional areas, inner regional areas, until its penetration sits at only

7.8% amongst Centrelink customers residing in major cities.

The above geographic statistics also accord with proportionately large numbers of Indigenous Centrepay customers. According to a Senate Estimates Committee response in October 2012, as at June 2012 there were 81,736 Indigenous Centrepay customers who had at least one or more transaction in that month. This is equal to 15% of total Centrepay customers at that date. The average Indigenous client deduction was $184, compared to the average non-Indigenous deduction of $115, demonstrating both a high usage of the scheme and higher average payments by Indigenous customers (Indigenous Financial Services Network submission, p.10-11).

Given the relative overweighting of Indigenous and remote area residents’ usage of Centrepay, special attention needs to be paid to ensuring that the unique characteristics of these populations in terms of culture, language and literacy levels are catered for in Centrepay operational practices and policy setting.

By far the largest proportion (30%) of Centrepay customers receive the Disability Support Pension (despite this customer type representing only 13.5% of all Centrelink customers), and just over 20% of DSP recipients use Centrepay. Another group that is overrepresented as a proportion of Centrepay versus their representation as a proportion of Centrelink customers is Newstart Allowance recipients, at 20% of Centrepay customers. Similarly Parenting Payment recipients make up 16% of Centrepay customers but only 4% of all Centrelink customers. A Centrelink customer group that is relatively underrepresented amongst Centrepay customers is Aged Pensioners who make up only 14% of Centrepay customers but 39% of all Centrelink customers (full and part pensioners); only 3% of all Aged Pensioners use Centrepay.

As an aside, it should be noted that the Department has also identified that Disability Support Pension customers are disproportionately represented in pay day lending, Centrelink’s ‘Urgent Payments’ and ‘Advance Payments’. The two trends are almost working in opposite directions and there should be a drive by the Department to encourage more Disability Support Pension recipients onto Centrepay in order to reduce the need for Advance and Urgent Payments and high cost loans.

Approximately 40% of Centrepay customers receive the Family Tax Benefit, often as a second income payment in addition to their primary income payment which might be, for example, the Single Parenting Payment.

The total amount of funds disbursed by Centrepay in the 2011/12 financial year was $1.76 billion. This means that on average each customer using Centrepay had $3,354 deducted from their Centrelink payments over the year, assuming for indicative calculation purposes, that the average number of customers remained on Centrepay for the entire year.

Low customer usage of Centrepay It is evident from the available statistics that there is low overall usage of Centrepay by eligible Centrelink customers (less than 10% of Centrelink customers use Centrepay). The lack of promotion of the Centrepay scheme is argued by many making submissions to this Review as a key reason for this low

participation rate. This issue was also highlighted at the stakeholder forums attended by the Review team and at consultative forums run by Centrepay in 2012 where it was recommended by many participants that a dedicated promotional strategy is required to address this problem (Department of Human Services 2012b). The key criticism at these forums was that many low income households that would greatly benefit from the Centrepay scheme are missing out due to its low visibility within the community, and low profile within Centrelink itself. It was argued that addressing this issue would also require improved understanding of Centrepay by Centrelink staff, through improved professional development training and the inclusion of Centrepay as part of the Centrelink Service Offer. For further discussion of this issue, see Chapter 10, Promoting Centrepay.

Purposes for which customers are making deductions Based on data provided by the Department for 2011/12:

• the six most frequently used categories of deductions (by number of deductions) through Centrepay are for (in descending order):

o electricity bills o court fines o rental of household goods and rent to buy schemes o rent paid to community housing providers o gas bills o real estate agents

• the five least used categories of deductions (by number of deductions) through Centrepay are for (in ascending order): o motor vehicle registration o insurance services o work uniform, clothing and footwear o Centrelink financial services o Indigenous housing loans (to Indigenous community housing providers).

There were some variations in Centrepay deductions by Indigenous customers, based on data analysis provided in the submission by the Indigenous Financial Services Network (from October 2012 data provided by DHS). This showed that for Indigenous customers the payment of court fines was the highest usage category, followed by electricity, household goods and then funeral benefit fund.

For the total customer base, the total average number of deductions per month being processed through Centrepay in 2011/12 was 1,738,681 per month and this has grown by 7% to 1,864,123 average deductions per month in the first eight months of 2012/13. The growth rates for the largest deductions categories mentioned above in that same 8 month period were: electricity 2%, court fines 12%, household goods 12%, community housing 6%, gas 8% and real estate agents 7%.

During the first eight months of 2012/13, approximately 190,000 customers per month had deductions for electricity, 177,000 for court fines, 98,000 for household goods, 62,000 for community housing, 50,000 for gas and 40,000 had deductions going to real estate agents.

(It should be noted that the above figures do not include the rent deductions made via the Rent Deduction Scheme (RDS), through which State and Territory Housing departments receive rental payments from Centrelink clients, as this scheme is operated separately to Centrepay. However, due to the operational similarities between the two schemes, customers can cancel their RDS deductions via Centrepay. Centrelink customers who have at least one deduction from Centrepay and/or RDS are larger

in number than the population of Centrepay users discussed above, totalling approximately 734,000, with close to 200,000 customers using both Centrepay and RDS, and about 100,000 only deducting for RDS.)

Centrepay service providers

Service providers and service reasons As of February 2013, there were 13,540 service providers (or Third Party Organisations (TPOs) as they are often referred to internally) registered with Centrepay, reflecting a more modest growth of just over 4% since February 2010 (compared to growth in customers of 14% over the same period). While there is some monthly variation in the number of registered service providers, the number has remained largely stable over the past 12 months (see Figure 2).

Of the service providers that are approved by Centrepay, the service reason categories for which the largest numbers are registered are, unsurprisingly, the categories in which many small organisations or even individuals operate: 34% of providers are private landlords, followed by real estate agents at 14% of all providers, schools and educational providers 10%, child care services 8% and community housing organisations 6% of all providers.

Services to which Centrepay disbursements are made Data provided by the Department indicates that for FY2011/12 the single greatest distribution of funds via Centrepay was for housing and accommodation costs, collectively representing over 56% of all payments or $977m. This included payments for private rent, community housing rent in the general and Indigenous sectors, short term accommodation, retirement and nursing home fees, caravan and boarding house fees, and allowable housing loans. (As noted previously, this data does not include revenue deducted from income recipients for the State and Territory Rent Deduction Schemes).

The second highest category was for utilities (gas, electricity, water and telecommunications) at just under 20% or $350m, followed by payments made for access to household goods at 11% or $188m (through both rent to purchase and rental arrangements), and payment of court costs at 6% or $111m (combining infringements and fines).

The combined proportion of disbursements for housing (in various forms) and utilities, of approximately 76% of all Centrepay revenues, indicates that the scheme’s original intention of providing a means for customers to budget for their basic living needs is being achieved, at least in the case of the large majority of current customers. Adding in the category of household goods takes the percentage to over 85% which would, at face value, only reinforce the success of the scheme in meeting its original purpose. The manner in which access to household goods is currently being facilitated by Centrepay will be discussed in Chapter 8, Government responsibility in relation to Centrepay, including an examination of whether the current policy directive around credit products versus leasing products is improving the financial inclusion and capability of customers (see Chapter 3).

Disaggregating the above figures into the individual service reasons used by Centrepay, the top five distribution subcategories (FY2011/12) were:

- General community housing ($409m or 23% of all payments) - Real estate agents ($355m or 20% of all payments) - Electricity providers ($255m or 15% of all payments) - Household goods ($188m or 11% of all

payments) - Court fines ($108m or 6% of all payments).

The lowest five distribution subcategories by service reason (FY2011/12) were: - Motor vehicle registration ($750) - Work uniform, clothing and footwear ($2,619) - Insurance services ($2,914) - Centrelink Financial Services ($17,767) - Indigenous Housing Loan ($18,311).

This indicates that the quantum of funds administered through Centrepay varies markedly across service reasons and across sectors. While there are specific reasons why the motor vehicle registration and insurance services payments and usage is currently so small (in both cases, the ability of service providers to accept fortnightly payments is limited due to their payment systems being configured to only accept monthly payments), it is not clear why usage of the other categories is so limited, other than there simply being little broad demand for the goods and services.

To address these issues, the Department should assess more closely the demand for service reasons currently included in the scheme and prior to introducing any new categories, as there are real costs associated with administering an increasing number of categories. From a policy perspective, it is conceivable that after assessment the Department may choose to keep a low volume service category for a particular reason, but the analysis should be undertaken in the first instance.

Trends in dollars disbursed by Centrepay to providers The amount of funds disbursed through Centrepay has risen substantially over the past three years of operation. Data provided by the Department indicates a nearly 14% increase to $1.76 billion in the total amount disbursed in FY2011/12, compared to $1.52 billion in FY2010/11, and trends suggest that the annual increase for FY2012/13 may be of a similar quantum. However, it is worth noting that the trends of consistent growth in the 2011/12 compared to 2010/11 were not matched in the first 8 months of 2012/13. In contrast there appear to be different monthly growth rates ranging from +20% to -3% with little obvious explanation. On the basis of year to date trends, it would appear that the Centrepay scheme will have annualised disbursements of approximately $2 billion by June 30, 2013.

Size of deductions The top five average monthly deduction amounts by service reason as at June 2012 were:

- Retirement and nursing home fees ($417 average deduction) - Boarding house accommodation ($341 average deduction)

- Property management ($322 average deduction) - Real estate agents ($312 average deduction) - Private landlords ($307 average deduction)

This data indicates that payment of housing and accommodation costs represent the highest expenditure items within the Centrepay scheme, which is not surprising given accommodation is usually the largest item of expenditure in low income households’ fortnightly budgets. In contrast, the category associated with the highest number of deductions (for payment of electricity bills) is only $51.58 per average deduction, the second highest number of deductions category (for payment of court fines) is only $27.81 per average deduction, and average fortnightly deductions for household goods and gas were $72.88 and $33.25 respectively (as at June 2012). These deductions for electricity, court fines, gas and household goods all involve the customer effectively paying over time for the provision of, or paying for access to, the service or good. Utilities, for example, calculate monies owed from the past (if any) and monies owed at the end of the next billing cycle, and calculate an amount to be paid per fortnight that will settle the bill over an agreed period.

Support for Centrepay The Centrepay scheme is a service that has overwhelming support from its existing customers and from registered service providers. The following comments received through the submissions process for this Review represent the general sentiment expressed from community organisations, service providers and individual customers:

Centrepay is a highly valuable and effective money management tool. (Good Shepherd Youth & Family Services and Good Shepherd Microfinance submission)

For many people doing it tough and who regularly have budgets in the red, Centrepay is a real godsend. It’s better than sliced bread – it is one of the best things that Centrelink has ever done. People really love it and it helps people keep on track financially when so many other things are going on in their lives. (Quote from a caseworker with more than 10 years’ experience, National Welfare Rights Network submission)

There is no doubt that Centrepay is an important tool for some, to assist in managing essential expenses like rent and utilities for those on low incomes. It provides the peace of mind and convenience of having payments deducted before Centrelink entitlements arrive in a client’s bank account, and reduces the likelihood of bank dishonour fees where these services are arranged through direct debits. (Indigenous Financial Services Network submission)

The ACCC and the AER recognise that Centrepay provides many potential benefits to both consumers and businesses through the assistance it offers to consumers to manage their financial obligations and to businesses to ensure they receive appropriate payment for their goods and services. (ACCC and the Australian Energy Regulator submission)

The Victorian Department of Justice is a strong supporter of Centrepay, reporting a 98% payment rate of fines when customers use Centrepay. Centrepay is widely used by this particular Justice Department to collect monies owed and allows the customers to pay lesser amounts per week to settle their fines than would otherwise be allowed.

Centrepay is a critical component of the Victorian infringements system’s accommodation of low income fine defaulters. The scheme ensures that low income Centrelink recipients have the same opportunity as the rest of the community to expiate their infringement offences, avoid conviction and the more serious penalties that arise from fine default and prosecution. (Victorian Department of Justice submission)

In a series of national staff and customer forums run by the Department’s Engagement Planning Solutions (EPS) consulting team in early 2012, 90% of Centrepay customers indicated high levels of satisfaction. Feedback from customers indicated they found the service easy to set up and maintain, with most reporting very few problems. Comments provided by customers at the forums included:

I have my gas and phone taken out. I didn’t need to fill out a form, I just called and it was all sorted out. We have had no problems with Centrepay at all. Maybe my wife and I are lucky I know, but Centrepay has been great.

When I first heard about Centrepay I thought it was a godsend and I’ve been using it for many years. I know that all the bills are paid and all I have to worry about is looking after myself and my pets.

It saves me from going to jail. I don’t have to worry about my bills and I know I am safe. I know my bills are taken care of, I don’t have to stress about it.

It took a lot of stress off me when my mother was dying and we were so worried about everything else that paying my Mum’s bills and our bills was very stressful. Having Centrepay was a big help because it meant we could put our energy where we needed to.

The strength of support for Centrepay from all those involved in the scheme is qualified in many cases by concerns about some of the perceived loopholes and inadequacies in its operation. However, the overwhelming sentiment is that, with targeted improvements, the Centrepay scheme should be made more widely available and strongly promoted to low income households as a positive budgeting and financial capability building tool. See more on this issue in Chapter 10, Promoting Centrepay.

Breadth of purposes for which Centrepay is currently used and how it is used

Centrepay expanded beyond essential services Centrepay is used for purposes ranging as widely as a budgeting tool for the regular payment of rent and utilities to a means of paying school fees, renting/acquiring household appliances, treadmills, funeral plans, children’s meal programs at school and paying for lawnmower services. Professional service firms can use Centrepay for payment of their services, and local Councils and child care services can also be registered service providers. The Department believes that the existing list of service reasons approved for use under Centrepay provide a balance between items considered as essential living costs and a wider range of goods and services that can enhance customers’ social capacity and encourage financial self-management (Department of Human Services 2013, p.6). However, the issue of whether Centrepay should return to its earlier focus on essential services, rather than continue with the broader range of goods and services considered ‘non-essential’, was a matter of contention for many of those providing submissions to this Review.

Centrepay was originally set up to help people manage essential bills, but is now being used for more discretionary purchases. It seems that once a business is given access to the Centrepay system, there are few, if any, controls over what products it can sell through it. (Financial Counselling Australia submission)

In our view, Centrepay is best suited to managing core recurring expenses such as rent and utilities bills. This aligns with Centrepay’s original purpose as a method for covering the most essential costs automatically without the risk of these deductions overdrawing the recipient’s account… Applying Centrepay deductions to less essential expenses gives those expenses a priority of equal or greater value than rent and utilities. This seems to undercut the aim of Centrepay. (Consumer Action Law Centre submission)

In relation to this, the Australian Bankers Association submits that while consumer choice is important, they believe it is necessary to improve oversight of service providers within the system to ensure legally compliant behaviour. They also argue it is crucial consumers are not negatively impacted by their use of the Centrepay system. Their proposed solution for balancing these sometimes competing goals is through enhanced and ongoing oversight of Centrepay service providers to ensure that transactions are restricted to ‘essential household goods’ (Australian Bankers Association Inc. submission). This issue is discussed further in Chapter 9, Restrictions and Expansions.

Paying for services past and present - and ‘saving’ for them In terms of the way Centrepay customers use the scheme, sometimes it is a budgeting tool (fortnightly rent), a budget smoothing tool (utilities and school fees where large quarterly or annual bills are paid for over time), a debt repayment mechanism (NILS, legal penalties, and utilities when overdue unpaid bills

are paid off over time), and in limited instances it is also available for mortgage payments to approved institutions such as Tassie Home Loan, Adelaide Homestart and Indigenous Business Australia (IBA).

While the wording of the financial service reasons category specifically precludes schemes that allow for an accumulation of debt by the customer, the Centrepay scheme is nevertheless effectively facilitating a credit product by authorising rent to buy offerings for the acquisition of household goods. This is another issue that provoked strong views within the inquiry process, with some organisations calling for the blanket ban of rental or lease companies from the Centrepay scheme (such as Financial Counselling Australia, the Indigenous Financial Services Network and Uniting Care Australia) due to what they see as a fundamental incompatibility between the purposes of Centrepay and the provision of consumer credit. This position is supported by the Australian Bankers Association on the basis that if mainstream credit providers (such as banks and credit unions) are excluded, then this prohibition should be extended to businesses effectively operating as credit providers. However, other organisations such as the National Welfare Rights Network warn against the wholesale banning of such service providers and products, arguing that they allow customers access to some essential household items that they would otherwise not be able to purchase.

Other anomalies or apparent policy inconsistencies that have been raised around the breadth of purposes for which Centrepay is currently used include:

• The practice of utility companies in setting up fortnightly payment plans through Centrepay, with those funds eventually being used to pay off a quarterly utility bill (effectively operating as a savings plan for the customer but on which the utility earns the interest)

• Anecdotal evidence about some legal firms using Centrepay deductions for the collection of third party debt

• The principle of payment for goods and services in advance, such as for funeral and insurance plans. The issue here was one of the appropriateness of the current structures of funeral plans authorised by Centrepay, and whether they engendered financial capability and/or provided a value for money service.

Paying for future services Paying for funeral plans and insurance via Centrepay is very much a risk management issue. Most services paid for through Centrepay are associated with terms which allow for the payment to be made on receipt, or soon after, the provision of the good or service. However, there are a small number of service categories which require payment to be made well in advance of the goods or services being received, such as insurance and funeral plans, and to a far lesser extent in terms of associated risk, quarterly ‘bill smoothing’ payments to utility providers. As mentioned previously, insurance services for housing contents and car registration have not achieved any traction as a service reason category for specific administrative barriers around processing fortnightly payments, hence the risk management issues around them do not currently exist.

Funeral plans and funeral insurance have a higher risk exposure for Centrepay customers as there is the possibility that the providers may go into receivership or become bankrupt, with customers subsequently

receiving no benefit for the monies expended over many years. As has been raised in various submissions (Financial Counselling Australia, Uniting Care Australia, Commonwealth Ombudsman, Consumer Action Law Centre, Uniting Communities and UnitingCare Wesley Country SA Inc.), the terms of these long term prepayment contracts for funerals can also be onerous if any payments are missed. See Chapter 6, Risk Management and Compliance Processes and Chapter 8, Government responsibility in relation to Centrepay, for more on this issue.

Providers relying entirely on Centrepay income Another concern raised in this Review is the practice of some service providers in signing up customers solely on the basis of the availability of Centrepay deductions, with no anticipation of customers having any other income stream or being able to settle their contractual arrangements via alternative means. As the Centrepay policy document and service provider contracts are silent on this matter it means there is nothing in their contracts to disqualify this model from operating.

There is evidence that some rental goods providers have based their entire business model on the basis of Centrepay deductions being the only possible payment means for the appliance rental. There are serious policy issues that arise from this. If the customer goes off Centrelink benefits as a result of gaining employment, or has insufficient funds to meet the rental contract deductions due to having to pay back Advance or Urgent Payments, for example, it is quite likely that the customer’s contract with the rental company will be breached due to having no available Centrelink income. This can result in additional financial penalties being imposed or repossession of the goods, despite many months or years of rental payments having already been made by the customer.

The Department should consider reviewing its policy and contract documentation to specifically address the practice of service providers basing their business model exclusively on the assumption of generating all revenues from ongoing access to Centrelink income through the Centrepay scheme.

Limiting access to a service on the basis of compulsory Centrepay deductions This concept has been entrenched by State and Territory housing department for Centrelink income benefit recipient tenants via the arrangements that exist for the Rent Deduction Scheme (RDS). In the case of Centrepay, examples have been given of Aboriginal hostels in remote areas only providing a service on the proviso of a Centrepay deduction contract being signed by the client. Presumably aged care facilities have a similar stance in relation to their customers if they rely on income benefits as their sole income source. In addition, there have been reports that authorised drug and alcohol rehabilitation units will only take on Centrelink clients when they agree to have 75% of their benefit deducted via Centrepay to pay for the in-house rehabilitation service for six to eight weeks.

The policy issues involved with allowing a rehabilitation service to require a compulsory deduction authorisation for a finite period of time or a nursing home requiring payment for its residential services are quite different in nature to endorsing a rental company charging rental payments in perpetuity, and

operating solely on the premise of Centrepay deductions for its revenues. However it would be prudent to develop a formal process through which permission must be sought and granted by Centrepay (based on specified criteria) before such compulsory deduction can be part of a service offer by housing providers, drug and rehabilitation or nursing home facilities.

Limited use by some essential service providers As well as concerns about the inappropriate extension of service reasons for the use of Centrepay, there were also concerns raised about the limited use of Centrepay by certain sectors that are arguably providing essential goods and services, such as motor vehicle registration and insurance products protecting valuable assets. Financial inclusion requires people to be able to access financial services such as insurance products in order to mitigate the risk of loss of property or life. In some cases it appears that there are logistical and/or administrative reasons why these service providers are not making greater use of Centrepay for their clients. (For example, both motor vehicle registration authorities in most states and territories and the majority of insurance providers are currently unable to accept fortnightly payments due to processing system limitations).

The Insurance Council of Australia advises that the feasibility of making extensive system changes is prohibitive for most of their members, and instead they are lobbying the Federal Government to invest in changes to the Centrepay system to allow it to administer monthly payments. Ongoing discussions are being held between Centrepay and all State/Territory Transport Authorities to resolve the issue of motor vehicle registration payments, and the ACT Transport Authority has a Business Application pending with Centrepay while administrative issues are worked through. Some customers, particularly in remote areas, have also found that while the service reason categories might exist, their local service providers aren’t necessarily registered with Centrepay. This means that the theory of having access to Centrepay as a budgeting and financial capability tool is not always matched in practice. The Department could consider targeting service providers in particular ‘essential service’ categories to increase the reach of Centrepay, particularly into remote communities.

Centrepay as a tool for increasing financial capability As mentioned in Chapter 2, ‘What is Centrepay?’, the primary objective of the government in establishing and maintaining the Centrepay scheme was to enhance the well-being of Centrelink customers by improving their social inclusion and encouraging their movement towards financial self-management. Centrepay has also been one of the tools various governments have utilised to help minimise the incidence and impact of financial exclusion.

Financial exclusion Financial exclusion makes day-to-day money management difficult. Individuals find it harder to plan for the future or manage ‘lumpy spending’ such as large bills or unexpected expenses. Individuals become more vulnerable to financial stress and can fall into a spiral of debt, hardship and poverty. The range of costs to individuals associated with financial exclusion, particularly those with a lack of access to credit facilities, include:

• limited ability to smooth ‘lumpy’ or unexpected expenditures leading to serious hardship, including going without food, fuel, school uniforms, disconnection from utilities and increased social exclusion;

• increased use of sub-prime lenders, and household goods rental companies, with high costs, confusing and punitive terms and conditions, being drawn into a cycle of borrowing and debt, stigmatisation, and negative impacts on household budgets and quality of life; and

• long-term impacts such as no opportunity to build up a positive credit history to allow transition to mainstream services, and a decrease in financial capability. (Whyley cited in Treasury 2010, p.12)

Financial services provide individuals with flexibility in accessing money and are important for people to manage their day to day expenses. Access to moderate amounts of credit and insurance is important to enable people to manage their cash flow and meet lumpy expenditure (such as large bills) or unexpected costs (such as funerals or emergencies).

The Centre for Social Impact identified key barriers such as the provision of identity documents, distances from branch outlets and literacy issues as impacting on people’s exclusion from financial services (Connolly, Georgourous & Hems, 2012). The report also raised the lack of access to mainstream credit products as a key issue. Barriers for people in accessing credit included: • insufficient income; • poor credit records; • inability to provide documentation; • residency; • unstable accommodation; and • age.

Options for people who are low income earners and/or who are unable to access mainstream financial service credit products include high cost short term lenders and leasing companies, nongovernment organisations and, for people who are customers, the Department itself.

Financial literacy Financial literacy, in turn, is about understanding money and finances and being able to apply that knowledge confidently to make effective decisions. Good financial literacy skills help individuals and families make the most of opportunities, meet their goals and secure their financial wellbeing, as well as contribute to the economic health of society.

