James Eyers -Mar 17, 2015
Consumer groups want tighter laws on payday lenders. Photo: Arsineh Houspian
Listed payday lenders Cash Converters and Money3 will face calls for tighter regulation in the wake of a damming report by the corporate regulator that called for them to lift standards to avoid enforcement action for breaches of responsible lending laws.
Ahead of a government review of the legislation governing payday lending in the second half of this year, the Australian Securities and Investments Commission said on Tuesday some payday lenders were not properly assessing whether loans were suitable for customers, weare issuing loans with terms that were too long to rake in more fees and had "systemic weaknesses in documentation and record keeping".
The 44-page report did not name particular lenders, but ASIC deputy chairman Peter Kell said Cash Converters and Money3 were among lenders the regulator was concerned about. The two are thought to account for around three-quarters of the $400 million a year market but their share prices have slumped over the past month amid growing concerns that regulation might be tightened.
"The areas where we need to see standards lifted apply right across the board," Mr Kell said. "This is not just about the smaller players, it applies to the big and small players, to online and shopfront operators. We want to see standards improve right across the sector."
Consumer advocates say they will now push for tighten protections to be introduced during a review of consumer credit laws in the second half of the year. Gerard Brody, chief executive of the Consumer Action Law Centre, said a campaign is being prepared to call for more stringent fee caps and restrictions on the use of direct debit authorities.
The original draft of new payday lending laws in 2013 capped establishment fees at 10 per cent of the loan for amounts of less than $2000 and monthly interest payments at 2 per cent. However, after intense lobbying from the industry, the final law doubled the caps to 20 per cent and 4 per cent, levels proposed by Cash Converters. Mr Brody said "at the moment we have caps that suit the industry but we need to see whether the caps suit the market and consumer interests".
The original draft also proposed banning the issuance of multiple payday loans
and the refinancing of existing payday loans with new ones. This was also watered down, and a series of presumptions that loans might be unsuitable introduced instead. But ASIC criticised these in its report on Tuesday, finding nearly two-thirds of the 288 files reviewed across 13 lenders showed loans to consumers "who appeared to trigger presumptions of unsuitability" which "may indicate that there are other weaknesses in a payday lender's overall compliance with their obligations as licensees".
Money3 chief executive Robert Bryant said the bipartisan support for the 2013 laws reflected a thorough consideration of the balance between borrower protections and sustainability of the industry, and warned that if the fee cap "was any lower than 20 and four at that low end, we are out of business." Providing loans of $1000 or less currently comprises 80 per cent of Money3's loans by number and accounts for 20 per cent of revenue. But Mr Bryant said the presumptions on loan suitability "could be looked at by the review and might be tightened".
Cash Converters chief executive Peter Cumins was not available to comment. Phil Johns, the chief executive of the industry lobby group the National Credit Providers Association, said the ASIC report "demonstrates that the majority of our sector are meeting their responsible lending obligations" and "the industry must of course remain viable to be able to provide financial services products amid strict regulations and low margins".
Director of the University of Melbourne's centre for corporate law and securities regulation, Ian Ramsay, described the 2013 payday lending legislation as "horrendously complicated" and said the review should simplify it to make it easier to enforce.
Adam Mooney, the chief executive officer of Good Shepherd Microfinance, said a duty of "responsible referral" should be introduced making it mandatory for payday lenders to refer clients to more suitable products, such as the No Interest Loans Scheme (NILS) offered by Good Shepherd with National Australia Bank. He also called for a cap on the number of times a payday loan loan can be recycled which would limit the number of times establishment fees can be charged.
ASIC's report also found payday lenders set loan terms on contracts at longer than 12 months when customers only need short term loans in order to earn higher fees. Mr Brody said this suggested the law needed tighter anti-avoidance measures.
Category: Payday loans