Improved financial literacy can increase economic participation and social participation, drive competition and market efficiency in the financial services sector, and potentially reduce regulatory intervention. As noted in the submission from the Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA), there are currently a range of government-funded programs and services for those on low incomes at risk of financial exclusion to improve their financial literacy and build self-reliance. These include Indigenous Community Links and the Financial Management Program, offered through over 750 non-government organisations nationally.

Other financial services available from Centrelink Centrepay is part of a suite of services Centrelink currently offers its customers. These include Advance Payments and Urgent Payments, which are briefly described below because of the impact they potentially have on Centrepay deductions.

Advance Payments are a key feature of the Department’s on-line service offer for Centrelink clients. They are not an additional payment but are a lump sum pre-payment of a social security entitlement or family tax benefit that is later recovered from the recipient. Advance Payments effectively provide a Government funded short term credit facility at no cost to the customer. This provides low income earners and families, who are Centrelink customers, access to their payments more flexibly, much like a line of credit but without interest

Urgent Payments can be accessed by customers who already receive an income support payment when they are in severe financial hardship as a result of exceptional and unforeseen circumstances. Customers can claim the part of their income support payment accrued since their last regular payment. As Departmental payments are paid in arrears, an Urgent Payment is payment a customer has already been assessed as entitled to. Because the Urgent Payment is issued and recovered in the same pay period, there is a risk the customer's financial hardship may intensify or be extended. Advance Payments effectively allow the Centrelink customer to take an advance of their scheduled benefits payment, which then needs to be paid back over a six month period. Urgent Payments allow the customer to draw down on the current fortnight’s payment ahead of time, but then the customer’s benefits for the upcoming next fortnight are commensurately reduced. Use of both ‘prepayment’ facilities generally helps customers with financial management, but can also be indicative of the customer’s inability to manage their finances, as they can become self-perpetuating with the customer never getting ‘ahead’. They can also result in Centrepay deductions being turned off as the Advance and Urgent Payment repayment schedules take precedence over Centrepay deductions.

Where Centrepay sits in the repayment hierarchy and more general hierarchy issues Whilst Centrepay is an integral and important tool in the government’s suite of financial capability offerings, the Department’s ranking of it in their hierarchy of the deductions that are taken out of government funded income benefits nevertheless indicates it is seen as an add-on, facilitative service. The Centrepay Policy states that ‘Centrepay deductions are the last amounts that will be deducted from the total amount of a customer’s Centrelink payment. Amounts that will be deducted before Centrepay deductions include: any advance payment recovery; any repayments of existing debts to the department; any child support payments; tax; income management accounts and rent deduction scheme amounts.’ (The Rent Deduction Scheme (RDS) is a separate deduction scheme that the Department has with State and Territory government housing departments and operates in a manner similar to Centrepay deductions, with monies going out to housing departments for rent prior to remaining benefits being deposited in customers’ bank accounts.)

One of the protocols associated with Centrepay deductions often overlooked by the customer, in addition to the overall Centrelink hierarchy of deductions mentioned previously, is the first in/first paid rule. If a customer has authorised several Centrepay deductions, these are applied in accordance with the order of receipt of the deduction authorisations, unless the customer expressly directs otherwise. This is not a widely known feature of the system, and should be better publicised so that customers can thoughtfully manage their deductions in times when overall income might be insufficient to cover the totality of deductions in a fortnight.

The first in/first paid rule applying to Centrepay deductions is not consistent with the hierarchy of deductions instituted in the broader Centrelink system in as much as Centrelink prioritises RDS payments above Centrepay deductions, but housing/accommodation costs do not get afforded the same priority within the Centrepay scheme itself. Conceivably, when there are insufficient funds to meet all deduction obligations in a fortnight, non-housing services and goods deductions may be paid while, say, a community housing deduction is not if it was authorised most recently. The Department should consider reviewing this rule and practice to establish a priority of deductions system more aligned with the overall objective of Centrepay and with Centrelink broader practice, and to potentially privilege essential (housing and utilities) deductions over less essential deductions.

Financial services and products aimed at increasing financial capability Currently there is a lack of mainstream financial services and credit options for households managing on low incomes, particularly in times of need, and this can lead customers to resort to high cost loans and payday lenders. Centrepay as an alternative to these high cost financial options should be facilitated where possible, in association with NILS and similar offerings. In the April 2012 Australian Government Treasury discussion paper, ‘Strategies for reducing reliance on high-cost, short-term, small amount lending’ the following statistics were cited:

Approximately 40 to 49% of small amount loan customers have annual incomes of less than $24,000; between 50 and 74% of small amount loan customers have annual incomes of less than $36,000; 50% of small amount loan customers are partially employed or unemployed; and between 46 and 50% of small amount loan customers are in receipt of government benefits (Australian Government Treasury 2012).

At the same time, less than 10% of Centrelink customers use Centrepay for managing their money. There is clearly an opportunity here for expanding Centrepay coverage and reducing reliance on financial products that are not in the best financial interests of low income households. But building financial capability requires a range of responses. Programs such as financial counselling, community education and microfinance also form an important part of this. Good Shepherd Microfinance runs the largest community microfinance program in Australia, delivered in partnership with 258 accredited community agencies, the National Australia Bank (NAB) and the Federal Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA). Their three microfinance products are:

NILS®, the no-interest loan scheme, was developed by Good Shepherd Youth & Family Service in 1981 and is available at over 400 community organisations nationally. NILS is a community-based loans scheme where no interest or charges are incurred on loans capped at $800 to $1500 depending on the purpose. The scheme operates on the idea of circular credit, where repaid funds are recycled and lent out to others in the community. In 20092010, the capital base for NILS was over $17 million and in 2011/12 it was just over $20m for 21,000 loans. The capital is provided by both the NAB and FaHCSIA. The NAB has provided over $23 million in capital funding for 200 NILS programs nationally and covers the cost of any losses and defaults for these programs. NAB also provides in-kind support by way of forums and training as well as administrative and product development support. Centrepay deductions can be used to facilitate NILS repayments and the fees on the NILS deductions are funded by government.

StepUP is a low interest loan developed by Good Shepherd Youth & Family Service in partnership with the NAB. It is available in 32 locations in Australia. Applications are received at community organisations and then sent to NAB for processing. Clients take out a credit contract, and a credit check is performed. StepUP allows people to establish a credit history with a mainstream financial institution, and was designed as a pathway into mainstream banking. In 2010, there were over one thousand StepUP loans approved. StepUP is primarily funded by NAB, which provides most of the operational funding as well as all of the capital for programs. AddsUP is a matched savings program also developed in a partnership between Good Shepherd Youth & Family Service and NAB. After successfully paying off a NILS or StepUP loan, borrowers can open an AddsUP savings account and have their savings matched by up to $500 once in the twelve month period. Referrals are sent through from community workers, with the account opening and matching process conducted at NAB. This program too is fully funded through NAB.

The Good Shepherd Microfinance and NAB partnership has allowed for a much greater reach of microfinance nationally. There has also been significant investment by state governments and FaHCSIA. In 2009 FaHCSIA provided $18.5 million for microfinance expansion and support, including grants to accredited providers of NILS, an increase in StepUP service locations and the expansion of AddsUP as part of the Federal Governments stimulus package. The 2011 Federal Budget further supported this with a commitment of $25 million over four years (Corrie 2011). Other microfinance and savings programs, such as the Saver Plus and Progress Loans schemes offered through the Brotherhood of St Laurence and a matched savings program offered by Kyabra Community Association, do not currently receive the same fee exemptions from Centrepay, and it is claimed that this acts as a barrier to greater client uptake (Brotherhood of St Laurence submission, Kyabra Community Association submission). In order to establish a fair playing field amongst community schemes, the government should offer equal deduction fee absorption to those microfinance and savings programs that meet an established set of criteria for addressing financial inclusion of low income households.

Centrepay as a budgeting tool In recent research, Good Shepherd Youth & Family Services highlighted the importance of Centrepay in helping people to manage their money and providing payment options for people on low incomes (Corrie 2011). The report noted that the use of Centrepay was preferred to direct debits because authorised household expenses are deducted from welfare payments before they arrive at the financial institution, and this allows Centrepay customers to manage their money better. The vast majority of customers appear pleased to have access to Centrepay as a budgeting tool that allows them to have vital living expense deductions made from their benefits payments, leaving them with only discretionary expenditure to worry about. The ‘set and forget’ nature of Centrepay deductions relieves stress and worry for customers.

I love Centrepay, you don’t know it but bills are being paid all at one time. Centrepay is awesome I’m on top of my bills. (Individual submission) [The great positives of Centrepay are] the ability for clients to keep on top of their bills without the worry of having to remember each payday…Centrepay allows the client to rest easy knowing their bills are getting paid. (Quote from an outreach money management worker in Broome, WA, from the Indigenous Financial Services Network submission) You’re already budgeting for your rent, power and phone then all you need to worry about is what you have left. You can go and get groceries and whatever else you need. Centrepay takes care of all the important things. It’s a little bit of security for you. (Customer at EPS Forum 2012)

The same ‘set and forget’ feature, however, can lead the vulnerable, who may have signed up for deductions that they did not fully understand or cost, to become even more vulnerable. These issues are highlighted in two case studies provided in the Consumer Action Law Centre NSW submission:

‘Angela’ is a single mother, survivor of domestic violence and the sole carer of her 3 children. Angela’s only source of income is Centrelink payments. In 2010 Angela entered into three lease contracts for household goods (TV, fridge, freezer, computer and software, and a vacuum cleaner) with the same business totalling deductions of $290 a fortnight over 24-30 months. As well as being unaffordable for someone on such limited income, each contract contained terms that would require Angela to keep making payments for the entire contract period even if the goods broke down, and a very large early termination fee. ‘Veronica’ is solely reliant on a Carer’s Pension and attended an electronics retailer to purchase a laptop and accessories for her daughter. Veronica’s original application was rejected but a phone call from the sales staff to the retailer’s head office resulted in it being approved. With significant existing debts, Veronica expressed concern about whether she could afford the repayments (48 monthly payments of just over $100) but was told ‘not to worry about it’ by the salesman. She signed the contract under the impression that she could easily terminate it if she could no longer afford the goods. Payments were made for some time but ultimately Veronica found them unaffordable and applied for a hardship variation. This request was rejected by the lessor. Veronica is being assisted to apply to the Financial Ombudsman Service.

This illustrates that when managed well, Centrepay can clearly be a positive budgeting tool, however when managed poorly it can lead to further financial hardship. Affordability of goods and services purchased through Centrepay agreements, and the sustainability of repayments, are two issues that need further scrutiny at the sign up stage. Further, the Department should review which service reason categories might be inappropriate for perpetual deduction authorisations. See section below on ‘Perpetual deductions’ for further discussion of this issue.

Some barriers to financial capability

Uncapped deduction scheme The Centrepay system as originally designed only allowed a maximum of 60% of the fortnightly benefit to go to service provider deductions. That rule was removed in response to demand from community and welfare organisations and customers. The current rule only requires customers to have a positive balance after deductions, no matter how small that balance. This lack of a cap on the proportion of the recipient’s income that can be assigned to various deductions has resulted in customers sometimes having insufficient funds left for food and other basic living expenses, which clearly is not an indicator of financial capability. The effect of this can be exacerbated when Advance Payments or child support payments are inserted into the deduction hierarchy, as highlighted in the examples below:

‘Gerry’ is currently receiving an income support payment and has been seeing a financial counsellor because of his financial stress. His Centrepay deductions are approximately $230 per fortnight. After all of his deductions are taken out – including a Centrelink Advance Payment, child support and rent, there is a budget deficit of $800 per fortnight. (Case Study from Financial

Counselling Australia report, 2012 – cited in Good Shepherd Youth & Family Services and Good Shepherd Microfinance submission). I have a client who is a single mum, with a fortnightly budget deficit of nearly $400 per fortnight. She receives $1000 per fortnight in her bank account, after Centrepay and Advance Repayments are deducted. She spends $500 per fortnight in rent, and also runs a car. She has a child with a disability and is struggling to pay living costs. She has a Centrepay deduction from her Family Tax Benefit of $100 per fortnight for an electronic tablet lease. (Case study reported in Financial Counselling Australia submission)

Anecdotally, the Reviewers also heard of cases in which a household may have several income benefit recipients but only one of the recipients paid all the bills, either willingly as part of a household budgeting plan, or under pressure because others in the household did not pay their share. Explanations from both the Department and some stakeholders around the suitability of having no cap on deductions have relied on both the concept of the customer’s right to do with his or her income what they please, and from the observation that in some households where there are income sources in addition to Centrelink benefits, the household may be sensibly using the maximum deductions from benefits as its specific budgeting method, leaving the non-Centrelink income for discretionary spending. Mindful of not exerting paternalistic rules on Centrepay customers, it can nevertheless be argued that if Centrepay’s facilitation of the inappropriate authorisation of too many deductions is causing the household to become more financially vulnerable, there is a case for at least investigating those customer circumstances where more than a given percentage (perhaps 60% or 75% depending on the benefit amount) is being deducted. Centrelink could use information in its database to trigger engagement with customers regarding specific household financial circumstances to establish their ability to fund all authorised deductions.

Perpetual deductions When Centrepay was originally launched, only essential services such as rent and utilities were in contemplation and these often appropriately warranted the customer signing up for deductions to be taken out for an indefinite period. The broadening of the goods and service provision categories have not come with any restrictions on which categories can have perpetual deductions associated with them. ‘Set and forget’ arrangements for some types of deductions increases the financial vulnerability of some customers, particularly if they are paying for goods via some of the ‘leasing’ or ‘rent to buy’ arrangements currently on offer by household goods providers. These contracts can effectively mean the customer is paying in perpetuity for access to products at a total cost that is vastly in excess of retail prices. There should be a review of the categories of service reasons that regularly have perpetual deductions authorised against them. In some cases, a service reason deduction might appropriately have a time limit set against it in order to facilitate, for instance, access to genuine short term appliance leasing. In other

instances, the service reason deduction might require the publishing of an estimated total cost of good or service at the planned deduction rate before deductions in excess of 12 or 24 months are allowed within the Centrepay system. Another means of ensuring the customer becomes more aware of the cost of the deductions that have been authorised could be to require annual reauthorisation of the deduction via a statement sent to the customer listing the cost of the deductions made for that service to date. Service reason categories such as housing and utilities might be exempted. Such fine tuning of the system would need to be done on the basis of an analysis and a risk assessment of each service reason.

Statements don’t allow customers to track deductions and expenditure The current statement system operated by Centrelink does not inform customers of the detail of the deductions they have authorised to each party, the target amount or the target period, making it difficult for customers to actively utilise Centrepay as the budgeting tool it was intended to be.

Centrepay is great, but the problem we are aware of is that once the payment is set up, when the client gets a copy of their income statement, it doesn’t show what the deduction is for.

(Quote from Financial Counsellor, in Indigenous Financial Services Network submission) Clients and relevant support workers are unable to see itemised Centrepay statements. It is strongly recommended that these parties are enabled to view which payments are allocated through Centrepay. This provides an opportunity to increase financial management capabilities and facilitate financial conversations with Centrepay clients and enables Income Support recipients to exercise more agency in managing their payment. (Good Shepherd Youth & Family Services and Good Shepherd Microfinance submission) Statements provided to Centrelink beneficiaries show the total amount deducted for Centrepay, but do not itemise the amounts. This means that consumers cannot reconcile and track payments. The right to be informed is of course a basic consumer right and protection (Financial Counselling Australia submission).

Improving the Centrepay statements provided, with itemised deductions and adequate tracking of payments made and amounts still to be paid, would make an immediate and material difference to the way in which customers managed their overall household budget and provide greater consumer protections.

Rules/policy that can compound financial vulnerability The evolutionary and often reactionary nature of Centrepay service category expansion has not always been associated with concomitant risk assessment or policy validation. In combination with ‘inventive’, sometimes non-authorised, commercial practices on the part of service providers, this has led Centrepay to sometimes inadvertently steer customers to more expensive channels for the acquisition of goods and services.

When Centrepay was originally designed, one of the founding principles was that Centrepay was not to be used to pay off debts. There was a desire for Centrepay not to be used for paying accumulated credit card or payday lender and pawnbroker debts. The Department did not want its customers’ use of Centrepay to result in increased indebtedness; therefore no form of credit product has ever been officially sanctioned as a service reason, other than NILS or approved mortgage lenders. However, as mentioned earlier, customers routinely pay off court fines and overdue utility bills via Centrepay. In both cases the Department sanctioned the use of Centrepay for debt reduction as it saw the larger benefit that accrued to the customer as a result. The same reassessment has not taken place in relation to household goods. Here, with a minor exception (described below), the bulk of the deductions are associated with high cost rental or rent to buy offers, rather than with more affordable large store credit schemes or layby. Amongst the 41 service reasons are two categories ostensibly both catering to accessing or the acquisition of household goods:

Household Goods: Includes rental of basic household goods (e.g. washing machine, refrigerator, furniture etc), and rent to buy schemes where there is on accumulation of debt. Includes repair services for appliances and whitegoods. Basic Household Items: Basic items for use by household members such as retail of clothing and footwear, small appliances, whitegoods and furniture (including the lay-by of such items). Includes repair services for appliances and whitegoods.

The ‘household goods’ or rental category has over 300 service providers authorised to take deductions, with close to $200 million of revenues flowing through those deductions and 98,000 customers signed up for deductions. In comparison, the ‘basic household items’ category has less than 50 providers authorised, there are only about $2 million in annual revenues associated with the category and about 1000 customers have deductions. Amongst this category there seem to be a preponderance of NT, WA and SA providers, often community stores or local not-for profit organisations. It is unknown what contractual arrangements exist between the service provider and the customer and hence the terms of the ‘basic household items’ acquisitions are also not known. For customers wanting a fridge or other household good, virtually the only option has seemingly been the ‘household goods’ leasing category. This has meant that customers without the available cash for an outright purchase or a credit card, and wanting a fridge, for instance, have had to resort to a relatively expensive rent-to-buy provider, or to paying perpetual lease payments for the fridge rather than being able to buy the fridge from a mainstream retailer on their normal terms or paying off a credit card debt. The latter two channels, while more expensive than cash, are less expensive than the rent-to-buy and leasing options. Some examples of clearly over-inflated rent-to-buy or lease contracts are:

A household reliant solely on Centrelink income had three contracts with Centrepay deductions, where the total price of the goods was $4944 but the minimum amount payable over the two and three year terms was $20,450. Fortnightly Centrepay deductions were $485 each fortnight. The annual percentage interest rates were 147%, 65% and 99% respectively. (Financial Counselling Australia submission)

A mother of six receiving Centrelink benefits approached a ‘Rent-Try-Buy’ company to enter into hire-purchase agreements for a TV, DVD player, fridge and camcorder over a 3 year period. She signed a Centrepay deduction form for each of the five agreements of between $23.45 and $55.71 per fortnight. In total the retail price of the goods was $3700, yet she would be required to pay a total amount of nearly $8000 for them. (Financial Counselling Australia submission)

Further, as has been pointed out in several submissions, the rent-to-buy product offering closely resembles a normal debt accumulation credit purchase, but has been structured to fall just outside the regulatory boundaries associated with credit products. Thus there has been no requirement to quote effective or even approximate interest rates applying in the rent-to-buy schemes, or to inform customers (be they Centrepay customers or other customers in the broader marketplace) as to how much they might be expending on leasing the good in a straight leasing deal. Requiring this information (effective interest rates and total payment amounts) on Centrepay deduction forms would provide greater consumer protection and allow them to make a better informed judgement about the affordability (and perhaps even necessity) of purchases through Centrepay. While NILS is a more cost effective option for the acquisition of household goods, NILS loan services are not available throughout Australia, available loan funds are finite (short of the government and NAB or similar institution extending available funding), and the application process, as a result of the rigour involved, can take several weeks. By comparison, high cost, short term loans, sometimes offered by what are known as pay-day lenders, and rental agreements, both have a fast application and approval process, with consumers often able to receive an immediate cash advance or to access the goods within days. The advancing of these loans or the signing of the rental agreement can often put the customer in a worse financial position and increase their vulnerability, but the customer often feels there is no choice if there are bills to pay or a fridge needed to keep the milk cold for the kids. In addition, rightly or wrongly, many customers have limited capacity to withstand the immediate availability of cash or a leasing proposal in lieu of a possible cheaper loan approval in several weeks’ time when faced with what they consider to be an immediate requirement for a product. Retail purchases and credit or store cards are not available options to many Centrelink customers due to their lack of having an appropriate credit rating or even a credit history. However, alternative providers to those same customers gain the benefit of the regular deductions from income benefits’ payments, and in the process, inadvertently help establish a credit track record for the customer. They can also significantly improve the customer’s credit rating as a result, were this record captured anywhere.

The Department could investigate ways of providing access (with the customer’s permission) by credit rating bureaus to a customer’s deduction payment record, in order to assist them in developing a positive credit history. They could also look at incorporating telecommunication bill paying history (through Centrepay) to support credit rating assessment. Finally, in order to provide access to the most appropriate (and less expensive) finance options, the Department could review its policy settings which currently prevent customers using Centrepay for debt accumulation or layby schemes, both of which are much less expensive than some of the existing ‘rent-try-buy’ schemes.

Online access One of the tenets behind all Departmental payments is the inalienability of the benefit recipient’s right to deal with her or his income as they see fit. While philosophically justifiable, this can at times also lead to customer outcomes that do not increase financial capability and may in fact actually increase financial vulnerability. In particular, the increasing use of self-administered online deduction authorisations/changes/suspensions by customers can result in the ease of instituting or cancelling a Centrepay deduction without associated counselling, potentially leading to increased financial hardship. Stakeholders at a forum organised by the National Indigenous Coalition for this Review have reported that “it is too easy to opt in and out of Centrepay. Customers enter into an agreement to pay for food and lodging at hostels, they stay for a week and disappear, cancelling the payment for the week.” Rehabilitation services have reported similar behaviour.

The online self-service deduction authorisation facility means vulnerable customers are changing or cancelling their deductions without associated counselling and they end up in large debt or with large rental arrears and they get evicted. They are always in crisis. (Participant at the National Indigenous Coalition teleconference with Reviewers, 28 Feb 2013.)

As noted in the submission by the Indigenous Financial Services Network, a common reason for Indigenous clients cancelling their Centrepay deductions is to cover unexpected family funerals or family emergencies. However with some additional follow up by Centrelink or financial counselling, they could be referred to Centrelink Advance Payments or some other suitable support to avoid putting their ongoing rental, utility or other deductions at risk.

It is a good system, the thing is that it is still not a strong system, like clients come to see you and they say that they can pay through the Centrepay system, then set it up, the next thing you know the business has called you up two or three months later letting you know that your client is behind on this and that, and then you ask why? They tell you that the client cancelled the Centrepay deduction. (Quote from Financial Counsellor, Wilcannia, in Indigenous Financial Services Network submission)

Department statistics for the 6 months to the end of February 2013 reveal that the two most common online transaction categories were ‘Vary an existing deduction’ (which usually means suspend or decrease a deduction) and ‘Cancel an existing deduction’, between them accounting for over 70% of all

online transactions. When the smaller category of ‘Cancel a suspended transaction’ is added to these the total proportion of online transactions associated with cancelling or reducing deductions is approximately 75%. ‘Add a new deduction’ only accounted for approximately 23% of all online transactions for the period, however the numbers were trending upward over the period. By comparison, the annual percentage processing trends in Centrepay’s Central Business Services (CBS) processing centre in Hobart revealed that 58% of their activity related to new deductions, 37% to variations, 4% to cancellations and 1% to suspensions. (Statistics were not available for the processing activities that were undertaken in the customer service centres around the country, in person or by phone to them.) While some of the transactions might be cancelled due to the goods or service having been successfully paid for, at face value, the ease of online self-service cancellations and the statistics associated with them, would seem to imply that this is possibly the processing channel of choice for orchestrating extra disposable funds to hit a customer’s bank account. Given the stakeholder alertness around and frustration with this problem, the Department’s push for efficiency and cost reduction via increasing use of the online service should be tempered by the implementation of a risk management strategy to ensure that online functionality does not lead to increased customer vulnerability. The Department plans to increasingly encourage its customers to use online options so that, all other things being equal, the incidence of ‘ill-advised’ self-administered deduction changes will likely increase. The provision of more general Department sponsored information and explanation about the benefits and risks of using Centrepay may go some way to ameliorating the problem. Without removing the customer prerogative, inserting more counselling and red flag warnings into the overall system would also potentially improve the use of Centrepay as the government’s preeminent financial capability tool for the financially vulnerable.

Vulnerable customers The Department should also examine the possibility of calling customers that cancel rent deductions, particularly those that have a vulnerability indicator against them in the system. Indeed, there should potentially be a concerted effort to explain the existence and benefits of appropriate use of the Centrepay scheme to customers with vulnerability flags against them in the system, as only a little over a quarter of current Centrelink customers with a vulnerability indicator use Centrepay in 2013.

Lack of ease transferring deductions when moving between different Centrelink income benefits When a customer moves from one type of Centrelink benefit to another, the established Centrepay deductions are not necessarily automatically transferred, nor is the customer notified of the possible cessation of the deductions prior to their ceasing. The system can transfer deductions when a customer moves between pensions (eg Disability to Age) or between allowances (eg Parenting Payment Partnered

to Newstart allowance) because these are groups of common payments. But a customer cannot transfer from a pension to an allowance without having to reauthorise deductions. This can lead to payments being missed and contracts or rental agreements being breached. It is recommended that the Department investigate the introduction of better transitioning arrangements for the Centrepay deductions in circumstances where the customer would not necessarily know that the change in benefit type required a new deduction authorisation to be processed.

Lack of awareness and understanding of Centrepay The Centrepay system has not been systematically promoted to customers and even in 2013 it is difficult to find explanatory material about it in Centrelink offices. The main Centrelink website also has no quick link to information about Centrepay. This is in contrast to the more concerted promotion of the Centrepay service to service providers that has taken place from time to time. The reason given for the lack of promotion of Centrepay to customers revolves around resourcing limitations to handle increased inquiries and the resultant increased usage. However, the lack of Centrelink promotion around Centrepay means its operations and how customers use it is often not well understood (see above section on ‘hierarchies of deductions’ as an example).

I’m a CSA and I don’t promote Centrepay. It’s not in the service offer or workflows. Why aren’t we taking extra time to talk about Centrepay? (Staff quote from EPS Forum 2012) I’d love Centrepay to be marketed more instead of weekly payments which I understand are costly to administer and to me probably less effective. (Individual submission) I didn’t even know it was through Centrelink. I just thought Centrepay was through the electricity company because that’s who told me about it. I didn’t think I had much choice in the matter but now I know I can still say how much to put in. (Quote from customer at EPS Forum 2012)

Further, its usage by those who could benefit most is not maximised, and it can be misused by outside parties, inappropriately promoting it selectively for their own commercial purposes. In the 2012 EPS Customer Survey conducted by Centrepay, the two most commonly discussed issues concerned their lack of knowledge of Centrepay providers and the lack of regular updates to help them manage their deductions (Department of Human Services 2012b). No matter where or how customers discovered the service, none were confident that they understood it to the extent they required. Clearly, relatively simple customer education activities could be used to massively leverage the possible positive attributes of the Centrepay system. The education that needs to be conducted around Centrepay and how it works should also be extended to the topic of what happens if the customer goes off Centrelink benefits (either due to a breach or lack of continuing eligibility), has inadequate benefits to meet deduction commitments or due to the customer gaining employment. At the moment, the Department simply notifies the service provider that the customer’s Centrelink payment has been cancelled and it becomes the service provider’s responsibility to

contact the customer and collect any amounts owing. There is no overt notification of the customer to alert them about the need to make new arrangements with the provider. Finally, Centrelink has not strategically developed and controlled the Centrepay brand in a marketing and product attributes sense, yet customers who use it put great store in the Centrelink/government backing of it. In order to ensure that Centrepay is truly tailored as a tool for developing greater financial capability and inclusion, the messaging and branding around the Centrepay scheme needs concerted strategic effort applied to it, both in the printed and online material made available, but also in the Centrelink Customer Service Centres and staff capacity to advise customers about it. For more solutions on better promotion and education about Centrepay, see Chapter 10.

Use of Centrepay deductions as a strategic and financial tool for service providers

Financial benefits to service providers Registered service providers receive considerable quantifiable benefits from use of the Centrepay scheme. Having their customers authorise Centrepay deductions directly from their Centrelink income (before the benefits reach customers’ bank accounts) to pay for products and services assists with improved cash flow, significantly reduced bad debt write-offs, and reduced costs associated with following up customer arrears. This is because the great majority of customers who authorise deductions to be made via Centrepay do not cancel or suspend those deductions, but ‘set and forget’ them once the deduction is established. In their submissions and in many of the conversations with the Reviewers, commercially driven service providers did not want to acknowledge these real financial benefits, undoubtedly for tactical reasons rather than for their lack of existence. Instead they concentrated primarily on trying to argue for reductions in transaction fees in order to make the Centrepay payment channel more cost competitive, at face value, to channels such as direct bank debits, BPay and EasyPay. However, none of these alternative payment channels are associated with the same relative certainty of payment and the concomitant savings listed above. If proof was needed that this certainty of payment has real financial value, one of the household goods companies interviewed for this Review described how their borrowings for the acquisition of the goods to be rented were secured against the receivables (i.e. future Centrepay deductions). Clearly the financiers attributed a real value to the future deduction stream revenues, even when they discounted them. It is likely that other service providers operate in a similar fashion.

In the case of utilities and State Justice Departments, the use of Centrepay also allows for the collection of past accumulated unpaid bills via the development of individual time payment plans with the customer, through which the customer pays off the debt owed over a period of time.

[Centrepay] enables recipients of Centrelink benefits to pay outstanding infringement penalties by instalment….The scheme ensures that low income Centrelink recipients have the same opportunity as the rest of the community to expiate their infringement offences, avoid conviction and the more serious penalties that arise from fine default and prosecution. (Victorian Department of Justice submission)

These customer benefits are matched if not exceeded by the revenue benefits to the State Justice departments and the cost savings that come from not having to incarcerate individuals who do not pay their fines

In relation to energy service providers, Section 44(c) of the National Energy Retail Law requires energy retailers to offer Centrepay to their hardship program customers as a payment option. Payment plans and bill smoothing are designed to help customers manage their household budget and energy bills by paying regular, smaller amounts and avoiding having to pay large quarterly bills. Centrepay is therefore an important mechanism for energy customers in hardship who are seeking to better manage their ongoing energy bills and may also be an effective tool for energy retailers to assist these customers (ACCC and Australian Energy Regulator submission).

Also in the case of utilities, the customer’s future quarterly bill is estimated by the utility company and a plan is developed for each customer to accumulate the funds to pay this bill on a fortnightly basis. In this instance, not only is there certainty of payment for the utility company, but it also has the accumulating cash ahead of the actual invoice/bill needing to be settled and it earns interest on this money. This forward payment of bills, in association with the ‘set and forget’ approach of the customer, can unfortunately sometimes mean that the customer ends up in credit with the utility when the customer could have used the money elsewhere.

We also receive complaints about utility companies generating substantial credits in accounts because regular Centrepay payments are too high. We accept that utility bills vary between seasons and that a credit accrued during ‘low’ seasons will often be used up when bills rise in ‘high’ seasons. However, there should be no reason a customer’s account should persistently be in credit by more than about $50 for more than 12 months. (Consumer Action Law Centre submission) I get Centrepay taken out and sometimes it gets into credit and I don’t know how it gets into credit. When I last checked I had $700 of credit sitting in my electricity account and no one told me. This could have been in my pocket. I could have a got a meat pack or some extra food . (Comment from customer at EPS Forum 2012)

One large utility’s response to this issue was:

‘…there is no ongoing proactive monitoring of the accounts utilising Centrepay with regard to their balances. As a voluntary system, a Centrepay arrangement can be set up completely without interaction with or discussion with [our company], and as such, there are no triggers for us to instigate anything beyond reconciliation of amounts received versus owing at the time the bill is generated. The bill is the quarterly account that tells the account holder what the remaining balance (debit or credit) is on the account and we have no specific processes to advise the customer of any credit balance. If the Centrepay amount is not enough then the standard dunning (collection) cycle will ensure that the customer is advised that their current payment arrangement is not meeting their consumption and as such needs to be adjusted to address arrears.’

This very one sided approach to financial relations with the customer is not replicated by all utilities but it is recommended that the Australian Energy Regulator investigate the issue and potentially introduce regulations to redress this imbalance.

Cost to service providers The cost to service providers of accessing Centrepay is 99c (90c plus 9c GST) per transaction, but this amount can vary, depending on what negotiations have taken place between Centrelink and the individual service provider. The negotiations and special pleadings around transaction volumes and provider systems capabilities have resulted in both reduced fees and other special conditions (such as monthly invoices instead of deduction of fees at source) afforded by Centrelink to a range of businesses using Centrepay. Despite a firm stated intention, fee setting and discounting within Centrepay has not been based on a rigorously assessed cost recovery basis where economies of scale pertaining to Centrepay have been reflected in large volume providers’ contracts. Rather, discounts have been agreed by the central office or account managers, either to encourage large provider participation or on the basis of provider requests that have assumed that discounts should apply to volume, mostly with little if any rigorous policy or economic rationale. It could also be argued that the commercial and negotiating acumen of the service providers more often than not probably exceeds that of the Centrelink staff unused to conducting daily commercial negotiations. In some instances, deduction fees have also been either absorbed by government (such as for NILS) or reduced as a result of political edict or on the basis of policy discussions around the importance of the service. It would appear that a more strategic approach (from both policy and commercial perspectives) is required to fee settings in future, including a review of decisions to discount or waive fees to selected service providers and/or categories.

Strategic benefits

Centrepay as the only means of payment Internet searching quickly reveals a range of businesses that not only advertise that they accept payments via Centrepay but ones that have gone further and based their whole business proposition around Centrepay being their only payment channel for their goods. The most obvious sector for this is household goods. Some businesses see acceptance of Centrepay deductions clearly as a positive, business-enhancing proposition to be promoted within certain sectors of the community, but some have gone even further to make Centrepay their sole revenue source. However, as discussed previously, a customer of such a provider which only accepts Centrepay deductions but who then goes off benefits or has them reduced for a period of time will potentially be economically disadvantaged as a result of not being able to meet his or her contractual requirements with the providers via other payment channels. It is recommended that the Department reassess the risk of making its customers more vulnerable via the registration of any providers who can’t offer a range of payment channels for their goods or services.

Perpetual deductions Indiscriminate application of the indefinite payment option when authorising deductions has also resulted in some businesses inappropriately taking money from customers over long periods of time without a concomitant value proposition embedded in the goods or services, such as is embedded in housing deductions.

…a Darwin based trader was using Centrepay to obtain payment for second hand goods. In that matter consumers entered into indefinite automatic Centrepay deductions to pay in advance for a ‘wish list’ of items, and either the goods were not supplied at all, or the goods supplied were of very poor quality. The trader went into liquidation owing thousands of dollars to consumers across Indigenous communities in the Northern Territory. (ACCC and AER submission) Centrepay is great, but the problem we are aware of is that once the payment is set up, when the client gets a copy of their income statement, it doesn’t show what the deduction is for. And clients get used to funds being paid this way and sometimes they are still paying for something [when] payment is no longer required. (Indigenous Financial Services Network submission, quote from Money Management Worker, Geraldton)

It is recommended that the Department assess which of the Centrepay service reasons should reasonably be allowed to have perpetual deductions made and which should have time limits or reauthorisation processes included.

Energy regulation and Centrepay The 2011 National Energy Retail Law which came into effect on July 1, 2012 established a national framework for the regulation of energy distributors, with the only excluded states being WA and the NT. The national regime includes minimum requirements for the provision and management of hardship programs (and these are mimicked in separate WA and NT legislation). Amongst the things that the energy providers have to include in their hardship programs is flexible payment options, including a payment plan and use of Centrepay. AGL Energy notes in its submission to this Review that:

The Centrepay system is a valuable tool for consumers and business, facilitating and supporting consumer control in how they manage their energy costs and ensures priority of payment of items deemed essential. (AGL Energy submission)

Obviously, for a regulated energy provider not being part of the Centrepay scheme is not a viable business option. As noted in the submission to this Review by Ergon Energy, their use of Centrepay to date has typically been targeted at customers who are identified as having difficulties with paying their electricity accounts (that is, as part of their hardship programs). They go on to say:

We have been using the Centrelink ‘Centrepay’ product to great effect, particularly during the past five years where we have grown the customer base from 7,000 to 26,000…Ergon Energy would now like to consider promoting ‘Centrepay’ as a more mainstream payment channel supported by Ergon Energy’s internal marketing campaigns, rather than a debt management tool as it is now typically used. (Ergon Energy submission)

It appears that once they saw the benefits of Centrepay for customers in their hardship programs, Ergon Energy identified its possible use for effectively managing payments from a wider customer base. This intention was also reflected in conversations between the Review team and representatives from other large utilities who said they were are also examining the possibility of expanding their access to Centrepay deductions beyond the identified hardship customers, via automated invitations to all customers with concession cards to authorise Centrepay deductions for their services. The size of deduction fees was a consideration amongst the distributors discussing this. Given this flagged intention of large utility providers to pursue greater use of Centrepay for their customer base on Centrelink payments (an extensive share of the market), the Department should assess if this type of expansion of Centrepay fits within the policy intent of Centrepay. If the decision is in the affirmative, it would be prudent for Centrepay policy on fee setting and the use of multiple deduction forms (MDFs) to develop a more strategic approach to contract negotiations with these large scale service providers. The Department should also consider the risk management framework it would need to implement were the dollars flowing through the Centrepay system increase significantly from their current already substantial levels of $2 billion a year.

Centrepay operational processes

Service reasons Centrepay deductions can be made for 41 different service reasons which are broadly grouped into the following categories: accommodation; education, employment, financial, health, travel and transport, utilities, professional services and social and recreational. The groupings do not always make intuitive sense for the uninitiated to navigate, with, for example, the ‘financial’ category including ‘household goods’ and ‘basic household items’, which sit in amongst a variety of loan products. Further, distinguishing precisely which category is most appropriate for the customer’s needs on the basis of the published definitions is not necessarily straightforward.

The detailed definitions also err on the side of being all-encompassing which can lead to ill-suited products or services being sanctioned and offered to Centrepay customers. For example, the definition for education fees is ‘all education associated services by any registered educational provider, including training, tutoring, workshops etc’. In addition to school fees being eligible under this definition, so too are pre-packaged so-called tutoring products that have been sold to customers.

In 2005 the ACCC found that a NT business had engaged in misleading and deceptive and unconscionable conduct after signing up Indigenous women to contracts for educational materials. Almost no educational materials were delivered, however the payments continued to be deducted. Between 1998 and 2004 it is estimated that this business took nearly $800,000 from customers in the NT and WA and more than $10,000 from one Alice Springs town camp resident through automatic deductions. (ACCC and AER submission)

As part of the more intensive approach to risk management that will be recommended by the Reviewers later in this report, the service reasons should be reviewed for: whether or not they help promote the core purpose of Centrepay; for relevance (determining if there is significant customer demand for the goods or services to warrant the administration costs for the category); and for the way in which it is described so that there can be no misunderstandings about what is included and what is not, either by the customer or the service provider.

Applying for Centrepay deductions There are currently several ways to start Centrepay deductions.

Customer initiated deductions The customer can initiate Centrepay deductions in the following ways:

• online, using the Department’s online services • by telephoning Centrelink or talking to one of their staff in a service centre

• by completing a Centrepay deduction form and mailing it to Centrelink. The mailed deduction form is scanned and processed by the CBS unit in Hobart.

To start Centrepay deductions, customers need to have the following information:

• a Centrelink Customer Reference Number (CRN) • the name of the organisation or person to be paid • if available, the address and phone number of the organisation or person to be paid • the Centrelink Reference Number of the organisation or person to be paid • the account number and/or billing number, for instance the electricity account/bill number • the amount to be deducted from the customer’s Centrelink payments each fortnight the

Centrelink payments from which the deductions are to be paid the payday that the deductions are to start.

Customers can also nominate an end date to the deductions or a target amount of total deductions that they wish to have made out of their Centrelink benefits. The deduction form itself comprises two pages of required information. It would not be readily navigable by someone with low literacy levels, or by someone who does not speak English well. It also requires the customer accessing data bases to discover the service provider’s reference number and it requires the customer to identify which of the 41 published service reasons is the reason for payment deduction. Given this complexity alone, it is not surprising that customers need help in filling out the application. This help is often provided by the service providers themselves, who potentially do not spend much time explaining to the customer the purpose of the scheme or the fine print included in the form. The fine print includes permission for information sharing and signing off on an understanding that: ‘if I stop using the service provider but do not stop my Centrepay deduction, the service provider may instruct Centrelink to stop the deduction; and if I change service providers, I may need to advise Centrelink to stop my previous deduction.’ At a minimum, the use of the word ‘may’ in each of these two sentences leaves the issue of who is responsible for what actions in limbo. The Review was told by the Department that some 35% of Centrelink customers have some form of language or literacy issue impeding them from readily accessing or understanding documentation, including financial documentation. As part of the recommendation for Centrelink to take greater ownership of the Centrepay brand and increase the education around the usage of Centrepay, it is also recommended that all documentation be reviewed for its ‘user friendly’ rating, particularly bearing in mind those customers who might have the least literacy and financial and legal acumen, but who would most benefit from the use of Centrepay.

Service provider initiated deductions In many instances, deduction application forms are held by the service provider and filled in for the customer when they decide to purchase the goods or services. The same information as detailed above for customer initiated deductions needs to be provided by organisations lodging deduction authorisations on behalf of customers. These authorisations are lodged in two formats:

• signed customer authorisation forms are lodged by providers in batches via facsimile (fax) machines with the CBS unit in Hobart, for batch processing. Appliance rental companies, real estate agents and landlords are the most prolific users of faxes;

• alternatively, certain providers, such as State Justice Departments, community housing associations and large utilities, are permitted to lodge emailed multiple deduction forms (MDFs), which they fill out on the customer’s behalf.

Only certain categories or organisations are currently authorised to use MDF’s, and even then different levels of authorisation are afforded to different organisations, with some only allowed to vary down and cancel deductions, while the highest MDF provider authorisation level allows it to start, vary up or down and cancel deductions on behalf of the customer. Customer authorisation is often given verbally via the service provider’s call centre rather than in written form. Where this happens, there are protocols that the call centre has to follow in taking the verbal authorisation. The emailed MDF forms are reprocessed by the Hobart CBS unit, with operatives rectifying any input mistakes on the provider submitted forms when required. The CBS staff will also intervene in instances when an MDF or facsimiled authorisation is for deduction amounts in excess of available benefits. The issue of the Department authenticating customer authorisations, either via signature or verbally over the telephone in the case of services provided by authorised MDF users, is a troublesome one. At the moment, the Department relies on either the customer complaining about inappropriate deductions or on its staff unearthing inadequate proof of appropriate deduction authorisations when provider compliance audits are undertaken. Such audits take place very infrequently due to resourcing issues. Several examples were provided of customers alleging that they had not agreed to certain deductions

• A Centrelink customer made a complaint to the Ombudsman after finding out that a utility company had set up Centrepay deductions from her account for $50 a fortnight without her authorisation. On investigation it was found that Centrelink had been provided with a list of names and Customer Reference Numbers by the utility company and asked that deductions be set up for those customers. There was no checking by Centrelink that each of the customers had signed an authorisation, they merely took the utility company’s assurance that consent had been given. (Commonwealth Ombudsman submission)

• A rental business provided a Centrelink customer with a vacuum cleaner on the basis of a 10 day cooling off period before she had to sign a contract. Despite not signing any contract, Centrepay deductions were then set up by Centrelink for $24.64 a fortnight on the basis of a signed contract which the customer claims never to have signed. Centrelink subsequently cancelled the deduction at the customer’s request. (Commonwealth Ombudsman submission)

Centrelink sends the customer a letter confirming the existence of their new deductions, regardless of the method by which the deduction was lodged. Centrepay pays the deduction to the organisation or person nominated on the same day on which the customer receives his or her Centrelink payment. The service provider receives a report with details of the customer’s deductions, in order to be able to reconcile the customer’s account. Centrelink does not, however, send customers equivalent reconciliations. The customer statement does not itemise deductions by provider, by target amount or date.

Almost half (48%) of all deduction authorisations are processed in Hobart with the remainder of deductions processed online by customers direct or by Centrelink Service Centres when customers call them or visit in person. The large percentage of deduction authorisations going through the Hobart processing unit is mostly due to the involvement of service providers in setting up deductions on the customer’s behalf. If the deduction authorisations sitting behind the Centralised Business Services (CBS) processed deductions are incorrect, it is up to the customer to inform Centrelink and seek rectification. The customer is reinstated for wrongfully deducted amounts when the processing error is by CBS, but the customer has to sort it out directly with the service provider if the error has been made by the provider. It is therefore very important to have a system that ensures that customer authorisations exist and are intended. Given that it is the Department’s intention to increasingly encourage both customers and service providers to carry out Centrepay deduction authorisations and changes online, without Departmental double handling, it is recommended that before that takes place a more robust system for ensuring appropriate authentication of authorisations is established. See below for discussion of the signature imaging technology utilised by commercial banks for verifying customer authorisations of direct debits.

Customer complaints mechanisms

Difficult to locate complaint mechanisms Currently it is not easy or straightforward to make a complaint about the Centrepay scheme and how its operations might impact a customer. This message came through strongly in stakeholder meetings where financial councillors expressed their frustration at not being able to find a channel through which to lodge complaints on behalf of their clients.

There are inadequate processes for complaints and disputes handling for users of Centrepay…no easily identifiable process for dispute resolution exists…It is not clear whether a specific complaints process is in existence for Centrepay, though some material that is available refers people to the Customer Relations Hotline. Other information refers people to a website address which is insufficient. (National Welfare Rights Network submission) The ACCC’s contact information suggests that many Centrepay customers do not know how they can make a complaint about a business or how they can arrange for payments to a business to be stopped. The ACCC considers that Centrepay consumers would benefit from information regarding appropriate contact points for complaints and other matters being made clearly available on the Centrepay website, as well as outlined in the regular statement provided to Centrepay consumers. Periodic training for staff on how to handle such complaints and informing consumers of their rights may also be worthwhile. (ACCC and AER submission)

The current mechanisms are largely reliant on consumer organisations to identify and escalate such matters and take too long to resolve. Promoting active citizenship through greater awareness of rights means that those who can self-advocate are given the tools to do so. (Good Shepherd Youth & Family Services and Good Shepherd Microfinance submission)

The main Centrelink webpage does not have a link to Centrepay and the only easy way of finding out about Centrepay is to put the word into the search box on that page. Once in the Centrepay section, there is no mention of how to make a complaint or to whom, other than if the customer downloads an 8 page Centrepay PDF brochure, where on page 7 of 8 the following number is given: Customer Relations Freecall™ 1800 050 004 (for complaints, compliments and suggestions). (This brochure is often not displayed in Centrelink offices.) The instructions on the Centrepay page around what the customer can do online and how to do it, also do not contain any complaints filing mechanism. The Department should not only make it easier for a customer or their adviser to discover how to make a complaint about Centrepay, but it should also establish a dedicated Centrepay phone service. In addition, a number of submissions referred to the lack of publicly available information about how complaints are handled once they are made, and the length of time taken to resolve them.

There is no policy or even culture of transparent dispute resolution within Centrepay to investigate or monitor systemic complaints. (Quote from a financial counsellor in Cairns, Indigenous Financial Services Network submission) Currently it is not clear: what process a consumer or consumer group would need to undertake to get a businesses’ registration on Centrepay reviewed, qualified or cancelled; what conduct would constitute a breach of the contract between Centrepay and a specific company sufficient to warrant removal; if there is a breach, what other factors Centrepay will consider before it takes action. (Financial Counselling Australia submission)

The North Australian Aboriginal Justice Agency (NAAJA) noted in its submission that Centrepay needs more clearly articulated processes about how complaints are handled, and that information about the outcomes should be made publicly available. Evidence was provided of a formal complaint being made with a Senior Manager of Centrelink about the exploitative and misleading practices of a particular service provider in the NT that was targeting Aboriginal clients. They were told that Centrelink ‘does not look at how traders generate their business’ and that their primary obligation, once the Centrepay deduction form was processed was to ‘continue the payment’ (National Aboriginal Justice Agency submission). Having a series of key performance indicators around timelines and targets for resolving customer complaints would assist in making this a more transparent and accountable process within the administration and reporting of Centrepay operations. This would need to include additional training and resources for staff in handling and resolving complaints.

When customers call or visit Centrelink, they may discuss a problem regarding Centrepay with the officer, but these are not necessarily recorded if there are a variety of issues discussed with the customer. As a result, relatively few complaints are documented about Centrepay. In the six months to December 2012, there were only a total of 125 complaints officially recorded. The topic most complained about related to service providers passing on Centrepay fees, in particular by real estate agents. While no organisation wants to receive complaints about its operations, they are nevertheless a highly effective method by which to monitor whether things are working well or not, and if customers are being well served. It is easy to become complacent about the operations or not be aware of trouble spots within them if no complaints are received. Complaints and complaint patterns can also be used to guide compliance activities and to drive them in a timely manner if there is a build-up of complaint themes. It is recommended that a dedicated complaints hotline (both phone and online) be instituted that can be accessed by both customers and advocates/advisers they have authorised. This could be supported by the development of a specific complaints section on the Centrepay website, prominently displayed and also promoted on the main Centrelink website. This information should also be included in contract materials provided to service providers, including the investigations processes that will be used and the sanctions that can be enforced if complaints against service providers are upheld. Finally, information about complaints mechanisms (including contact details) should be provided on individual Centrepay statements provided to customers to ensure that they have timely access to this information.

Stakeholder consultation Another means by which the Department can test whether the Centrepay scheme is working as intended and whether it is meeting customer needs, is to consult regularly with welfare groups and financial counsellors that work with this client group. The ACCC and others also propose that greater consultative and engagement mechanisms by Centrepay with external stakeholders would be a positive way of improving the integrity of Centrepay.

Regular engagement with those community and consumer organisations likely to hear of concerns experienced by consumers who use Centrepay might also help improve knowledge of those concerns. The ACCC and AER’s own experience of consumer and customer consultative bodies have been consistently positive in that regard. (ACCC and AER submission) …there is a lack of consumer engagement regarding Centrepay. No formal advisory or oversight processes exist, whilst feedback procedures have not been established. (National Welfare Rights Network submission)

It would appear that establishing some form of consumer consultative body, including both consumer and community service organisations, could assist in the implementation of recommendations from this report as well as form an ongoing mechanism for customer feedback. Best practice principles of consumer engagement would also suggest it as prudent to have individual consumers on such a body.

See also the compliance section in Chapter 6, Risk Management and Compliance Processes, for a suggestion on the use of a simple star rating system to collect feedback on providers and to instigate an early warning system around poor service from providers.

Processes involved in becoming an authorised service provider

Application process For a service provider to become authorised to use the Centrepay scheme there is a generic six page application document which acts as the primary vetting tool for access to the system. In this form, the applicant needs to provide a variety of routine information (names of contact person, business names, contact addresses for both postal and operating purposes, bank details for receiving Centrepay deductions), nomination of the service reason category under which the goods or services will be supplied, and a description of the goods or services that will be offered. In addition the applicant has to answer a range of questions, the answers to which would theoretically allow the Department to assess the provider’s suitability to be a participant in the system. These mostly require ‘yes’ or ‘no’ responses and include questions as to:

• whether the provider has necessary accounting, administrative and pricing systems (yes/no);

• is there an external dispute resolution mechanism available? (yes/no); • is the applicant or its directors able to pay its debts? (yes/no); and is the applicant

aware of any actions against it? (yes/no)

While most of the questions asked are pertinent, some require only minimal information and, due to the limited resources available within the Department to vet the applications, the answers are mostly accepted at face value. ASIC searches are carried out and ABN numbers are checked. Some service provider categories are required to lodge, or be able to access, additional material in addition to the application form. For example, whitegoods suppliers need to have a credit licence and for those that don’t, they need to complete a compliance plan in which they sign off on what dispute resolution systems they have and how they train their staff etc. They also need to provide the Department with a range of material describing their business practices. Similarly, real estate agents need to be licenced in order to gain service provider status. The application form requires the applicant to certify that the information is correct and that they will comply with contract terms should they be successful. They are not, however, asked to positively affirm that they will honour and abide by the objective of Centrepay in the way they conduct their business with Centrepay customers, which is a major oversight in the current application process. This could be corrected through the simple inclusion of an additional statement on the contract that all service providers will make such a commitment. Another issue is that the contracts with service providers are generic (apart from any special conditions, which are usually about terms relating to the quantum of the deduction fee or payment schedule for it, or to MDF participation conditions). Greater differentiation of contract terms and conditions based on

service reasons and a range of other criteria may assist with improved risk management, particularly for those sectors and service reasons identified as posing a greater risk to vulnerable consumer groups. The contracts are also indefinite and once established do not need to be renewed or reviewed, which means that a provider who signed up in the early 2000’s may still be operating under a contract that has not been refreshed for corporations law, recent privacy and data protection legislation updates, or other legislative amendments. The contracts can be terminated with 30 days’ notice. In addition there are apparently many inactive provider contracts in existence, which, apart from causing inefficiencies in the overall system, also pose a risk management issue. These inactive provider contracts could theoretically and in practice be reactivated by new parties operating under the registered ABN and company name without going through any vetting process.

What processes does a bank use by comparison? A cursory investigation was undertaken as part of this Review to compare the Centrepay service provider application process to the process that a bank might carry out in order to approve a business to access point of sale (POS) terminals for accepting customer credit cards. This information was obtained via conversations with one of Australia’s big four banks. Information collected identified that the bank carries out ASIC searches on both the business and its directors. It also accesses online credit bureau information to identify if there has been any evidence of poor trading by the company or by any of its associates/directors, or if there has been any company ‘rebirthing’. The bank has a scoring mechanism for the outcomes of these searches that sit behind the evaluations. The bank undertakes internet searches about the business to assess their published terms and conditions of trading, and it will also search social media sites and blogs to ascertain if there is any persistent negative feedback about the business or its operators. Google map searches are done on the location of the business headquarters to determine the plausibility of the stated operations. For example, if the business purports to sell fridges but operates out of an apartment in the city central business district, the bank would make further inquiries about the bona fides of the business. The depth of the inquiry process is also tiered in its thoroughness, depending on the outcomes of the credit bureau investigations. The bank also has in its arsenal of filters for weeding out fraudulent behaviour by the provider the ‘big stick’ of being able to debit the business account the amount that has been fraudulently or wrongly appropriated from the customer. Customer authorisation of direct debit deductions for payment of third party bills that go through banks were also discussed, as the fiduciary issues around having authentic customer authorisations are as real for banks as they are for Centrepay. The normal process is that a customer picks up the form from the ‘store’ or online from the merchant/provider. They fill it in and return it to the merchant. Some customers arrange the deduction by phone with the service provider’s call centre, not dissimilar to the Centrepay process for approved MDF service providers. Banks insist on the external provider call centre approvals being conducted under

the Australian Payments Clearing Association rules and protocols. They also monitor if the provider’s investment in governance and technology is sufficient to ensure a robust risk management culture, before embarking on all electronic arrangements with the providers. If the merchant/provider has a batch code with the bank (that is, the bank has assessed the service provider as having a robust risk management system), the bank electronically verifies the account and the customer through capturing an image of the form. For manual forms (for example faxes that are sent to the bank’s image server), they also electronically verify the signature and perform some secondary checks if required, depending on the profile of the merchant activity. Increasingly the bank is using imaged files and electronic verification, and zoning in on periodic checks on providers to ensure the increasing hands-off automation is still protective of customer interests. Customer feedback is instant if something is wrong and the bank swiftly acts on this. This somewhat cursory comparison of Centrepay processes with those of banks would indicate that not enough verification activity currently takes place, not enough tailoring of the application assessment activity is carried out by Centrepay according to the potential riskiness of the service provider applicant, and not enough checking on the business takes place after a successful application, via data drilling on activity trends etc. It is recommended that Centrepay adopt a more sophisticated service provider applicant approval process, more closely matching what is being done by the banking sector.

Contract management

Regular contract review processes Centrepay should also revise its approach to contracting with service providers. The current system of open ended contracts has meant that there are large numbers of inactive providers on Centrepay’s register, who could, if so inclined, reactivate and commence trading with Centrepay customers. More importantly, it has meant that a provider who signed a contract many years ago has not necessarily had any review of their performance, or the applicability or appropriateness of their systems to changed legislative environments (such as more modern data security and privacy laws) since they were first registered. It has also meant that in some cases, providers signed up for one service reason have, over the years, inappropriately started providing a different good or service. It is recommended that a more regular review process of service provider contracts is instigated as part of improved risk management processes, and that renewal of a provider contract entails a modified approval process to ensure accountability measures remain in place. The 30 day notice period to cancel a contract should be maintained to give Centrepay flexibility to terminate for inappropriate activities or operations, but the length of the contract with a service provider should be dependent on the risk profile of the service reason in which the provider is involved and the

history of the company, whether or not it is closely regulated, whether or not it is listed on the stock exchange, etc.

Account Managers within Centrelink Account Managers undertake service provider relationship management and compliance oversight for both the Centrepay service providers and for Income Management service providers (there is often an overlap between the two, despite being separate schemes). The Account Managers are also for the most part the people who approve the service provider applications to become authorised Centrepay providers. They are a very small team in number and have an inherent conflict of interest in undertaking both relationship management and compliance with one and the same service provider population. It is recommended that these two operational functions be separated and that the number of people undertaking compliance activities be significantly increased, at least until such time as more robust risk management and compliance systems have been instituted throughout Centrepay.

Capability of Centrepay IT systems

Current IT systems in place The management information required to run Centrelink is quite different to that required to administer Centrepay. Centrepay simply does not have adequate data and management information capability to strategically run the business or to formulate evidence-based policy associated with the implementation and running of an expanding Centrepay scheme. This is largely due to the lack of adequate investment in program infrastructure and IT, despite the robust growth since its inception in the number of service providers and number of deductions made through the system. As a result, there is no regular monitoring of either growth or trends in the makeup of either the customer base or service reason deductions. Lack of investment into IT capital initiatives (as opposed to IT maintenance) has also resulted in ineffective and inefficient systems for staff, customers and service providers. The impact of these issues on productivity and workloads has also been noted in the submission by the Community and Public Sector Union, Tasmania and in staff feedback at the EPS Forums in 2012 (Department of Human Services 2012b). The Department has been investing in and implementing the migration of its diverse activities from the now very old system to a modern SAP based system. While much planning has happened around this large scale activity, there has been no Centrepay specific IT strategic planning undertaken to date. Given that the mantra within the Department is about increased automation and efficiency across all aspects of the Centrelink business (with resultant cost savings the goal), it is timely that the very specific business and operational opportunities and risks pertaining to Centrepay be addressed as a matter of priority, as it is difficult to reverse IT logic once implemented. In particular, if more service providers are to be encouraged in the future to undertake the end-to-end processing of customer deduction requests,

without the Department’s current hands on involvement, the risk management and compliance systems that should ensure that customer welfare is protected must be significantly reworked and improved.

An online world and the non-IT savvy customer As mentioned previously in this report, it appears that ready access to online deduction processing by customers is not always compatible with increasing financial capability and inclusion, or with improving a customer’s overall financial position. Therefore care needs to be taken to ensure that checks and balances are in place to counteract/catch the potential facilitation by a system of increased vulnerability.

The movement to encourage increasing numbers of customers to transact online can also result in a group of more vulnerable or less well-resourced customers (such as the aged or disabled, those without internet access or with low literacy levels) that get left behind, relying on reduced physical service interaction options. Indigenous customers in particular have a strongly expressed preference for face-to-face financial interactions over electronic services (Gibson 2008 cited in Connolly et al 2011, p.22). Great care needs to be taken to ensure that less face-to-face interaction does not also result in less opportunity to offer financial counselling or other interventions and help when required. In addition, care must be taken to ensure that for the most vulnerable in our community this doesn’t result in a further form of exclusion, where it might cost the customer more (in time or money) to carry out transactions with Centrepay.

Lack of a business owner for Centrepay Centrepay has been administered by diligent, hardworking and dedicated staff that have not always had the benefit of high level strategic guidance by a ‘business’ owner, focussed on the Centrepay business for both policy and operational purposes. A similar $2 billion business unit in a commercial organisation would warrant considerably more human resource and intellectual infrastructure than has been allocated to the running of the Centrepay unit over the years. This has manifested itself in the shortcomings identified in this report, despite the overall scheme mostly achieving its purpose for the bulk of customers. It is recommended that the resourcing for the administration of Centrepay be increased to take into account the scale and complexity of the business as it has developed, and to allow for proposed future growth. In addition, it is recommended that the resourcing also includes more commercial and financial services business acumen to ensure greater equality between Centrepay and the service provider population when customer welfare considerations that might conflict with the commercial imperatives of the service providers need to be taken into account.

Risk management and compliance processes

Risk management framework Risk Management Framework…the architecture for managing risks. Centrepay uses the department standards for risk management outlined in the Risk Management Framework. The Risk Management Framework is the foundation for effective risk management. It outlines the key elements for identifying and managing risks, and consists of authority, accountability, support/tools, outputs and reporting. The Risk Management Framework has been endorsed by the departmental Risk, Business Continuity and Security Committee. Authority: Risk Management Standard AS/NZS ISO 31000:2009 The department, including Centrepay, also uses Australian and New Zealand standards to manage risk. AS/NZS ISO 31000:2009 is an international standard that provides principles and guidelines to help establish and implement effective risk management practices and specifies the elements of the risk management process.

As described above, Centrelink has instituted a standardised, well recognised risk management methodology which is in accordance with the Australian/New Zealand Standard for Risk Management. The methodology is multi-layered and comprehensive. However the organisation-wide risk register is a top down creation for all of Centrelink without active engagement by staff at all levels or a specific risk register for Centrepay as a subset of Centrelink. It is highly probable that a Centrepay risk register would have different risk imperatives to those of the larger organisation. In addition, the approach to risk management does not appear to be a dynamic activity that is reviewed regularly with new risks upgraded or included and others downgraded or excluded as circumstances change.

‘There is no risk register as such. Areas of business are risk assessed on a needs basis. The service reasons, as currently published, have all been risk assessed. The Department is aware of the risks associated with each of the service reasons and these do not change. Risk levels may vary between States/Territories. In these instances, all are afforded the risk rating of the highest risked State/Territory’. (Discussion between Reviewer and Department officer)

More broadly, the risk management model and resource that should be applied to Centrepay should be driven by the breadth and the complexity of the Centrepay scheme. An entirely different approach would be needed to control a limited deduction scheme that might entail only the most essential of services such as housing and utilities (supplied respectively by either State Housing departments, or by listed or multinational companies regulated by the Australian Energy Regulator), than is required for a deduction scheme such as the one that currently exists where there is a very broad range of commercial services involved, supplied by a wide range of regulated and unregulated companies, not for profit organisations and individuals. The current form of Centrepay needs a complex and sophisticated control model that is

regularly reviewed and updated for changing risks, which would involve stringent authorisation procedures for entry to the scheme. This should be backed up by sophisticated compliance monitoring and multi-versioned (rather than generic) contracting, tailored to the level of service provider risk. The resources, both human resources and infrastructure, required to effectively manage the risks associated with the current multi-faceted model are considerably greater than those that may have been envisaged when the scheme was first established. On a more granular note, Centrepay transactions and operations take place within the much broader Centrelink IT system, which is decades old, transactional and rules based. Information management for risk management purposes via timely data extraction and analysis is currently not possible, nor is risk management via strategic compliance-oriented data analytics. Fortunately however, Centrelink as a whole, and the Centrepay operations, are in the process of transitioning to a more modern SAP based system. The implementation of the Centrepay scheme within the Department’s new ‘Customer First’ IT system should take strategic cognisance of the customer welfare responsibilities associated with the Centrepay bill payment scheme and its particularly unique interaction with the private sector. The new IT system should also have specific risk management data analytics capabilities to help mechanise the risk management and compliance functions and enable timely interrogation of activity data which could be proactively and swiftly acted upon by Department staff for Centrepay risk management and compliance purposes. At the same time, efficiencies that might be envisaged as achievable via the new IT system, such as more customer and service provider self-service online activities, should be examined for their possible effects on Centrepay specific risk management and also for their potential negative effects on vulnerable customers living chaotic lives and on customers who do not or cannot access the Centrepay service online.

Compliance and enforcement

Significant function but only limited resources As with its approach to risk management, the Department has developed and adopted a range of processes to monitor and implement the compliance function. These are well documented and training is conducted around them. But as with the approach to risk management, while the frameworks, words and intentions are there, the execution does not necessarily adequately deal with the complex and sophisticated demands of the Centrepay scheme. In part this is a result of limited resources which, for a scheme that has over half a million customers and over 13,000 service providers dealing with close to $2 billion in revenues, are meagre in relation to the scale of the tasks at hand. For example, in 2011/12 there were only 12 people to carry out the compliance function for all of Australia for both Centrepay and Income Management and Basics Card providers, including visits to regional and remote communities where just the time spent getting to a location can be

significant. This number was augmented by 7 compliance only positions in 2012/13, to increase the number of compliance checks that could be carried out, but the total number is still small given the geographic coverage. However, further distracting these scarce resources from the compliance function is the fact that the original core 12 Account Managers are also the relationship managers for the service providers that they are ostensibly auditing. The two roles are not compatible within the same position as on the one hand, professional but friendly relationships need to be developed and assistance given to the providers to ensure the smooth induction into and operation of the payment deduction system, while on the other hand, there is a requirement to enforce compliance with the Centrepay contract. Separating these functions with inherent conflicts of interest into differentiated positions or roles would assist in both developing better relationships with service providers, and in enforcing compliance. In turn, these improvements would also lead to better outcomes for customers.

Current audit and compliance activities The Deductions and Confirmation Services Branch is responsible for conducting compliance checks on organisations that participate in the BasicsCard, Centrelink Confirmation eServices (CCeS), Income Management and Centrepay. Service providers often participate in more than one of the schemes at the same time, therefore the Department considers it efficient to roll the compliance programs of the various schemes together, and if a provider is audited, they are audited for all of the schemes in which they participate. According to the Department, the purpose of the audit, as regards Centrepay, is to check that:

• information or representation in the business application is not incorrect or misleading; • the organisation continues to meet eligibility for Centrepay registration; • protected information is not used or disclosed without approval to do so; customer

deductions are credited in full to customer accounts; and charges or fees are not imposed onto a customer.

As can be seen from this list, there is no attempt to include in the checklist the scope of or appropriateness of the services that are supplied by the service provider to Centrelink customers. This should be addressed in future compliance activities, but will require considerable up-skilling of the compliance personnel to undertake such an analysis. It will also require the Department to be more specific in its service reason descriptions to ensure that the purpose of Centrepay is more adequately and strictly captured in them, and can then be enforced. The number of Centrepay service providers that are reviewed each year is determined on a State by State basis, taking into account: the mix of providers in each State (BasicsCard, Income Management, CCeS and Centrepay); a risk assessment of the service reasons used by the provider; and the number of account managers and their capacity in each State. Each Account Manager is given a target number of compliance checks to conduct each year and the checks are divided into random and nonrandom, with the non-

random ones selected on the basis of complaints or ‘tip-offs’ that may have been made about a provider. Random audit selections are made on the basis of a matrix of risk assessments. In a resource scarce environment, it is questionable if the split of three quarters random/one quarter manually selected audits represents the best utilisation of the available resources. In 2012/13, with the help of the additional staff, it was intended to conduct 549 random audits and 179 manually selected audits on Centrepay providers (728 audits in total). This compares to a total of 310 reviews completed in the previous financial year, of which 245 were considered to be compliant (79%) and 68 non-compliant. The main reason for non-compliance in 2011/12 was passing on fees to the customer. Of the reviews that had been conducted by December 2012, there was a compliance rate of 82%. Once again the main reason for discovered non-compliance was the passing on of fees to the customer or failing to credit the full amount to the customer’s account. The 2012/13 audit process has also found that failing to ensure that customer information was protected is also a common non-compliance issue. As previously discussed, the service provider authorisation process for participation in the Centrepay deductions scheme conducted by the Department does not have nearly the rigour or commercial risk focus of the processes used by the commercial banks for POS terminal access . This means that it is easier for service providers to become part of the system which broadens the reach of Centrepay, but it also means that it is easier for inappropriate providers to be part of the system and potentially exploit or cause financial hardship to Centrepay customers. The potential negative impact of this ‘easy in’ aspect of provider authorisations is exacerbated if there are insufficient resources to monitor the activities of the providers, and even further exacerbated by the hands off approach taken by Department staff to their potential capacity to act as regulators of the Centrepay scheme. In addition, the current IT systems on which Centrepay relies are very old and transactionally based and there has been no capacity to utilise data analytics to identify irregular activities or patterns of deduction authorisations or changes. The effectiveness of the compliance function would be greatly increased through the use of data analytics in the pending new IT system, in association with increased and/or reoriented resources to analyse and investigate potential compliance ‘hot spots‘ and to move on them quickly.

Complaints handling As discussed previously, it is not easy for customers or their advocates to make a complaint about the operations of Centrepay or its service providers, and the result is that the complaint registries that are maintained contain relatively small numbers. For example, in a Senate Estimates Committee hearing late in 2012 the Department provided statistics that indicated only approximately 20 complaints a month were received and in the six months to December 2012, there were only a total of 125 complaints officially recorded, with the bulk of these relating to providers (mostly real estate agents) passing on deduction fees to customers. (These statistics do not capture the complaints that might be made by a

customer over the phone or in person when dealing with a Centrelink customer service officer if there are numerous issues discussed in that conversation.) While it may seem virtuous to receive low numbers of complaints, it is not good if those low numbers are due to the practical difficulty of making a complaint. Complaints monitoring can be a means of quickly identifying where or how a service is not being adequately administered or delivered. The best service would ensure that it is very easy to make a complaint, but that few are made due to the quality of the service. In order to improve the overall operations of Centrepay and in order to better feed into the compliance program, it is recommended that a dedicated Centrepay customer complaints hotline be established (to at least match the dedicated number that service providers have available to call.) However, a complaints hotline alone will not allow the Department to become more aware on a timely basis of issues that are not working well within the system. The Department also needs to be cognisant of the cultural differences that can be associated with customers from different backgrounds using Centrepay. The lack of ease of making a complaint is currently exacerbated by some cultural reticence to make complaints at all. For example, it is reported that many people in Indigenous communities in rural and remote areas will not complain when they are aggrieved because of the feeling of ‘shame’ about having seemingly made a mistake around a Government sponsored program, or because of not wanting to share their private business with outsiders or because of worrying about ending up in court just for having officially raised an issue. Unfortunately, it is these very cultural characteristics that have been exploited at times by less scrupulous Centrepay providers. In addition to ensuring that the Centrepay administrative program is more sensitive to such cultural nuances, it is also recommended that the Department investigate establishing an easy to access section within the website which allows registered Centrepay customers and their financial advisers/counsellors to rate Centrepay service providers. This would not need to be a complicated system with large moderator or administrative upkeep requirements, but could be a simple system that listed registered providers by service reason category, and customers and their advisers/counsellors could allocate a number of stars against the provider to reflect their experiences with using the providers’ services. It would more quickly become apparent from such a dynamic customer feedback system, the names and locations of providers that are well-aligned with the larger Centrepay purpose, and also those that have customer friendly systems and processes. Increased overt ‘outing’ of problems via both a complaints hotline and the suggested rating system, will lead to more robust compliance and greater Centrepay integrity.

Centrepay relationship with other regulators Working closely with other regulators can be a means of augmenting limited resources within the compliance field.

In its Centrepay Policy document describing the approval criteria for service providers being accepted into the Centrepay system, the Department states that it will take into account any adverse information received about the service provider from the Australian Competition and Consumer Commission (ACCC), the Australia Securities and Investments Commission (ASIC), other regulatory bodies (including State fair trading agencies) and any other relevant agencies. But it was unclear to the Reviewers the extent to which this is systematically or routinely done by the Centrepay Account Managers or management team. There are processes to check on a service provider’s ABN, the existence of a Credit Licence in the case of whitegoods providers, and the existence of a valid licence for a real estate agent. However, fair trading agencies were apparently only approached when there was something overtly ‘suspicious’ about the service provider applicant. As described in the Centrepay Policy document, once approved to be part of the scheme, the Department enters into a contract with the service provider which provides a level of protection for the Department ‘and, through the Objective of the Centrepay Scheme department, the Customer’ (although the contract makes no mention of the Centrepay Objective or providers adhering to it, only the Policy document does). The Policy document very clearly points out that there is also a contractual relationship between the customer and the service provider, stating ‘The Department is not responsible for any money owed to the service provider by the Customer, or any failure in the proper delivery of goods or services by the service provider.’ The Department very overtly directs customers to ASIC or ACCC if there are any complaints made to it about poor standards or faulty goods and services. Alternatively, the Department refers the customer to an external dispute resolution system. However, many categories of service providers don’t have such a body. Further, the referral of customers to other regulators would seem counterproductive in the cases of those customers that are reticent to make a complaint to any Government body, let alone one they have never dealt with. In its responses to this Review, the Department very clearly and repeatedly articulated that “it is not a regulator”, but that it works closely with regulators such as ASIC and the ACCC. That the Department is not a regulator for Centrepay is legally correct as it is not a statutory scheme, so in order to ensure that Centrepay customers are not negatively impacted through their participation in the Centrepay scheme, the Department needs to work closely and in a timely fashion with external regulators. The Department asserted that this was the case, but the practice of close cooperation with and timely responses from the Department were disputed in Review interviews with both ASIC and ACCC. Further, the Department noted that a Memorandum of Understanding (MOU) was in preparation with both regulators to facilitate closer cooperation and information exchange. Unfortunately these MOU’s have been ‘in preparation’ for some time and are still not finalised. In their joint submission to this Review the ACCC and AER note their commitment to further development of engagement and cooperation activities with the Department, and that establishing a clear contact point within the Department to facilitate these efforts would be useful. This does suggest that previous efforts have been less than ideal and more formalised cooperative arrangements would be beneficial in future. Both ASIC and ACCC have also expressed frustration with the Department’s lack of response in numerous circumstances when either of them have been investigating fraudulent or unconscionable behaviour by a

Centrepay service provider. The Department has been reluctant to suspend or terminate a contract with a service provider until the offences by the provider have been proved in a court of law. The current Centrepay operational system that has placed the dual responsibilities of relationship management and compliance in the hands of the Account Manager has also at times possibly prevented the regulators in getting timely action from Department. The Department needs to work more closely with regulators and, as a matter of urgency, to finalise MOU’s that are general in content and include real expressions to cooperate, as currently exist between ASIC and the ACCC. Utilising the format of these existing documents as the basis for a specific agreement between Centrepay and regulators means it could potentially be quickly adopted by the Department.

Codes of Conduct – generic and industry specific In order to give the Department legal standing as more of an enforcer of standards with service providers, it should capitalise on the fact that the Centrepay scheme is not a statutory scheme, and hence can be moulded into a shape that, from both an operational and policy perspective, better guards the interests of Centrepay customers. This could be done by including in the contract, in plain English, standards of behaviour and a commitment to adhere to the Centrepay objectives. It could also be done via voluntarily signed Codes of Conduct or Practice, both at a generic Centrepay participation level, and perhaps more finely targeted sub-Codes for specific industries that were considered high risk or prone to working against the goal of improved customer financial capability. The generic Code could include such commitments by service providers as, for example: to treat the customer with respect and at all times to have the customer’s financial welfare at the forefront in any dealings; to ensure that the customer understands the contract with the provider and how it works; to never approach new customers via door knocking, texting or other random solicitation methods; and to ensure that the provider’s activities in relation to Centrepay customers will not bring the Department into disrepute. See examples of specific sub-codes for relevant industries in Chapter 8, Government responsibility in relation to Centrepay. Once the service provider has signed the code of conduct, if there is any breach the Department will immediately have cause to investigate and potentially terminate the contract if the breaches are persistent and/or egregious and not fulfilling the Centrepay Objective. In effect, the Department could set its own rules and then enforce them, without having to rely solely on outside regulators.

The business model that sits behind Centrepay

$26 per customer per year Centrepay charges service providers a transaction fee for each deduction it makes under the Centrepay scheme. The revenue from these transaction fees is intended to cover the costs of administering the Centrepay scheme, including:

• authorising eligible providers; • setting up, changing and cancelling customer deductions; • communicating with customers about their deductions; • communicating with service providers; • monitoring and auditing the appropriate operations of providers and their interactions with

Centrelink customers; and

• ensuring adequate risk management around the scheme. The current deduction fee of 99c (including GST) per fortnightly transaction equates to approximately $26 per annum per customer (including GST), for those service providers paying the ‘advertised’ rate. Centrepay’s policy, and included in the contractual arrangements it has with service providers, is that they must not pass on this deduction fee to customers. Some complaints have been lodged around this point, particularly in relation to real estate agents, but in actuality it is probably difficult to monitor or ascertain if the cost of the good or service has been increased to absorb the deduction fee. The implementation of the Department’s objective of Centrepay fostering financial inclusion for customers is dependent on service providers signing up to and participating in the scheme. However, their involvement is reliant on a commercial assessment that they are able to absorb/offset this $26 annualised deduction fee per customer via savings elsewhere. A service provider receiving fortnightly deduction revenues of $10 from a customer, or $260 annual deduction revenues, has less commercial capacity (all other things being equal) to absorb the $26 annual deduction cost (10% of total revenues collected via the deductions) than does a service provider receiving say $50 per fortnight deductions per customer (or $1300 per annum), given that the same $26 per annum cost of deductions represents only 2% of the total revenues generated by the larger fortnightly deductions. Effectively this means that the larger the customer’s fortnightly deductions, the lower the percentage cost of having Centrepay facilitate those deductions per customer and the more affordable the fee is for the service provider. As mentioned in Chapter 4, very tangible benefits can accrue to a service provider from its use of Centrepay as a payment channel, particularly in relation to reducing the service provider’s costs of following up with overdue accounts and writing off bad debts, and in relation to the improved cash flow outcomes for the service provider. But there is also potentially a tipping point where the proportional deduction costs might outweigh the benefits, especially for small businesses such as professional services where the average fortnightly deduction cost has been less than $30. Water utilities and ambulance service providers are also associated with similarly low average fortnightly deduction amounts. A small private business may have no incentive to participate in the program and perhaps shouldn’t be participating. Alternatively, the business will charge a higher price for providing the same service to the customer or extend the length of the contract over which the service or product is paid for in order to increase revenues from the product or service. Both these alternatives result in a higher priced service or product for the customer, which would be antithetical to the financial inclusion objective of Centrepay. In its review of service reasons, the Department should factor in the commercial cost of participation ($26 per customer per annum) in assessing the provider’s capacity to absorb the cost without increasing the price of the service to the customer.

History of revenue determination and fee setting According to Centrelink, after trialling Centrepay with no deduction fee for 6 months in 1998, fees of 92c per deduction were introduced in early 2000. Fees were discounted from this level for three primary reasons:

• as a marketing incentive to encourage public utilities to make Centrepay nationally available rather than them just targeting their hardship customers with Centrepay;

• as a means of achieving widespread service provider uptake of Centrepay and achieving a marketing promise that Centrepay could be used nationally to pay utility bills; and

• for Centrepay to be able to compete as a payment channel within the commercial universe of the direct deduction market.

By mid-2001, the discounts offered resulted in some service providers variously having to pay fees of 60c, 55c and 50c per deduction. GST applied to all these fee levels, but in order to make the rounding up of fees plus GST in service provider customer accounts simpler, the basic fee was set at 90c plus GST, or 99c in total, at the end of 2005. Also at the end of 2005, No Interest Loan Scheme (NILS) providers using the Centrepay system were granted a zero deduction fee status by Ministerial instruction. Discount fees below the 90c have not been offered since 2011. The discounted deduction fees are accorded on the basis of the service reason, and as some service providers provide a variety of services, different discount rates can apply to different deduction streams going to the same provider. Categories of service providers currently afforded discounts include: No Interest Loans Scheme (NILS) providers, home care services, school nutrition programs, gas and electricity providers, State Justice Departments collecting fines, funeral benefits funds, household goods providers, general community housing, council services, water utilities and education services. It is important to note that not all service providers in all the mentioned categories enjoy the discounted rate, as for the most part, discounts were only offered to service providers who generated significant volumes of deductions, under the assumption that economies of scale would apply within the Centrelink processing operations as a result of the larger volumes per provider. To date, this assumption has not necessarily proved to be the case. The number of service providers afforded discounts is only very small by number of providers (a little over 100 providers), but the impact on Centrepay revenues of those with discounts is substantial. It is estimated that the revenue forgone by the department through discounted or waived fees is in excess of $5 million annually. To put this into perspective, total revenues collected in the financial year 2011/12 were $13.4 million. In addition to the deduction fee discounts being offered to selected providers, some service providers are also invoiced the deduction fees on a monthly basis rather than having the fees taken out at the time of the customer deduction being made on a fortnightly basis. (For example, under fortnightly fee levying if the customer deduction is for $10.00, the service provider would only receive $9.01 whereas under monthly invoicing they would receive the full $10.00 and have to pay the 99c at a later date). According to Centrelink, billing in arrears is not a standard offer and is mostly only provided in restricted circumstances. It is provided to real estate agents and service providers who need to deposit customer

payments into trust accounts, and it is provided to some utilities that have a requirement for this arrangement due to their IT systems linking to monthly billing cycles rather than fortnightly deduction cycles. There are also certain other service providers who have negotiated to be invoiced rather than having their payments deducted at source fortnightly. Clearly, this is another economic or commercial advantage accruing to only certain service providers, with a cash flow benefit for the provider and negative cash flow impact for Centrepay. It is recommended that the Department review all contracts that include either one or both of the special contract conditions of discounted fees and monthly invoiced payment of fees, to establish if the economies of scale purported to exist in association with the contracts actually exist as far as the Department is concerned. In addition, it should be determined whether there are real systems impediments at the provider end to necessitate monthly invoices, and, most importantly, whether from a policy perspective, encouraging some providers and service reasons over others, with reduced fees, is helping to facilitate the objectives of Centrepay.

Cost recovery policy The Australian Government has a formal cost recovery policy to improve the consistency, transparency and accountability of cost recovery arrangements and to promote the efficient allocation of resources. The underlying principle of the policy is that entities should set charges to recover all the costs of products or services where it is efficient and effective to do so. The lack of transparency to date around the cost recovery basis of fee setting within Centrepay has led stakeholders to comment that there is a conflict between looking after vulnerable customers and account managers chasing additional service providers to participate (Financial Counselling Australia, Brotherhood of St Laurence). This fear, while understandable, has proved to be misplaced on examination. While Centrepay is not a profit generator for the government, it was intended that the levied fees cover the costs of administration. However, there has been a lack of commercial rigour exercised around capturing costs and fixing fees at levels to cover those costs. Current internal expenditure assessments around Centrepay are just that, estimates of the marginal extra costs associated with the running of Centrepay within the larger Centrelink operations. Close examination has revealed that the marginal costs identified to date understate the true cost of the activities and systems involved. Further, the current resources allocated to, and the activities involved in, the administration of Centrepay are not adequate to ensure that the customer welfare responsibilities that come with the promotion of Centrepay as a government sponsored service can be adequately carried out. So not only are existing administrative costs not adequately accounted for, but costs which should be incurred for the provision of the service are at times not contemplated, and hence not included, in the current cost recovery model. These uncaptured costs relate not only to risk management systems and human resources, but also to systems and infrastructure investment. As mentioned previously, there has been a lack of capital investment in IT systems specific to Centrepay, which has resulted in both inefficiency and a lack of readily available information to strategically run Centrepay.

The benefits afforded to certain service providers of discounted fees and monthly invoices instead of deductions at source, were assumed by the Department to have been warranted on the basis of economies of scale applying to the volumes generated by most of the providers receiving the benefits. However, it seems to have been more of an assertion than a tested hypothesis. Observing the processing procedures in Hobart’s CBS, it could easily be concluded that the processing of faxed deduction forms took considerably longer than MDF email processing, yet some providers who submitted forms via fax received larger discounts than those submitting MDFs. Additional to the processing costs incurred, the Department also has compliance and risk management costs to recover, and these should vary according to the risk level associated with the category of the goods or service provided. A high risk category would need to have more application approval and subsequent compliance resources applied to it than a low risk category. The random audits conducted by the account managers include a higher sampling of high risk businesses and the non-random audits are usually of businesses about whom complaints have been lodged and or suspicious activities have been observed. The costs of this differential compliance activity for different service reason categories are not taken into account when discounts have been set. Further, the totality of the current available compliance resource has been too small to ensure the Centrepay system was being robustly monitored on behalf of its customers. Effectively, the Centrepay scheme has been operating on a cost base that has not adequately captured the costs that should be associated with operating a robust and rigorous risk management and compliance function around a multi-faceted service provided to a diverse customer base. The estimated costs that have been input into the cost recovery formula in the past have been understated. At the same time, the revenue benefits that have been afforded to some providers have not been warranted, either on the basis of the actual costs involved in servicing their business, or on the basis of the costs that should have been incurred to service their business in accordance with the Centrepay purpose as regards customers.

Future revenue setting business model The future revenue setting business model should also include the costs of communicating about Centrepay to customers, including education about its benefits and pitfalls (for example, the lack of nexus between the Centrepay deduction regime and the contract between the customer and the service provider means that the contract with the provider persists, even when Centrelink benefits may not). This would also require additional staff training and education about the Centrepay scheme, and, as suggested in the recommendations from the EPS Forum in 2012, the development of a specific ‘Service Offer’ for Centrepay as part of Centrelink standard practice. The Centrepay scheme is mostly working well with those customers who use it, but even they have said in customer forums that they would like to understand more about it. Some of the comments at the EPS Forums in 2012 included:

• customers wanted more detailed information about Centrepay, what it can be used for and how to manage deductions;

• many had little understanding of who administered the service (even existing customers were not aware it was administered by the Department);

• even those customers who had found out about Centrepay via the Department (around 41%) felt they weren’t fully informed or confident about how to use the system (Department of Human Services 2012b).

Then there are the more than 90% of Centrelink customers who do not use Centrepay, a large proportion of whom may well find positive attributes in its use. Potentially, if Centrepay was more widely used by vulnerable groups there may even be less impetus for programs such as Income Management. It is recommended that detailed work is undertaken on both a commercial/economic basis and on a policy basis, to re-examine both the current cost recovery model and the current revenue model, and how they each work. The cost recovery model needs to take into account a proper assessment of the real costs of providing the Centrepay service (as opposed to the marginal costs), both in its current form and in an improved form with more, and more calibrated, risk management and compliance activities included. The new cost model should also factor in increased investment in IT resources and increased investment in promotion of and education about the Centrepay scheme.

Government responsibility in relation to Centrepay

Safeguarding customer welfare Centrepay provides the Department with a specific challenge as to how it administers a service specifically aimed at improving its customers’ financial circumstances. As a service that differs markedly from the more interventionist approaches such as Income Management, Centrepay carries within its core purpose a requirement that it is providing a tool for increasing financial capability, thereby achieving the objectives of social and financial inclusion. But the Department is also reliant on the external service providers with which Centrepay has contracts for the facilitation of this financial capability tool. There is no Centrepay without the involvement of businesses and service providers. The challenge for the Department is to develop a symbiotic relationship with business in the provision of the Centrepay scheme in a manner that is empowering rather than prescriptive as far as the customer experience is concerned. This does not mean, however, that the Department can ignore the structural contexts in which its customers operate. As the National Welfare Rights Network notes:

The Department of Human Services has a duty of care to ensure that participating businesses do not place already vulnerable people at risk of increased financial hardship. It is critically important that people on low incomes including people with vulnerabilities who use the scheme and the broader community maintain confidence with the Centrepay system. (National Welfare Rights Network submission, p.5)

Provider participation in Centrepay and safeguarding customer welfare Nowhere is this more evident than in the current relatively unmediated relationships between Centrelink customers and service providers, especially when service providers behave in an exploitative and predatory manner:

If Centrepay is seen as a financial capability tool to support people who are made vulnerable because of their low income levels, then it is vital that only reputable and responsible service providers are able to access the system, and that Centrepay supports a non-exploitative market. (Good Shepherd Youth & Family Service and Good Shepherd Microfinance submission)

Many if not most customers would see the inclusion of a provider in the approved list of Centrepay service providers as a tacit endorsement of the provider, its services and its business practices by Centrelink and hence the government. This is reported as being particularly the case, and particularly acute, amongst Indigenous and non-English speaking customers. The responsibility that the Department has towards its customers in relation to meeting this expectation about Centrepay should be exercised through a more rigorous approval process before allowing a provider to become an authorised Centrepay scheme participant, and then through monitoring the behaviour of the service providers once in the system. Despite the deeply held concern about, and desire to improve, customer welfare amongst all Centrelink staff, the administration of Centrepay requires a cultural shift to more of a watchdog status than currently exists. However, given the non-statutory nature of the Centrepay scheme, Department staff have to date been reluctant to take on such a role. Instead they have relied on other regulators enforcing legislation, at a distance somewhat removed from the daily Centrepay operations. In order to provide the Department staff with the proverbial ‘stick’ with which to threaten providers who are not fostering the core purpose of Centrepay or who, worse, are exploiting the system, it is recommended that the Department devise clear and prescriptive Codes of Conduct to which all would-be providers would need to voluntarily subscribe. The Codes of Conduct would build an explicit nexus between the purpose of Centrepay and the service providers’ goods and service offerings and how they go about providing those to Centrelink customers. Providers’ adherence to the Code would be monitored in addition to monitoring the carrying out of their contractual obligations to Centrelink, and any consistent or egregious breaches of the Code could be immediately acted on by the Department. To illustrate why more needs to be done, the following examples were included in submissions about practices by service providers that could be perceived as ‘unconscionable’ or lacking in any moral or ethical sensibility toward customers:

• A rental company is under investigation after allegedly targeting Indigenous communities with predatory loans that required one person to pay more than $4000 for a $500 laptop. (Financial Counselling Australia submission)

• The media, in an article warning consumers about the fine-print in rent-to-buy schemes, reported that a leading rent-to-buy company had advertised a plasma TV at $16 per week over three years, meaning a total payment of $2500 for an item with a recommended retail price of $700. (Financial Counselling Australia submission)

• A financial counsellor working in Mildura identified many clients from the Dareton community in south-west New South Wales who had taken out rental agreements with one particular rental company that door-knocked homes, offering loans for household goods. According to one rental agreement signed in January 2011, the client will pay $4160 for a laptop worth about $500 through 52 fortnightly payments of $80. (Financial Counselling Australia submission)

• An Aboriginal woman who is a Warlpiri elder with a hearing impairment was signed up by a sales rep to purchase a single bed base and mattress worth $250, with total repayments costing more than $1430 over a 12 month period. She was not provided with a copy of the agreement, and later found that after the payments ended the company still owned the goods. (Northern Australian Aboriginal Justice Agency)

• Evidence was provided about a restaurant in the Northern Territory that allows customers to ‘book up’ food purchases using Centrepay. One customer reported signing a Centrepay deduction form for a single transaction (and was not given a copy of the contract), but then found several months later that regular $30 deductions were still being made from her account. On inquiry, the restaurant claimed that its practice was to only stop taking deductions two months after the customer had last made a purchase. (Northern Australian Aboriginal Justice Agency)

• The chief executive of Mildura Aboriginal Corporation cited one client who paid up to $2000 for a washing machine worth no more than $600. (Financial Counselling Australia submission)

The Financial Counselling Australia’s 2012 Report on Centrepay has received significant support from organisations across Australia committed to advocating for low-income consumers, with particular concern expressed about the practices of rental/lease companies. The Consumer Action Legal Centre NSW, for example, was not alone in arguing that:

Retail/Consumer Lease companies for consumer goods should be removed from the Centrepay scheme or in the alternative be treated by Centrepay with increased scrutiny both in the application phase and necessary review of existing Participants.’ (Consumer Action Law Centre NSW submission)

While there was by no means universal support for the proposition that all companies of this type should be removed from Centrepay, there is a solid body of opinion that, in the words of the same Submission:

... a Government-backed scheme such as Centrepay adds legitimacy to Participant organisations and makes it too easy for Participants to access vulnerable consumers.

The welfare safeguarding attributes that customers and stakeholders assume Centrepay to be associated with, mean that access to it by service providers should be treated as a privilege that comes with responsibilities additional to the standard requirements under national consumer laws. This would require a reorientation on the part of Centrepay messaging, as the current messaging is still more focussed on selling the Centrepay payment mechanism to businesses. This is something of a hangover from the very early days of Centrepay needing to get enough businesses on board to be able to offer its customers a comprehensive national service. This reorientation in messaging also needs to be reflected in a more fundamental reorientation of practice. Centrepay operations and systems would need to be restructured in such a way as to not only prevent unscrupulous businesses from operating with what is perceived as a Government blessing; it needs to be actively promoted and presented as a program that is oriented towards financial capability and inclusion outcomes for its customers. In line with this view, the Commonwealth Ombudsman asserts that:

…Centrelink has an obligation to its customers to be accountable for payments it makes on a person’s behalf. In our view, Centrelink, and not the [service provider], must ensure its customers have access to complete information about Centrepay and how it works before the customer makes a decision, prior to Centrelink authorising a deduction and throughout the duration of the Centrepay arrangement. (Commonwealth Ombudsman submission)

Sensitivity to cultural differences In the course of this Review, evidence has been presented not only of the abuse of the scheme by some service providers but also of the difficulty faced by individual and consumer organisations to have such abuse investigated and resolved. This is particularly the case with vulnerable customers, those from culturally and linguistically diverse backgrounds and those with low literacy and/or financial literacy levels. In its meetings with Centrepay customers Reviewers heard the story of an Indigenous woman, ‘Mary’, who received an unsolicited visit at home in the evening by a rental goods company and as a result signed a contract for a clothes dryer with that company. The same company had made similar unsolicited visits to many others in her community. Not only did Mary not receive the dryer until sufficient deductions had been taken from her benefits to pay for the cost of the dryer and its transport to her community, but the dryer was faulty and soon didn’t work. She eventually complained to a local non-profit welfare agency that followed up on her behalf, but most of her fellow community residents did not complain about similar experiences. When asked why the others were not prepared to complain about the unconscionable service Mary replied: “they felt ‘shame’ and thought that Centrelink would think they were bad for making a mistake in the way they signed up for one of Centrelink’s services”. Some also worried that Centrelink would think they were bad for having used a family benefits payment to pay for the rental goods instead of spending it on something more directly or overtly associated with their children’s welfare. As noted in the submission by the Indigenous Financial Services Network,

…it is our experience that the most vulnerable clients in the community often lack confidence in making complaints. A system servicing highly vulnerable clients on extremely low incomes should be maximising every opportunity to ensure strict compliance themselves, removing the onus on the clients to protect themselves from further disadvantage.

Service providers to sign on to upholding Centrepay purpose As has been recommended earlier, the Department’s contract with the service provider should have a strong inbuilt connection with the purpose of Centrepay and it should overtly refer to providers’ needing to facilitate that purpose in their dealings with customers. The additional introduction of a Code of Conduct to be voluntarily signed by all service providers will help provide guidance as to how that purpose might be met by prescribing appropriate and inappropriate behaviours and activities between providers and Centrelink customers.

Household goods rentals The service reason category most often mentioned in submissions and stakeholder meetings in relation to customer welfare issues was household goods rentals. The main charge against this category of providers was that their provision of consumer durables and appliances via rental contracts often cost the customer far in excess of the value of the goods. Stakeholders consistently told the Review that the household goods rental category, with its very overt rent-to-buy advertising, was usually interpreted by customers as a means of gaining ownership of a good. The assertion was made that most customers want to own the goods, not rent them. However, the customer’s ownership goal often did not materialise, particularly, for those customers on perpetual rental contracts. It was also asserted that being able to use Centrepay deductions for household goods rentals often resulted in the customer overextending him or herself financially, and sometimes this resulted in insufficient funds then being available for basics such as food.

Size of the household goods rental category In 2011/12 a little over $188 million worth of Centrepay deductions (11% of total deductions) related to the payment of household goods rental products, representing approximately $15.7 million in deductions per month. The category has been growing, as over the first 8 months of 2012/13 the monthly deductions averaged closer to $18.2 million, an increase in the average monthly dollar value of almost 16%. The household goods category is likely to exceed $200 million on an annual basis by June 30, 2013. As at March 2013, there were approximately 118,700 Centrepay deductions for household goods (up from 107,000 12 months prior), and the average deduction size per fortnight was edging up to $76 from $72 a year earlier. Only court fines and electricity have higher numbers of deductions. There were in excess of 300 service providers registered under the household rental goods category, but the deductions are not evenly distributed across that number of providers, with a few large companies dominating. According to an IBIS industry research report from October 2012, ‘Furniture, Appliance and Equipment Rental in Australia’, the industry nationally is valued at around $1.5 billion (IBISWorld 2012). IBIS

estimated that some 35% of that gross figure, or $525 million, relates to electronic rentals (including televisions, stereos, DVD players and computers) and household appliance rentals (including fridges, ovens, microwaves, toasters and blenders). The remainder of the industry category includes party equipment, clothing, residential and office furniture (including high end goods) and recreational equipment.

Characteristics of the household goods industry According to the IBIS report, ‘renting appeals to households with no previous credit history or who have a low credit rating, since most operators do not undertake credit checks on customers. Security for the rent-purchase agreement lies with the goods rented, which can be repossessed or returned at any stage if customers fall behind in their payments.’ (IBISWorld 2012) The IBIS report states that the largest players in this industry are the Thorn Group and Mr Rental, however, they characterise the industry as having a low level of market concentration:

The industry comprises many small scale geographically dispersed firms which operate in narrow regional or niche product markets. The industry includes many non-employing establishments, typically one or two person businesses in which the proprietor may function on a full or part-time basis (IBISWorld 2012).

At face value, the Department’s statistics showing over 300 registered providers for this category mirrors the IBIS report’s description. It raises the issue of whether or not it is likely that one or two person establishments engaging in the provision of rental goods to Centrepay customers would have appropriate systems (including dispute settlement systems) to adequately ensure their dealings with customers met the Centrepay purpose. It would also appear unlikely that such small establishments would have many of the economies of scale in their operations or the volume buying power to ensure that Centrepay customers received the best possible deal. Anecdotally, it appeared that remote and very remote communities were serviced by the very small household rental goods providers. The conundrum is how to encourage the larger service providers to enter the market in these more remote locations that are currently only being served by the small players, who are often willing to exploit the lack of choice or alternatives faced by residents. The Department could consider offering a range of incentives, either through contract terms or alternative fee structures, for the larger and more reputable service providers to increase their coverage to remote locations. In conjunction with suggested reforms to introduce an industry specific Code of Conduct, this would ensure that remote communities are still receiving access to required goods and services, at the same time as reducing the risk that they will be paying severely inflated costs for access to those products.

Regulatory framework governing the household goods rental sector As mentioned previously, it has generally been Centrepay Policy not to permit the use of Centrepay for goods and services which entail or facilitate the accumulation of debt by the customer (with some exceptions, eg NILS). This has meant that for a customer without a credit card or an acceptable credit history who is in need of a fridge or a bed, there have really only been two options available: rent the goods or approach a short term/high interest lender. The Department does not allow the repayment of debt via Centrepay deductions, so it is not known how many Centrelink customers avail themselves of the high interest lender option. This leaves renting or leasing goods as the only way of getting a fridge via Centrepay deductions.

Leasing products in the market There are generally three types of leases or lessors in the market: 1. A lease which is regulated by the National Credit Code (part of the National Consumer Credit Protection Act 2009 and NCCP authorised). This will meet the following criteria: it is for a fixed period, the amount paid exceeds the cash value of the goods, and the contract does not contain an option or obligation on the consumer to purchase the goods at the end of the lease (so the consumer does not have a legal right to own the goods). These regulated leases are called ‘consumer leases’ in the National Credit Code – the lessor is required to hold an Australian Credit Licence (ACL) and to meet a range of other disclosure and responsible lending obligations, such as: being a member of an external dispute resolution scheme, reporting to ASIC annually, having to ensure that a consumer can meet repayments without substantial hardship before entering into a transaction with the consumer, and having reasonable and systematic arrears and notice policies and procedures. With this category of lease, the lessor has to disclose the repayment amount and the total of repayments, but NOT the total amount payable relative to the cash value of the goods or a notional or effective interest rate. While the consumer does not have certainty they will own the goods at the end of the contract, in practice this is often not a problem as most lessors will facilitate ownership by giving the goods away or selling the goods for a token amount. The commonly advertised ‘Rent, Try, $1 Buy’ offers fit into this category, with the contracts carefully worded to ensure they are not captured under credit contract legislation that would, amongst other things, require them to advertise interest rates. By and large, the costs involved in applying for and maintaining ACL licensing standards are likely to ensure that the lessor companies have a commitment to repeat and ongoing business, and therefore in order to preserve their reputations, would have higher standards of conduct than unlicensed lessors. 2. A consumer lease which is being offered by someone illegally, that is they do not hold an ACL and are unlikely to be complying with the protections in the National Credit Code. Clearly, this is a version of leasing that the Department would not be actively authorising, but it is not known if there are any

providers currently registered for Centrepay deductions that might nevertheless fall into the category. Such providers would be unlikely to bother assessing a customer’s capacity to meet repayments without hardship, would potentially specifically target vulnerable customers via door to door selling, and are difficult for ASIC to catch until there is evidence of systemic misconduct. 3. A lease which does not require the lessor to hold an ACL as it is not a consumer lease : most commonly this will either be a lease that is exempt due to the contract being for 4 months or less (but the contract is continually renewed), or it is exempt because it is for an indefinite period (the lessee must keep making payments in order to retain possession of the leased goods). It can be surmised that firms that offer these ‘perpetual’ leases do so in part because the structure of the leases allows them to avoid the costs and scrutiny of regulation under the ACL regime. They are unlikely to assess a customer’s capacity to meet repayments without incurring hardship, and they potentially offer the customer the most expensive form of accessing goods, as the lessors in practice rely on the Centrepay deductions continually being made, otherwise the goods are repossessed. It is known that such firms are currently registered for Centrepay deductions, as the Department has introduced a requirement for them to sign off on a compliance plan in lieu of having the ACL. The level and format of monitoring the implementation of and adherence to this compliance plan is not known by the Review.

Future possibilities for household goods acquisition In the first instance, it is recommended that the Department re-examine its policy in relation to the accumulation of debt via Centrepay deductions and its ban on Centrepay deductions being used to pay off credit products. There is clearly an anomaly if Centrepay can be used to obtain goods via high-cost finance (Rent to Buy leases) while lower cost options are not allowed. In association with this recommendation, the Review would envisage that the Department might work with some of the large white and brown goods retailers to investigate alternative customer assessment procedures. These could include the possibility of using the steady flow of Centrepay deductions in their assessments of a customer’s credit worthiness, and to create product acquisition programs for Centrelink customers that included the ACL responsible lending requirements, including making an assessment in relation to a customer’s capacity to make repayments without incurring hardship. Opening up the field to a much broader range of providers will not only reduce the cost of household goods for customers least able to afford current expensive leases, but it will also potentially make lessors more competitive in their own offerings.

Regulatory precedents for taking a more prescriptive approach with rental goods providers As regards Centrepay continuing to allow deductions to be made for leased products, the Review does not recommend banning this option, but instead recommends a range of measures that draw on Centrepay’s non-statutory status, on precedents from recent legislative initiatives in relation to small short term lenders, on US precedents in relation to regulating rent-to-own providers, and on mooted legislative measures in relation to consumer leases (see April 2013 Treasury discussion paper, ‘Changes to

Disclosure Requirements under National Consumer Protection Act 2009’, in particular, Attachment F, Consumer Leases). Short term loans After lengthy investigations, and the issuing of discussion papers centred on the practice of small amount lending, the government has recently introduced legislation that will require those offering small amount credit contracts ($2000 or less) with a term of less than 1 year to cap the interest rate at 48%, and to overtly disclose to their customers possible alternative financial products of which they might avail themselves, such as NILS loans. A regulation has also been introduced whereby, if the customer’s primary source of income is from Centrelink payments, the loan repayments cannot exceed 20% of their income. US regulatory precedents By way of background, the Review also draws attention to regulatory developments in the United States pertaining to rent to buy leasing schemes. Rent To Own (RTO) laws are not covered by US Federal legislation but rather by individual States. The legislation varies somewhat from State to State, however there is a similarity of regulatory intent among the six States the Review examined for precedent purposes. The Vermont legislation was typical. In Vermont, RTO transactions are governed by the Rent to Own Disclosures Bill. Requirements within the RTO agreement as per the Bill include disclosing:

• the total cost of rental-purchase ownership • a statutory limit on consumer’s risk of loss • if the product is new or used • the cash price of the property • any buy-out options and the right to acquire ownership • any other charges • the timing, amounts and total number of periodic payments to acquire the property • the effective annual percentage rate • the product is only being rented and it will not become their property until they have made all

scheduled payments or use the early purchase option. Other US States with similar legislation included New York, Minnesota, Maine, California and Arizona. In some States the requirement for the effective interest rate to be published was replaced by a requirement to publish the cost of the lease service.

Rental goods providers and Centrepay In order to address existing problems raised throughout this Review process in relation to the rental of household goods, it is recommended that:

1) Only NCCP accredited organisations are registered for Centrepay household goods deductions. 2) Indefinite leases or the rolling over of four month leases are disallowed. For any customer

genuinely only wanting to access a good for a short period via a rental contract, a four month lease with an NCCP accredited provider could be allowed.

3) All Centrepay authorised household goods rental providers would voluntarily sign a specific Rental Goods Code of Conduct (in addition to the generic Centrepay Code of Conduct), that would not only incorporate adhering to the purpose of Centrepay, but would also include having to ensure the rent to buy service is structured so as to limit the lease terms to one or two years (a suggested inclusion in the Code of Conduct despite the Credit Act preventing lessors giving consumers a contractual right to purchase the goods at the moment); disclosure of the effective or notional interest rate or cost of the lease which is not to exceed 48% per annum, including the cost of delivery, maintenance and replacement if the good is faulty; and the lease documentation to clearly include not only the total cost of the contract but an indicative retail price for the product.

4) The Department may also choose to investigate the appropriateness of limiting the percentage income that can be allocated to rent to buy deductions in the case of households with only one Centrelink income and no additional outside source of income.

5) In consultation with stakeholders, and drawing on the US legislative experience, ASIC and the Federal Treasury (which has been actively working on disclosure issues for a range of financial products), the Department should also ensure (via the provision of the signed Rental Goods Code of Conduct) that a range of other relevant information is made available by the provider to the customer about the ongoing costs and obligations of the contract and about the legal status in relation to ownership of the goods.

It is recognised that the suggestions for what might be included in the proposed Rental Goods Code of Conduct might not be completely in accord with the current legislation governing consumer leasing products. However, that legislation is intended to be applicable to the entire leasing market, not just that segment of the market that utilises Centrepay deductions for lease payments. It is within the Department’s authority in relation to how it wants to see Centrepay used to adopt policy settings that are specifically intended to help it safeguard the welfare of its Centrelink customers. Lessors can then choose to participate or not participate in the Centrepay deduction scheme via signing the Rental Goods Code of Conduct.

Transition arrangements for household goods The Review acknowledges that there were would be quite complicated transitional issues to deal with in moving from the current status quo to the new recommended rent to buy regime, as many of the 300 plus service providers would not be able to meet the recommended deduction authorisation hurdles or the Code of Conduct requirements, but would have existing rental arrangements with Centrepay customers. Nevertheless, careful planning with balanced consideration of customer welfare as the focus should achieve the desired outcomes over time. In the interim, the Department should move quickly to ensure no new perpetual leases with onerous costs can be entered into by customers, particularly with organisations that are not NCCP accredited.

Addressing other service categories of concern

Funeral benefit plans Another service reason category that received considerable criticism from stakeholders and regulators was the ‘Funeral Benefit Fund’ category. The complaints centred on the structure of the products which were often not well understood by customers and on the (at times) highly onerous, unfair consequences of the structures and exclusions associated with the funds. The plans can require consistent payment over many years with any missed payment leaving the customer without any funeral insurance coverage, despite potentially having already paid well in excess of the costs of the funeral. They can also include exclusions such as suicide and pre-existing conditions, which are often not explained to the customers and/or not understood. In 2011/12 the ‘Funeral Benefit Plan’ deduction category amounted to approximately $6.6 million a year and approximately 9,500 customers made fortnightly deductions. Deductions in this category are dominated by one funeral plan operator. Anecdotally, Indigenous customers are the main users of this deduction category, in large part due to their cultural practices focussing on a profound reverence and respect in matters relating to death and mourning. Kinship members may have to travel long distances across Australia in order to participate in Indigenous ‘sorry business’. There can be significant travel and funeral costs associated with ‘sorry business’ and these costs can be particularly high in remote areas. Funeral benefit plans are sold on the premise of defraying or helping to defray these costs.

Regulatory environment for funeral benefit plans The regulatory framework covering funeral benefit plans is complicated by the various formats in which the product might exist. The Australian Securities and Investment Commission (ASIC) has responsibility for the conduct and disclosure obligations of issuers of funeral insurance and funeral bonds, while the Australian Prudential Regulation Authority (APRA) has prudential responsibility for life insurance companies and friendly societies. Prepaid funeral plans are regulated at the State and Territory level. The plans that are mostly associated with Centrepay deductions provide insured cover and are regulated by ASIC. In contrast to prepaid funerals and bonds which have a fixed total cost, the total cost paid for funeral insurance cover depends on how long the person lives.

Specific Funeral Benefit Code of Conduct As with household rental goods, it is recommended that the Department institute a specific Funeral Benefit Code of Conduct to be signed on to by any provider before they are registered for deduction payments for this category of service reason. ASIC has carried out considerable investigative work in this area and would be an ideal party for the Department to collaborate with in designing the contents of the Code. The Code might, for example, include a requirement for the funeral plan contract to be considered to be met once the customer has paid sufficient premiums to meet a preagreed funeral cost amount, rather than having to continually keep up payments regardless of how much longer the customer lives. It might also prohibit door to door sales. Finally, it might require having a customer overtly sign-off on having understood the consequences of exclusion clauses (written in plain English).

As with the recommendation in relation to household goods rental products, the Department has the right to institute a policy governing the implementation of the service reason that ensures its customers have the fairest and most cost effective options available to them via Centrepay. The policy prescriptions that might be contained in the Funeral Benefit Code may go further than the regulatory framework and legislation, but as signing on to the Code would be voluntary, service providers do not need to comply with the Code if they don’t want to be part of the Centrepay scheme.

Real estate agents and rooming house operators Real estate agents During the course of the Review the practice of real estate agents passing the fortnightly deduction fee on to the customer was regularly raised by both the Department and stakeholders. It is also conceivable that private landlords similarly pass on the deduction to their lessees, but that this has not yet been identified as a problem due to the compliance/audit effort not extending to private landlords in a comprehensive manner. It is suggested that any provider, either individual or company, wishing to utilise the Centrepay deduction scheme for the collection of rent should have in either their Code of Conduct or in their Centrepay contract, a very overt signoff on the principle of not passing on deduction fees to the renters.

Boarding house or rooming house operators It was brought to the attention of the Review in a joint submission by The Tenants Union of Victoria and Council to Homeless Persons Victoria that the Centrepay deduction scheme ‘is misused by unscrupulous operators of unregistered rooming houses, to exploit vulnerable tenants. We strongly recommend that measures be put in place to ensure that rooming house operators are required to demonstrate that their properties are registered with their local council, and provide a national police check in order to be registered as Centrepay merchants.’ Annual revenues nationwide of approximately $10 million are deducted for this service reason category via Centrepay and there are over 100 registered providers. The above mentioned submission related specifically to the Victorian experience and to Victorian regulatory frameworks, however, it is assumed that if problems exist in that State due to the lack of sufficient alternative affordable housing, then they also potentially exist in other States and Territories. The submission stated that while there are rooming house operators who register properties with local councils to ensure the appropriate safety inspections, maintain generally good standards in the properties, and conduct themselves well in their dealings with residents, there are also a large number of unscrupulous operators, often with previous criminal convictions who run poor quality rooming houses that put the welfare and safety of residents at risk. Cases were cited of operators specifically purchasing or taking the head lease over a multiple bedroom home for the express purpose of turning them into rooming or boarding houses. People residing in rooming houses have few other housing options, are often

highly marginalized and thus vulnerable to exploitation, but meanwhile the system, at least in Victoria, has no means of establishing if the operator is a fit and proper person to run such housing. It is recommended that the Department establish special approval criteria, and subsequent compliance monitoring criteria, for the boarding and rooming house category of service provision within Centrepay, to address the issues raised in the joint submission by the Tenants Union and Council to Homeless Persons in Victoria, and institute such other checks that might be pertinent to other State and Territory jurisdictions.

Exploring restriction, expansion and promotion of Centrepay

What is at issue? Centrepay is not a legislated Government program or scheme. Centrepay service reasons are also not based on legislation, but rather on policy directives. Whilst upholding the customer’s right to spend their Centrelink income as they wish, Centrepay does not necessarily need to facilitate this right in all circumstances as it is seen to do at the moment, with its broad list of service reasons that have moved beyond essential services to incorporate requests for services from both the customer and service provider constituencies. This is particularly so if the operation of the scheme itself contains system rules or hierarchies that are often not well understood by customers and that do not always accord with the fundamental purpose of Centrepay of engendering financial inclusion and capability.

Service reason expansion beyond essential goods

Growth of Centrepay service reasons has been welcomed by customers and providers, but not always by customers’ advocates As discussed earlier, Centrepay was originally introduced to help Centrelink clients with budgeting for the payment of essential services, and in the first instance, these were envisaged to encompass only housing and utilities. As customers began to use Centrepay and its effectiveness as a payment tool became more broadly understood, so the demand for the inclusion of more service reasons grew. This demand came from both customers and from service providers who saw the revenue benefits they would reap from accessing Centrelink income streams directly via the Centrepay scheme. The growth of service reasons has resulted in Centrepay now being used for both essential and nonessential services. Customers still want to expand the list of goods and services for which Centrepay deductions can be authorised. Some of the suggestions from the EPS Forum in 2012 for services that are not currently overtly included were: car registration/servicing, medical/dental/optical, Christmas hampers, holidays, veterinary bills, pay TV, household maintenance and donations/charity. Customers also reported that

even amongst the existing approved service reasons such as rent and utilities, not all service providers they dealt with were registered with Centrepay and therefore customers were unable to use the deduction scheme. Another customer highlighted the affordability issues faced by communities in remote locations and how Centrepay could assist:

It would help a hell of a lot if I could use Centrepay for groceries. It would be handy if it were set up here in Palm Island and in Townsville, you have a choice then and you might be able to purchase your groceries a little cheaper. (Customer quote from EPS Forum 2012, North Queensland)

Customers, community organisations and financial counsellors have also suggested using Centrepay for savings purposes, including through a range of microfinance programs currently available.

Research by Good Shepherd Youth & Family Service found that “very few (research participants) could access $2,000 in an emergency, and where this was possible it was often facilitated by borrowing from family or friends”… Centrepay should be extended to microfinance savings schemes to support people on low-incomes to ‘plan ahead’ and have access to an ‘emergency buffer’. (Good Shepherd submission) While many people aspire to save, the reality of finding money to set aside at the end of the fortnight is very difficult. By broadening its ‘Service Reasons’ to accept deposits into a savings account at the start of the fortnight, Centrepay could assist people to automatically prioritise their savings goals. (Brotherhood of St Laurence submission) Kyabra believes its clients should have access to a range of microfinance options including savings options. It is important to reinforce that credit isn’t always the solution to reach financial goals and that savings should be encouraged where possible… (and) recommends that matched savings programs become an eligible ‘Service Reason’ within Centrepay Policy (Kyabra Community Association submission)

The Department has allowed the gradual expansion of the service reasons for which Centrepay can be used as it has seen the budgeting function of Centrepay being augmented by any expansion, with the caveat of it not sanctioning expanding the service reasons to facilitate overt debt accumulation. However, see previous discussions on the lack of consistency around the application of this policy by the Department, and on the perverse economic outcomes this no-debt accumulation policy stance has generated for some Centrepay customers. The growth in the number of service reason categories has not necessarily been matched by significant volume demand for all the service reasons, and as a result, some service reasons have very few users and very low volumes of deductions booked against them. The Department should carefully examine the

demand for current categories and the demand for the introduction of any future new categories to ensure that the demand for the category warrants the costs associated with adequate administration. During stakeholder meetings and in submissions, many (financial counsellors, community services and regulators, but NOT customers themselves) expressed the view that the service reason categories now associated with Centrepay had expanded too far and that there should be a pulling back of the scheme to cover only essential services.

Organisations that should not be able to access Centrepay are those that offer non-essential and overpriced consumer goods, or are in essence trading in credit. (UnitingCare Australia submission) Centrepay was originally set up to help people manage essential bills, but is now being used for more discretionary purchases. It seems that once a business is given access to the Centrepay system, there are few, if any, controls over what products it can sell through it. (Financial Counselling Australia submission) Centrepay is an important service that assists Centrelink clients in managing essential expenses such as rent and utilities… However, what is a major concern for Indigenous clients is that there appear to be a growing number of businesses signed up to Centrepay that do not necessarily fit the requirement of ‘essential services’. (Indigenous Financial Services Network submission)

What’s causing the concern? While much of the commentary around curtailing service reasons has been prompted by financial counsellors’ and advisers’ negative experiences (via their clients’ use of Centrepay) with household goods rental and funeral benefit fund offerings, some has also arisen as a result of the way the scheme itself currently operates. The submissions and commentary calling for change do not necessarily distinguish between the two, in terms of what aspect of the Centrepay scheme is actually exacerbating their client’s hardship. The lack of a cap on deductions, regardless of the payment type or household composition, and the hierarchy of deduction payments being determined on the basis of the timing of the deduction authorisation, regardless of the service reason, are two such operational attributes of the current scheme that can inadvertently result in increased financial vulnerability in certain circumstances. So too is the lack of education about Centrepay which has resulted in many customers’ lack of understanding about the potential effects of the wider Centrelink deduction hierarchy (whereby Centrepay deductions come out after advance and urgent payment obligations are met). Further, the Department’s encouragement of online self-service transacting, particularly as it relates to cancelling deductions, has in some cases facilitated customer behaviour that is antithetical to Centrepay’s purpose of increasing financial capability and budgeting skills. Addressing these operational issues and their inadvertent negative effects could conceivably reduce the incidence of the negative customer outcomes that are currently causing the stakeholder concerns, and

the issue of essential versus non-essential services being included in the Centrepay scheme may become less of a pressing concern. An example of possible action that the Department could take might be to institute a hierarchy of Centrepay deductions favouring essential services (rather than relying on the current system of first authorisation lodged/first deduction paid). A customer with multiple service reason deductions might always have any housing and utilities deductions paid ahead of others, as a Departmental rule. The customer would be made aware of this when signing on for multiple service reason deductions. Another example of the Department changing its operations to better promote financial capability, might be to have alerts within the Centrepay system to trigger a phone call to any customer cancelling housing deductions, particularly if the customer already has a vulnerability indicator against him or her. Similarly, if the logic within the IT system itself contained for example, an automatic requirement to enter a target amount for certain types of goods and services, then overpayment would become less of an issue. It is considered that a combination of amendments to some of the current Centrepay operational rules, in association with the previously discussed introduction of specific service reason Codes of Conduct, will greatly reduce, if not eliminate, the need for contracting the number of available service reasons back to essential services only.

Policy considerations around expansion or curtailment of service reasons As discussed previously, it is recommended that the Department review the current range of service reasons through the lens of operational efficiency, to ensure that the administrative costs associated with maintaining the broad range of service reasons currently available are also warranted by significant customer demand levels and provider participation levels for each of the service reasons. However, it is also important to review the service reasons through the lens of policy integrity and fulfilling the scheme’s intended purpose. It is not sufficient for stakeholders to deem that renting whitegoods not be considered an essential service, if the customer’s only alternative to accessing a fridge to keep the milk cold for the kids is then outside the Centrepay system via a more expensive or more onerous short term loan. If restrictions are placed on existing categories of products and services offered under Centrepay and prolifically used by its customers, what alternative options will those customers have for acquiring and paying for those products and services, and will those options better engender financial capability and inclusion for the Department’s customers?

[We are]…concerned about the consequences of excluding rental operators from the Centrepay system. Some people, particularly women who move to avoid domestic violence are compelled to rent furniture or whitegoods until other options became available. A blanket ban on such items could have unforeseen consequences with this most vulnerable of client groups. (National Welfare Rights Network submission)

The better way forward would be to assess if the current ‘packaging’ or delivery method of any contentious but in demand service reasons, is the most appropriate to meeting the Centrepay purpose. As a result of Centrepay NOT being a statutory scheme, the Department theoretically has unlimited capacity to fine tune it or to make wholesale alterations to it, as it can set the ‘rules’. For example, in the case of customers needing to access household goods, examining large retailer store cards, routinely promoted repayment plans and lay-by options for inclusion within the Centrepay payment system, would appear to be warranted if the Department wants to facilitate cheaper purchase options for the customer. These will not be as inexpensive as cash purchases, but potentially will be more favourable than rent-to-buy schemes. Additionally, if the Department implements the Review’s recommendation to set up Codes of Conduct to govern the delivery of certain products and services, it can capture in those Codes desired outcomes for customers to which service providers will voluntarily agree. From a policy perspective, decisions about the merits of the inclusion and exclusion of certain goods should refer back to the principles and objectives of the scheme. As highlighted in the Australian Banker’s Association (ABA) submission, there are now a wide range of mainstream financial products and services available to community, and in some cases the use of these may result in better outcomes than the financial contracts entered into between Centrepay customers and service providers. If one of the key goals is to foster financial inclusion and capability, and mainstreaming of the most vulnerable members of our community, then the offer of the ABA to work in consultation and partnership with government to identify ways of improving financial self-management of Centrelink customers should be investigated. There is also some demand for Centrepay to allow for deductions to facilitate savings. The Department has sought advice on this issue in the past and found legislative roadblocks to acting as the savings institution itself, that is, the Department taking on the role of holding customers’ benefits payments rather than disbursing them each fortnight. However, it might be possible to devise a savings product in collaboration with a financial institution, into which customers’ predetermined fortnightly savings amounts are deposited, separate to the accounts into which their benefits are deposited. Whether or not it would be economically viable to also offer any interest on these accounts, would be an issue for the financial institution to determine. However, given the motive of building financial capability is one the purposes of Centrepay, it is recommended that the issue of saving via Centrepay be examined.

Promoting Centrepay more widely A consistent theme throughout the Review was the need for better education of existing customers about the Centrepay product, and greater promotion of Centrepay as a tool for those not already signed up. This was based on the significant financial and budgeting benefits of Centrepay to those on low incomes, and its potential for assisting even more households on Centrelink benefits. In addition, the benefits of promoting Centrepay more widely to appropriate service providers was considered by many stakeholders to be an important way of enhancing the options available to low income consumers.

Better education of existing customers Even those customers and advocacy groups who spoke highly of the Centrepay scheme highlighted the need for better information to be provided about how it works in practice, and clearer information about how customers can benefit from the scheme. Some of the common concerns about the paucity of information currently available included:

• Lack of knowledge about approved service providers • Uncertainty about what could and couldn’t be paid for through Centrepay • Poor understanding about what happened to Centrepay deductions when customers are moved

onto different payment regimes within Centrelink

• Lack of information about status of deductions • Inadequate information about the hierarchy of Centrepay deductions • Limited information on making changes to deductions or even setting up deductions • Limited knowledge and use of online facilities for managing Centrepay deductions • Inadequate information available about how to deal with problems, register a complaint or have

an issue addressed within Centrepay

• Lack of emphasis on the need for customers to actively manage their Centrepay deductions, and not just rely on a ‘set and forget’ mentality (Department of Human Services 2012b).

Apart from the Centrepay Policy document, which is difficult to find on the Centrelink website, it appears there is little written information available about the way the scheme currently operates and there is no evidence of the existence of how-to guides for customers in managing their deductions. Good Shepherd note in their submission that the availability and accessibility of financial information and support is one of the critical factors for customers in exercising agency or choice when it comes to financial products (Good Shepherd Youth & Family Services and Good Shepherd Microfinance submission, p.2). Another submission noted that:

It would be beneficial to examine how Centrepay information could be made more accessible to potential Centrepay users. Integrated service approaches between FaHCSIA and

DHS…provide an opportunity to test how this information could be made available to a wider audience and at the time it is likely to have most impact for the consumer. (FaHCSIA submission)

The Commonwealth Ombudsman also notes that the quality and accessibility of information available to Centrelink customers about Centrepay needs to be reviewed and improved to ensure that new customers are fully informed about how the scheme works, the impact the deduction will have on their fortnightly payment amount, what they can do if there is a problem, the type of activities and conduct that service providers are prevented from engaging in and how to report breaches (Commonwealth Ombudsman submission, p.13) In addition, a lack of easily available information in plain English about the rules and requirements for service providers to be part of the scheme appears to have played some role in allowing unconscionable and non-compliant practices on behalf of some providers. If it was clearer to customers what can and

can’t be offered, and what practices are contrary to Centrepay guidelines (such as door to door sales, failure to provide a copy of signed contracts, or failure to obtain written consent for deductions), they may be in a better position to question those practices at the time they occur, rather than relying on complaints procedures once a deduction process is underway. Providing better documentation and information about the Centrepay scheme would also allow nonfinancial support services (such as mainstream welfare agencies, tenant advice services and legal services) to step in more quickly and either follow up issues directly or refer clients to financial counsellors if they were concerned about a customer’s situation or became aware of inappropriate practices by a service provider. However, as highlighted in the submission by the North Australian Aboriginal Justice Agency Ltd submission, this would have to be accompanied by more responsive complaint and feedback mechanisms to ensure that when concerns were raised, agencies were able to track and be informed about how such complaints were resolved. Finally, a number of submissions note the need for Centrepay information to be tailored specifically for communities with low literacy levels, and low financial literacy levels, or where there is a particularly high risk of exploitation (such as in remote Indigenous communities).

DHS should work with Indigenous legal and community organisations to produce tailored and targeted information to better inform Indigenous communities of some of the pitfalls that can arise throughout the use of Centrepay. (National Welfare Rights Networks submission)

The Commonwealth Ombudsman also notes while many customers will be capable of establishing and maintaining their Centrepay deductions unaided, those who are vulnerable or disadvantaged could benefit from extra assistance. They suggest a more active process of providing appropriate information and support for these customers;

Instead of simply facilitating a Centrepay deduction at the customer’s request, an integrated approach to assisting a customer manage their money and receive a service that most suits their needs should include taking the opportunity to discuss the range of options or support services available to a customer to find the best option for their circumstances (Commonwealth Ombudsman submission).

Such an approach would obviously have resource implications for Centrelink staff, given the additional time it would take to fully canvas the range of options available. However the Department should investigate ways in which a mix of improved written information, and improved training for staff, could help flag and raise these issues with customers deemed to be most at risk and/or most vulnerable to financial exploitation. At a minimum, where customers with Centrepay deductions are found to be facing financial difficulties, a more active referral process to Centrelink financial counsellors should be instigated including a process of ensuring those customers have adequate information about how to access hardship programs with various service providers.

Greater promotion of Centrepay The need for greater promotion of Centrepay as a financial management and budgeting tool was also prominent throughout the Review process. Those already using Centrepay sounded at times ‘evangelical’ in their praise of the scheme, genuinely wanting it better promoted so that others in similar situations to theirs could benefit from the scheme:

We told friends what we are doing with Centrepay. They were struggling so they signed up and they are blown away by how much easier it all is. (Customer at EPS Forum 2012) I try to tell people who are having a hard time to get things in order with Centrepay. It has really saved them and helped them to turn their lives around. (Customer at EPS Forum 2012) I told my daughter about it and now she is using it to buy a washing machine at the same place I got mine. We haven’t really got much idea of what else we can use it for though. (Customer at EPS Forum 2012) We are aware that there are a number of people who could benefit from utilising Centrepay, but who do not know about its services. We recognise the difficulties in promoting services like Centrepay to targeted audiences, but suggest that some additional, targeted promotion of Centrepay would be of value. For example, late payment notices from Utility Companies could include contact information for Centrepay and articles in publications like the Commonwealth Seniors magazine would be beneficial (Uniting Communities and UnitingCare Wesley Country SA Inc. submission)

Greater promotion of Centrepay to selected service providers was also seen as a positive way of spreading its benefits to a wider population. A financial counsellor in Broome WA noted that none of the local gas companies were registered with Centrepay, and neither were any motor vehicle repair companies. This led to the situation where:

…as gas companies in Broome only provide gas bottles, a client is not usually in a position to purchase a whole bottle of gas…the option of prepayment or an affordable arrangement via Centrepay would alleviate the problem of finding $200 when the gas runs out…and many clients end up incurring additional storage costs and some are never able to retrieve their vehicle from the repairer as they have trouble finding available cash to pay for the repairs. (Quote from Financial Counsellor in the Indigenous Financial Services Network submission)

In both instances, targeted promotion of Centrepay to those service providers would enable customers to have greater access to much needed goods and services, but also assist local businesses in communities with a high percentage of Centrelink incomes to have payments met. The Review is of the view that once the problems associated with the current Centrepay operations and policies are addressed, the Department should embark on a substantial promotional strategy for

Centrepay, engaging with targeted audiences and delivering tailored promotional materials. Such an initiative would be in accord with the strongly held support for Centrepay mentioned throughout this Review, and address the concerns raised in this submission by an individual customer, who will be given the last say in this section of the report:

I wish to speak up in the strongest terms in support of the Centrepay system which has made my life unbelievably better than I could have imagined. If there have been aspects of Centrepay which have been mismanaged and rorting enabled, I sincerely request that only these aspects be corrected, and that Centrepay will continue in the form which I have found so helpful. (Individual submission)

Recommendations for future action This Review process has identified a wide range of issues for the Department to consider in responding to the Minister’s Terms of Reference for the Review of Centrepay. Without doubt the prevailing sentiment from all stakeholders is that the Centrepay scheme represents a valuable tool for Centrelink customers. However, this strong level of support is accompanied by a deep concern that the current policy settings and management of the scheme require attention and reform in order to remove the opportunity for abuse and exploitation of the most vulnerable within the community. This is most aptly summed up in the title of the submission by Financial Counselling Australia: ‘Centrepay: a good idea that has lost its way’.

Overview of future directions The Centrepay scheme is likely to be a $2 billion a year operation by the time this report is read. It is multi-layered, complex in its offerings, and impacts on the lives of almost 600,000 Australian residents. It has potential to be far more widely used by the great proportion of Centrelink customers that currently don’t even know of its existence, as well as by those that currently use it but want to understand it better in order to maximise their usage and benefits of the scheme. The Department needs to treat the operations of the Centrepay system as if it were a discrete ‘business’, set up to deliver the vital government objective of helping its Centrelink customers better manage their finances. For this ‘business’ to work well and the objective to be delivered, the government needs the cooperation of external commercial service providers. These providers gain tangible benefits from participating in the Centrepay scheme, but in exchange they need to acknowledge that participation in the scheme comes with certain responsibilities. To date, the scheme has been administered in a manner that, despite good intentions, has at times resulted in laissez-faire commercial practices harming Centrelink customers. Certain policy settings within the scheme have also sometimes inadvertently resulted in sub-optimal outcomes for customers. The Department now needs to take greater control of the Centrepay ‘business’, of the Centrepay brand and its value proposition. Further, it needs to reorient the operations of Centrepay to better cater for its customers, particularly those that are vulnerable, by

ensuring that the implied promise of safeguarding customer welfare that is embedded in the system due to its Government backing is actually delivered. It is vital that the Department takes this opportunity to significantly increase the resources it applies to administering and developing the Centrepay scheme. The Centrepay operations require greater policy attention being paid to the ‘rule’ setting around the scheme; increased senior personnel (preferably with some outside financial services operational expertise) dedicating their time to ensure its smooth, coherent and transparent operations; a more sophisticated and tailored risk management and compliance system; and increased investment in Centrepay specific IT and other infrastructure. The costs of this more focussed and intensive administrative effort and the increased investment in infrastructure could potentially be covered through increased revenues that are currently foregone through the fee discounting and special conditions certain providers enjoy.

Recommendations Based on the evidence presented to this Review and the issues canvassed throughout this report, the following represent a list of recommendations for the Department of Human Services to consider both in direct response to the formal Terms of Reference, and a range of other matters listed under relevant headings. It should be noted that at times the Terms of Reference and recommendations did not easily align, or alignment could be achieved between a recommendation and several Terms of Reference, in which case the recommendation was only listed once.

Recommendation: The Government should revisit and then restate the objective behind Centrepay. Currently the objective of Centrepay is ‘as a means of enhancing the well-being of its Customers by improving their social capacity and encouraging their movement towards financial self-management’. However the restatement is formulated, the objective should then drive all policy and operational reforms leading out of this Review.

Term of Reference #1 - Examine the controls, risk management and administrative processes in place to ensure the Centrepay service is used in a way that protects people’s entitlements.

Risk management • Recommendation: The overall Centrepay risk management function and execution needs to be

specifically tailored to Centrepay and its unique circumstances as they relate to its interplay with the private sector, rather than just a generic subset in the larger Centrelink risk management framework. Centrepay’s risk management approach needs to be built from the ground up and regularly updated for changes in customer circumstances and the broader economic or regulatory environment.

• Recommendation: If more service providers and customers are to be encouraged in the future to undertake the end-to-end processing of customer deduction requests, without the current Department’s hands on intermediation, the risk management and compliance systems that are

meant to ensure that customer welfare is protected must be significantly reworked and improved.

• Recommendation: Contract documentation with providers should include an additional statement that all service providers make a positive commitment to honour and abide by the purpose of Centrepay in the way they conduct their business with Centrepay customers. Testing the adherence to the Centrepay purpose should then become part of the risk management framework and compliance program.

• Recommendation: In implementing improved risk management and compliance measures, considerable up-skilling of compliance personnel should be supported to undertake the more sophisticated analysis required.

• Recommendation: Improved compliance and enforcement activities will also require the Department to be more specific in its service reason descriptions to ensure that the purpose of Centrepay is more adequately and strictly captured in them, and can then be enforced.

• Recommendation: The effectiveness of the compliance function would be greatly increased through the use of data analytics in the pending new IT system, in association with increased or reoriented resources to analyse and investigate potential compliance ‘hot spots‘ and to move on them quickly.

Deduction hierarchies • Recommendation: Institute a new partial hierarchy of Centrepay deductions based on criteria of

‘essential services’ (rent and utilities) so that they always are deducted first (rather than relying on the current system of first authorisation lodged/first deduction paid).

• Recommendation: Better publicise the existence of a ‘hierarchy of deductions’ within Centrelink, which place non-Centrepay deductions ahead of Centrepay deductions, as they are not a widely known feature of the system.

• Recommendation: Publicise Centrepay deduction hierarchy. Currently the rules state where a customer has authorised several Centrepay deductions, these are applied in accordance with the date order of receipt of the deduction authorisations, unless the customer expressly directs otherwise. This means that even after an ‘essential services first’ hierarchy is instituted as recommended above, the customer still needs to be made aware that other deductions will be made on the basis of the date order of authorisations.

Affordability controls • Recommendation: Establish mechanisms to more adequately scrutinise affordability of goods

and services purchased through Centrepay, and the sustainability of payments, at the deduction authorisation stage. This could be through additional requirements placed on approved service providers in vetting affordability of applications for goods, and/or through a process of flagging

customers whose total Centrepay deductions reach a certain percentage of their overall benefits. It could also be through Centrepay IT systems requiring the customer to fill in a target amount against certain service reason deductions in order to avoid overpayment via perpetual deductions.

• Recommendation: Develop a mechanism to investigate those customer circumstances where more than a given percentage (perhaps 60% or 75% depending on the benefit amount) is being deducted through Centrepay. Centrelink could use information in their database to trigger engagement with identified customers regarding their household circumstances in order to establish the customer’s ability to fund authorised deductions, combined with taking into account of other indicators such as requests for Advance or Urgent Payments.

• Recommendation: Refer to recommendations in relation to ‘Household Goods’ rentals and ‘Funeral Benefit Plans’ which might require that an upper limit of a percentage of the Centrelink benefit payment that can be allocated to those categories of service reasons be instituted within the Centrepay system for customers with no other income stream in the household.

Perpetual deductions • Recommendation: Review the categories of service reasons that have perpetual deductions

authorised against them for the appropriateness of perpetual deductions. In some cases, a service reason deduction might appropriately have a time limit set against it so as to facilitate, for instance, access to genuine short term appliance leasing. In other instances, the service reason deduction might require the publishing of an estimated total cost of good or service at the planned deduction rate before deductions in excess of 12 or 24 months are allowed within the Centrepay system.

• Recommendation: Request the Australian Energy Regulator to investigate the lack of ongoing proactive monitoring by all utilities to ensure that Centrepay customer account balances are not inappropriately kept in high levels of credit.

Self-management of deductions • Recommendation: To reduce the incidence of Centrepay deduction cancellations that may put

customers’ ongoing rental, utility or other critical deductions at risk, investigate means of providing an option where customers deemed ‘at risk’ could be referred to Centrelink Advance Payments or some other suitable support (particularly raised as an issue for Indigenous customers).

• Recommendation: In acknowledgement of the Department’s increasing reliance on ‘selfmanagement’ of deductions through the online portal, implement a risk management strategy to ensure that online functionality does not increase customer vulnerability.

• Recommendation: In addition, the Department should provide more information and explanation about the benefits and risks of using Centrepay as a means of preventing ‘ill-advised’ deduction cancellations that may occur through online self-management. Without removing the customer prerogative, inserting more counselling and red flag warnings into the overall system would also potentially improve the use of Centrepay as the government’s preeminent financial capability tool for the financially vulnerable.

Centrepay documentation • Recommendation: All documentation for the Centrepay scheme should be reviewed and

‘tightened up’ so that policies and operational practices are clear to all, fair to all and can be enforced. This process should be aimed at ensuring that all ‘rules’ are up front in one well-placed, easy to read, comprehensive information source, not scattered in background policy documents as is currently the case.

• Recommendation: All documentation should be reviewed for its ‘user friendly’ rating, particularly bearing in mind those customers who might have the least literacy and financial and legal acumen, but who would most benefit from the use of Centrepay.

Term of Reference #2 - Examine the approaches taken to ensure Centrepay is used to distribute money to legitimate organisations providing services to people on a fair and reasonable basis, and the associated contract management approaches used.

Service provider approvals, contract management and contract controls

• Recommendation: Centrepay should adopt a more sophisticated, comprehensive and nuanced service provider applicant approval process, more closely matching what is being done in the banking sector. This would include tailoring the provider approval process more closely to service provider operational risk categories and how they might impact customers. For example, boarding and rooming house providers might need to provide documentation around proving they are fit and proper persons and that their boarding/rooming house is registered and complies with regulatory requirements.

• Recommendation: Centrepay should instigate a more regular review process of service provider contracts as part of an improved risk management processes, and should ensure that renewal of a provider contract entails a modified approval process to ensure accountability measures remain in place.

• Recommendation: The 30 day notice period to cancel a contract should be maintained to give Centrepay flexibility to terminate for inappropriate activities or operations, but the length of the contract with a service provider should be dependent on criteria such as: the risk profile of the

service reason in which the provider is involved, the history of the company, whether or not it is closely regulated, whether or not it is listed on the stock exchange, etc.

• Recommendation: Develop a formal process through which permission must be sought and granted by Centrepay (based on specified criteria) before compulsory deductions can be part of a service offer, such as currently occurs with services such as drug and rehabilitation or nursing home facilities.

• Recommendation: As part of its risk management strategy, the Department should reassess the risk of making its customers more vulnerable via the registration of any service providers who can’t offer a range of payment channels (other than Centrepay) for the settlement of the purchases of their goods or services.

• Recommendation: Implement a more robust system for ensuring appropriate authentication of customer authorisations is established, particularly before there is a greater shift toward selfmanagement of deductions through online tools by both providers and customers. The signature imaging technology utilised by commercial banks for verifying customer authorisations of direct debits provides a possible precedent.

• Recommendation: For Centrelink Account Managers within Centrepay, the two operational functions of ‘relationship management’ and ‘compliance oversight’ should be separated and the number of people undertaking compliance activities should be significantly increased, at least until such time as more robust risk management framework and compliance systems have been instituted throughout Centrepay.

• Recommendation: Consider offering a range of incentives, either through contract terms or alternative fee structures, for the larger and more reputable service providers to increase their coverage to remote locations. In conjunction with suggested reforms to introduce an industry specific Code of Conduct, this would ensure that remote communities are still receiving access to required goods and services, at the same time as reducing the risk that they will be paying severely inflated costs for access to those products.

• Recommendation: Review all contracts that include either one or both of the special contract conditions of discounted fees and monthly invoiced payment of fees, to establish if the economies of scale purported to exist in association with the contracts actually exist as far as the Department is concerned. In addition, it should be determined whether there are real systems impediments at the provider end to necessitate monthly invoices, and, most importantly, that from a policy perspective, encouraging some providers and service reasons over others, with reduced fees, is helping to facilitate the objectives of Centrepay.

• Recommendation: Provide the same government fee absorption benefit currently afforded to approved NILS providers to other microfinance and savings programs that meet an established set of criteria for addressing financial inclusion of low income households.

Codes of Conduct • Recommendation: Contracts with providers should be augmented via voluntarily signed Codes of

Conduct, both at a generic Centrepay participation level, and more finely targeted sub-Codes for specific industries that were considered high risk or prone to working against the goal of improved customer financial capability.

• Recommendation: Industry specific sub Codes of Conduct should be instituted for the Household Goods rental industry and for Funeral Benefit Plans.

• Recommendation: The generic Codes could include such commitments by service providers as, for example: to treat the customer with respect and at all times; to have the customer’s financial welfare at the forefront in any dealings; to ensure that the customer understands the contract with the provider and how it works; to never approach new customers via door knocking, texting or other random or uninvited solicitation methods; and to ensure that the provider’s activities in relation to Centrepay customers will not bring the Department into disrepute.

• Recommendation: Any provider, either individual or company, wishing to utilise the Centrepay deduction scheme for the collection of rent should have in either their Code of Conduct or in their Centrepay contract, an overt signoff on the principle of not passing on deduction fees to the customer.

• Recommendation: Special approval criteria should be established, and subsequent compliance monitoring criteria developed, for the boarding and rooming house category of service provision within Centrepay, to address the issues raised in the joint submission by the Tenants Union and Council to Homeless Persons in Victoria, and institute such other checks that might be pertinent to other State and Territory jurisdictions.

Working more closely with regulators Recommendation: The Department needs to work more closely with regulators and as a matter

of urgency finalise MOU’s that are general in content and include real expressions to cooperate, as currently exist between ASIC and the ACCC and which format could potentially be quickly adopted by the Department.

IT system improvements and online customer activity • Recommendation: Given that the mantra within the Department is about increased automation

and efficiency across all aspects of the Centrelink business (with resultant cost savings the goal), it is timely that the very specific business and operational opportunities and risks pertaining to Centrepay be addressed in an IT strategy specific to Centrepay as a matter of priority, as it is difficult to reverse IT logic once implemented.

• Recommendation: The implementation of the Centrepay scheme within the broader Department’s new ‘Customer First’ IT system should take strategic cognisance of the Centrepay scheme’s need to safeguard customer welfare, and also of its particularly unique interaction with, and reliance upon, the private sector.

• Recommendation: The new IT system should also have specific risk management data analytics capabilities to help mechanise the risk management and compliance functions and enable timely interrogation of activity data which could be proactively and swiftly acted upon by Department staff for Centrepay risk management and compliance purposes.

• Recommendation: Efficiencies that might be envisaged as achievable via the new IT system, such as more customer and service provider self-service online activities, should be examined for their possible effects on risk management and also for their potential negative effects on customers who do not or cannot access the Centrepay service online.

Term of Reference #3 - Provide suggestions about which businesses and services should have access to the Centrepay service, and services that might be excluded.

Review of service reasons • Recommendation: The existing service reasons should be reviewed for whether or not they help

promote the core purpose of Centrepay, and for the way in which they are described so that there can be no misunderstandings about what is included and what is not, either with the customer or the service provider.

• Recommendation: Rigorously assess the existing (and potential future) demand for service reasons included in the scheme. This must be done prior to introducing any new categories, as there are real costs associated with administering an increasing the number of categories. From a policy perspective, it is conceivable that after assessment it may be decided to keep a low volume service category for a particular reason, but the analysis needs to be undertaken in the first instance.

• Recommendation: In its review of service reasons, the Department should factor the commercial cost of participation ($26 per customer per annum) in assessing the reasonableness of the provider being able to absorb the cost without increasing the price of the service to the customer.

• Recommendation: Re-examine existing policy in relation to the accumulation of debt via Centrepay deductions and the ban on Centrepay deductions being used to pay off credit products. There is clearly an anomaly if Centrepay can be used to obtain goods via high-cost finance (Rent to Buy leases) while lower cost options are not allowed.

Scope of service reasons • Recommendation: Rather than focussing on the restricting service reasons to only ‘essential

services’, assess if the current ‘packaging’ or delivery method of any contentious but in demand service reasons, is the most appropriate to meet the Centrepay purpose.

• Recommendation: Decisions about the merits of the inclusion and exclusion of certain goods should refer back to the principles and objectives of the scheme.

Safeguarding customer welfare • Recommendation: In order to better safeguard customers’ welfare, institute a more rigorous

approval process before allowing a provider to become an authorised Centrepay scheme participant, and undertake closer monitoring of the behaviour of the service providers once in the system to ensure that the Centrepay purpose is not being compromised.

• Recommendation: Devise clear and prescriptive Codes of Conduct to which all would-be providers would need to voluntarily subscribe.

• Recommendation: Reorient Centrepay messaging to ensure service providers (and aspiring service providers) understand the full set of responsibilities that come with the privilege of being a registered provider, in addition to their requirements under national consumer laws.

Rental goods companies • Recommendation: Ensure only National Consumer Credit Protection (NCCP) accredited

organisations are registered for Centrepay household goods deductions.

• Recommendation: Disallow the use of indefinite leases or the rolling over of four month leases. For any customer genuinely only wanting to access a good for a short period via a rental contract, a four month lease with an NCCP accredited provider could be allowed.

• Recommendation: All Centrepay authorised household goods rental providers should voluntarily sign a specific Rental Goods Code of Conduct (in addition to the generic Centrepay Code of Conduct), that would not only incorporate adhering to the purpose of Centrepay, but would also include:

o having to ensure the rent to buy service is structured so as to limit the lease terms to one or two years;

o disclosure of the effective or notional interest rate or cost of the lease which is not to exceed 48% per annum, including the cost of delivery, maintenance and replacement if the good is faulty; and

o lease documentation to clearly include not only the total cost of the contract but an indicative retail price for the product.

• Recommendation: The Department may also choose to investigate the appropriateness of limiting the percentage income that can be allocated to rent to buy deductions in the case of households with only one Centrelink income and no additional outside source of income.

• Recommendation: In consultation with stakeholders, and drawing on the US legislative experience, the Department should work with ASIC and the Australian Government Treasury (which has been actively working on disclosure issues for a range of financial products), to ensure (via the provision of the signed Rental Goods Code of Conduct) that a range of other relevant information is made available by the provider to the customer about the ongoing costs and obligations of the contract and about the legal status in relation to ownership of the goods.

• Recommendation: As a transition arrangement to these new requirements, the Department should move quickly to ensure no new perpetual leases with onerous costs can be entered into by customers, particularly with organisations that are not NCCP accredited.

Term of Reference #4 - Look at ways in which Centrepay can be used to build the financial capability of its customers and to assist them to manage their money in the best way possible.

Centrepay administrative processes • Recommendation: Investigate the introduction of better transitioning arrangements for the

Centrepay deductions in circumstances where the customer would not necessarily know that the change in benefit type required a new deduction authorisation to be processed.

• Recommendation: Develop a system of alerts within the Centrepay processes to trigger a phone call to any customer cancelling rental or other housing-related deductions, particularly if the customer already has a vulnerability indicator against him or her.

• Recommendation: Consider a requirement for the annual reauthorisation of ongoing or ‘perpetual’ deductions to ensure customers are more aware of the cost of deductions that have been authorised.

Review current policies • Recommendation: Review current policy settings which prevent customers using Centrepay for

debt accumulation or layby schemes, both of which are much less expensive than some of the existing ‘rent-try-buy’ schemes.

• Recommendation: The NILS loan scheme currently is afforded the benefit of government absorbed Centrepay deduction fees, however, similar loan schemes offered by other not-forprofit organisations receive no such benefit. In order to establish a fair playing field amongst community schemes, the Department should in the first instance review whether the NILS fee

absorption by the government is consistent with policy, and then provide the same fee exemptions or discounts to other microfinance and savings programs that meet an established set of criteria for addressing the financial inclusion of low income households.

Assisting the most vulnerable • Recommendation: Ensure that less face-to-face interaction between Centrelink officers and

customers (as a result of proposed increased online self-service) does not also result in less opportunity to offer financial counselling or other interventions and help when required. In particular, the Department must ensure that for the most vulnerable in our community this doesn’t result in a further form of exclusion, where it might cost the customer more (in time or money) to carry out transactions with Centrepay.

• Recommendation: Investigate ways in which a mix of improved written information, and improved training for staff, could help flag and raise these issues with customers deemed to be most at risk and/or most vulnerable to financial exploitation. At a minimum, where customers with Centrepay deductions are found to be facing financial difficulties, a more active referral process to Centrelink Financial Information Service officers or FaHCSIA funded financial counselling services should be instigated, including a process of ensuring those customers have adequate information about how to access hardship programs with various service providers.

Improve written information to customers • Recommendation: Improve the Centrepay statements provided to customers with itemised

deductions and adequate tracking of payments made and amounts still to be paid, to assist in capacity to manage their overall household budget and provide greater consumer protections.

• Recommendation: Require information about effective interest rates and total payment amounts to be included on Centrepay deduction forms for household goods and other service reason categories where the customer purchase price from the provider exceeds the retail price.

• Recommendation: Extend education around Centrepay and how it works to the topic of what happens if the customer goes off benefits (either due to a breach or lack of continuing eligibility), has inadequate benefits to meet deduction commitments, or due to the customer gaining employment.

Expanding and promoting Centrepay • Recommendation: Promote Centrepay more widely across the Centrelink customer base by

investing resources in a concerted, strategic effort around messaging and branding of the Centrepay scheme, both in the printed and online material made available, but also in the Centrelink Customer service centres and staff capacity to advise customers about it. This promotional strategy must engage with targeted audiences and deliver tailored promotional

materials to ensure that particularly vulnerable and/or marginalised, and culturally and linguistically diverse, communities are reached.

• Recommendation: Consider targeting and encouraging registration of applications from service providers in particular ‘essential service’ categories to increase the reach of Centrepay, particularly into remote communities.

• Recommendation: Explore setting targets for expanding usage of Centrepay across the Centrelink customer base, from the existing rate of less than 10% of Centrelink customers, in order to reduce reliance on other financial products (such as pay day lenders) that are not in the best financial interests of low income households.

Improving customer credit rating • Recommendation: Investigate ways of providing credit rating bureaus with access to a

customer’s deduction payment record (with customer’s permission), in order to assist them in developing a positive credit history, as well as incorporating telecommunication bill paying history (through Centrepay) to support credit rating assessment.

• Recommendation: Explore working with some of the large white and brown goods retailers to investigate alternative customer assessment procedures. These could include the possibility of using the steady flow of Centrepay deductions in their assessments of a customer’s credit worthiness, and to create product acquisition programs for Centrelink customers that included the ACL responsible lending requirements, including making an assessment in relation to a customer’s capacity to make repayments without incurring hardship.

Partnership with others Recommendation: Investigate the offer of the Australian Bankers Association to work in

consultation and partnership with government to identify ways of improving financial selfmanagement of Centrelink customers.

Term of Reference #5 Examine the complaints and feedback mechanisms associated with Centrepay to ensure that issues are resolved in a fair way.

Improve complaints processes • Recommendation: Make complaints information and processes around Centrepay easier to find

online or in Centrepay service centres, as well as establish a dedicated Centrepay phone service to take feedback and complaints.

• Recommendation: Develop a series of key performance indicators around timelines and targets for resolving customer complaints to assist in making this a more transparent and accountable process within the administration and reporting of Centrepay operations. This would need to include additional training and resources for staff in handling and resolving complaints.

• Recommendation: Information about complaints processes should be included in contract materials provided to service providers, including the investigations processes that will be used and the sanctions that can be enforced if complaints against service providers are upheld.

• Recommendation: Information about complaints mechanisms should be provided on individual Centrepay statements provided to customers.

Customer feedback mechanisms • Recommendation: Investigate establishing an easy to access section of the website which allows

Centrepay customers and their registered financial advisers/counsellors to rate Centrepay service providers via a simple star system.

• Recommendation: A consumer consultative body should be established, including consumer advocacy and community service organisations, as well as individual consumer representatives, to assist in the implementation of recommendations from this report as well as form an ongoing mechanism for customer feedback.

• Recommendation: Ensure that the Centrepay administrative program is more sensitive to cultural needs and nuances of culturally and linguistically diverse customers, particularly in relation to being able to capture instances amongst those customers of services not working well.

Term of Reference #6 Examine how Centrepay relates to other financial products and services available to the Department’s customers.

• Recommendation: Establish closer linkages between Centrepay and other government and

nongovernment financial capability improvement tools to better support greater customer financial capability.

• Recommendation: Promote Centrepay as a potential alternative to other schemes such as Income Management, where appropriate.

Term of Reference #7 Other future opportunities and directions for the Centrepay service.

• Recommendation: Target increased usage of Centrepay by Centrelink customers with a vulnerability indicator.

• Recommendation: Investigate the introduction of a savings product with the cooperation of some of Australia’s large financial institutions.

Examine impacts from potential expansion of Centrepay • Recommendation: Assess whether the type of large scale expansion of Centrepay foreshadowed

by utility providers fits within the Policy intent of Centrepay. Large scale expansion of Centrepay would not only result in the current $2 billion scheme significantly expanding in size, but also in increased requirement for risk management infrastructure, IT and personnel resource.

• Recommendation: If the decision is in the affirmative, it would be prudent for Centrepay negotiations on fee setting, special contract conditions and the use of MDFs to take on a more commercial and more strategic approach with these large scale service providers.

Cost recovery • Recommendation: Detailed work needs to be undertaken on both a commercial/economic basis

and on a policy basis, to re-examine both the current cost recovery model and the current revenue model, and how they each work. The cost recovery model needs to take into account a proper assessment of the real costs of providing the Centrepay service (as opposed to the marginal costs), both in its current form and in an improved form with more, and more calibrated, risk management and compliance activities included. The new cost model should also factor in increased investment in IT capability and increased investment in promotion of and education about the Centrepay scheme.

• Recommendation: Develop a more strategic (from both policy and commercial perspectives) approach to fee setting in the future, including a review of past decisions to reduce or absorb fees and to extend special conditions to selected service providers and/or categories.

Resources • Recommendation: Resources should be allocated to additional staff training and education about

the Centrepay scheme and, as suggested in the recommendations from the EPS Forums in 2012, the development of a specific ‘Service Offer’ for Centrepay as part of the broader standard Centrelink practice.

• Recommendation: Ensure that resourcing for the administration of Centrepay be increased to take into account the scale and complexity of the business as it has developed, and to allow for proposed future growth.

• Recommendation: Future resourcing decisions should also provide for the acquisition of more commercial business acumen to ensure greater equality between Centrepay and the service provider population when policy initiatives need to be implemented that might conflict with the commercial imperatives of the service providers.

A—Terms of Reference

Scope of the Review The Centrepay review will:

• examine the controls, risk management and administrative processes in place to ensure the Centrepay service is used in a way that protects people’s entitlements

• examine the approaches taken to ensure Centrepay is used to distribute money to legitimate organisations providing services to people on a fair and reasonable basis, and the associated contract management approaches used

• provide suggestions about which businesses and services should have access to the Centrepay service, and services that might be excluded

• look at ways in which Centrepay can be used to build the financial capability of its customers and to assist them to manage their money in the best way possible

• examine the complaints and feedback mechanisms associated with Centrepay to ensure that issues are resolved in a fair way

• examine how Centrepay relates to other financial products and services available to the Department’s customers, and

• suggest future opportunities and directions for the Centrepay service. The review will be conducted with appropriate reference to existing and related reviews conducted by other parties. The reviewer will deliver a report to the Secretary of the Department of Human Services, outlining key findings and related recommendations for improvement.

Consultation Input will be sought from relevant government agencies, welfare and financial peak bodies, and community agencies as appropriate. Specifically the review should consult people who have used Centrepay. The input of companies, service providers and third party organisations will also be important. It will be necessary to consult across geographically remote locations.

How to Participate Anyone can make a submission at any time up until Thursday 28 February 2013. If you would like to make a submission to the review, you may find it helpful to consider the terms of reference provided on this site. Information provided in your submission may be made publicly available; however, if you would like information to be kept in confidence, please make this clear in your submission. Submissions can be emailed to centrepay.review@humanservices.gov.au[2] or posted to:

Centrepay Review Team PO Box 7788 Canberra BC ACT 2610.

Timeframes It is expected that the review will be completed over approximately eight weeks.

B—Notification and consultation

Notification of Review Notification of this review was contained in the Minister’s media release of 12 November 2012 and information from this document was subsequently posted on the DHS website: http://www.humanservices.gov.au/corporate/government - initiatives/centrepay - review/ Meetings

The Reviewers held public and private meetings on the following dates:

• Meetings with personnel from the Department of Human Services were held December 11, 2012 (Canberra), January 31, 2013 (Canberra), February 8, 2013 (Wollongong), February 18, 2013 (Chatswood), February 25, 2013 (Hobart), March 4, 2013 (Canberra), March 27, 2013 (Cairns), April 4, 2013, (Sydney).

• Meetings were held with various service providers on January 17, 2013 (Melbourne), January 31, 2013 (Sydney), February 6, 2013 (Sydney), February 19, 2013 (Sydney). In addition, various telephone calls took place with service providers.

• Meetings with stakeholders, (customers, their advisers and welfare groups) were held January 17, 2013 (Melbourne), February 11, 2013 (Sydney), March 7, 2013 (Mildura), March 25, 2013 (Mossman Gorge), March 26, 2013 (Yarrabah), March 27, 2013 (Cairns). In addition, teleconferences were held with the National Indigenous Coalition February 28, 2013 and with the Family Responsibility Commission April 9, 2013.

• Meetings were held with the Australian Securities and Investment Commission on February 14, 2013, and with the Australian Competition and Consumer Commission March 5, 2013. In addition, several telephone calls occurred with representatives of both bodies and also with representatives of the Federal Treasury.

C—Submissions

Submission process Submissions to the Independent Review of Centrepay were sought by Friday 15 February 2013. Extensions were granted to a number of individuals and organisations.

Submissions received The Inquiry received submissions from the following 34 individuals and organisations:

Australian Competition and Consumer Commission (ACCC) and Australian Energy Regulator (AER) – joint submission Australian Council of Social Services (ACOSS) AGL Energy Australian Bankers Association Inc. (ABA) Brotherhood of St Laurence Commonwealth Ombudsman Consumer Action Law Centre Council to Homeless Persons Victoria and Tenants Union of Victoria Commonwealth Public Sector Union (CPSU) Tasmania Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA) Ergon Energy Essential Appliance Rentals (CONFIDENTIAL) Financial Counselling Australia Good Shepherd Youth and Family Service and Good Shepherd Microfinance (jointly) Indigenous Financial Services Network Individual Individual Individual Individual Individual - DHS Individual - DHS Centrelink Individual - via Youth and Family Service (Logan City) Insurance Council of Australia Insurance Law Service (CCLC NSW Project) Kyabra Community Association Make It Mine (CONFIDENTIAL) National Welfare Rights Network NILS Network of Tasmania Inc. Northern Australian Aboriginal Justice Agency Ltd Thorn Industries (CONFIDENTIAL)

Uniting Care Australia Uniting Care Kildonan Uniting Communities and UnitingCare Wesley Country SA Inc. Victorian Department of Justice

Appendix D—Centrepay Service Reason definitions

Service Groups1 In all categories of Service Reasons, the following goods and services are excluded: alcoholic beverages, home brew concentrate, home brew kits, tobacco and tobacco products, pornographic material, gambling services and goods or services specified in a legislative instrument made by the Minister under section 123TI of the Social Security (Administration Act) 1999 (Cth).

AccommodationService Reason description Further description of relevant goods/services and comments

Boarding Houses Boarding house accommodation including board and lodgings by landlords.

Caravan Park Fees Rental accommodation provided by caravan parks.

General Community Housing Includes disability housing (rent related—not loans).

Indigenous Community Housing Community accommodation for Indigenous Australians

Indigenous Short-term Housing Short-term accommodation for Indigenous Australians.

Private Landlords Rent charged by landlords for private accommodation.

Property Management Property management services.

Real Estate Agents Services of agents who collect rent on behalf of homeowner.

Retirement and Nursing Home Fees Provision of residence in retirement villages, nursing homes, life style villages and hospices

Short-term Accommodation Provision of short-term accommodation for non-Indigenous Australians, including sheltered accommodation, rehabilitation and hostels. Note: for specific Indigenous accommodation, refer to Service Reason ‘Indigenous Short-term Hostels’.

EducationService Reason description Further description of relevant goods/services and comments

Child Care Services Services by registered carers and FaHCSIA approved providers of child care services (i.e. Centrepay can be used for child care gap fees, after school and holiday program fees and occasional care fees).

Education Fees All education associated services by any registered educational service provider, including training, tutoring, workshops etc.

EmploymentService Reason description Further description of relevant goods/services and comments

Tools of Trade All associated expenses for tools of trade.

Work Uniform, Clothing and Footwear

Expenses associated with work uniform, clothing, footwear etc.

FinancialService Reason description Further description of relevant goods/services and comments

Basic Household Items Basic items for use by household members such as retail of clothing and footwear, small appliances, whitegoods and furniture (including the lay-by of such items). Includes repair services for appliances and whitegoods.

Household Goods Includes rental of basic household goods (e.g. washing machine, refrigerator, furniture etc), and rent to buy schemes where there is no accumulation of debt. Includes repair services for appliances and whitegoods.

Community Group Loan Repayments Repayment of loans to community organisations for assistance with: the purchase of household items; proof of identity; assistance with money management; Family Income Management Scheme (FIMS) no interest loans not covered under the Good Shepherd Foundation model.

FaHCSIA-approved ‘No Interest’ loans

Only for organisations that satisfy the criteria of the Good Shepherd Youth & Family Service of Victoria, in relation to interest-free loans.

General Community Housing Loan Repayments of general community housing loans.

Indigenous Housing Loan Repayments of Indigenous housing loans.

Special Interest loans Loans approved for the purchase of home i.e. Tassie Home Loan, Adelaide Homestart and Indigenous Business Australia (IBA) Home Loan.

HealthService Reason description Further description of relevant goods/services and comments

Ambulance Services Provision of ambulance or associated services (i.e. payments for services provided by the Flying Doctor Service, emergency helicopter transfer service etc).

Food Provision The retail supply of groceries and personal items.

Funeral Benefit Fund Services provided by organisations that satisfy the department and all applicable financial regulations as to their on-going stability (and which have prudential regulations to protect Customers) in order to allow Customers to save for future funerals, but not funeral homes. Funeral related goods and services provided by funeral homes that allow for all manner of existing funeral related debts to be paid off.

Home-care Services The supply of home-care services (i.e. domiciliary care, household maintenance, gardening, pest control services, home security services, food services (e.g. meals on wheels, technical aids and home modifications to assist mobility).

Service Reason description Further description of relevant goods/services and comments

Medical Services and Equipment Includes prescription only drugs, optical, dental, hospital, veterinarian and family planning clinic fees. Also includes medical equipment (e.g. crutches, wheelchairs, oxygen tanks, inhalers etc).

School Nutrition Program For specific programs that provide nutritional benefits (e.g. schools providing meals to students).

Travel and TransportService Reason description Further description of relevant goods/services and comments

Motor Vehicle Registration Including registration for caravans, boats, trailers, and compulsory third party insurance.

Travel and Transport Includes payments for: ‘Return to Country’, general transport costs, furniture removalists, storage and removal, motor vehicle and boat repairs, and the purchase of fuel.

UtilitiesService Reason description Further description of relevant goods/services and comments

Council Services The provision of land, water and sewerage rates and services by organisations, local councils/shires.

Electricity The provision of electricity.

Gas The provision of mains and/or bottle gas.

Sewerage The provision of sewage services.

Telecommunications The provision of telecommunications services.

Local Council Community Services For covering the cost of community services provided by local council/shires.

Water The provision of water services.

Professional ServicesService Reason description Further description of relevant goods/services and comments

Court Fines Includes payment of compensation to victims of crime.

Court Infringements Includes payment for infringement notices.

Professional Services Professional services (i.e. tax agent fees, legal/solicitor costs, compensation report costs and births deaths and marriage reports).

Insurance Services Insurance cover for house, home contents, life/income protection, vehicle, boat, private health cover, etc. Note: currently limited to existing participants (i.e. as at 1 July 2010)

Social and RecreationalService Reason description Further description of relevant goods/services and comments

Social and Recreational Commitments

Payment of fees or donations. Includes sporting activities and equipment, lessons (e.g. football, piano), church donations, sponsorships.

Appendix E—Glossary

Acronym Expanded

ACL Australian Credit Licence

CBS Centralised Business Services (Centrelink processing unit in Hobart)

CCeS Centrelink Confirmation eServices

Department Department of Human Services, Australian Government

DHS Department of Human Services, Australian Government

FaHCSIA Department of Families, Housing, Community Services and Indigenous Affairs

MDF Multiple Deduction Form

The Minister Minister for Human Services

NCCP National Consumer Credit Protection – based on the National Consumer Credit Protection Act 2009 (Cth)

NILS No Interest Loan Scheme

RDSRent Deduction Scheme – administered separately to Centrepay, for use by State and Territory Housing Authorities to deduct rents from public housing tenants

Appendix F—Bibliography Australian Government Treasury, April 2013, ‘Changes to Disclosure Requirements under National Consumer Protection Act 2009: Discussion Paper’, Australian Government, Canberra. [Refer in particular, Attachment F, Consumer Leases] Accessed March 2013, http://www.treasury.gov.au/ConsultationsandReviews/Submissions/2013/Changes - to - disclosure requirements - under - NCCP

Australian Government Treasury, 2010, ‘Strategies for reducing reliance on high-cost, short-term, small amount lending: Discussion Paper’, Australian Government, Canberra. Accessed March 2013,

http://www.treasury.gov.au/ConsultationsandReviews/Submissions/2012/Strategies - for - reducing reliance - on - high - cost - short - term - small - amount - lending

Connolly C, Georgourous M, Hems L, 2012, Measuring financial exclusion in Australia, Centre for Social Impact, University of New South Wales.

Corrie, 2011, Microfinance and the Household Economy: Financial inclusion, social and economic participation and material wellbeing, Good Shepherd Youth and Family Services, Melbourne.

Department of Human Services, 2013, Centrepay Policy, accessed February 2013, http://www.humanservices.gov.au/spw/business/publications/resources/9174/9174 - 1207en.pdf

Department of Human Services, 2012a, Annual Report 2011-12, Accessed March 2013, http://www.humanservices.gov.au/spw/corporate/publications - and - resources/annual report/ resources/1112/resources/dhs - annual - report - 2011 - 12 - full - report - web.pdf

Department of Human Services, 2012b, Centrepay Review: EPS Forums Report, Department of Human Services, Canberra (unpublished).

IBISWorld, 2012, ‘Furniture, Appliance and Equipment Rental in Australia’, IBIS Market Research Report, Accessed March 2013, http://www.ibisworld.com.au/industry/default.aspx?indid=670