The short-term loan provisions
Schedules 3 and 4 to the bill propose changes to the lending
requirements for short-term lending contracts. The bulk of this committee's
evidence—and that of the Parliamentary Joint Committee on Corporations and
Financial Services (PJC)—relates to these amendments. As the PJC's report
noted, the public debate on the measures in Schedules 3 and 4 have been termed
the 'payday loan reforms'.
A 'payday loan' is a small, short-term loan that is often used to cover a
borrower's expenses until the next time they receive their regular wage. This
chapter will use the phrase 'short-term lending'.
Schedule 3 has the following components:
- a prohibition on the number of contracts that a borrower may
- a prohibition on refinancing contracts;
- a prohibition on increasing credit under existing contracts; and
- requirements to provide web-based disclosure statements, which
would include a short high-impact statement disclosing the availability of
sources of assistance...and cheaper alternative sources of credit'.
Schedule 4 would introduce caps on the charges that may be imposed on
borrowers under small amount credit contracts, and caps on the costs on certain
other credit contracts. For small amount credit contracts, the maximum amount
that could be charged is:
- an establishment fee not exceeding 10 per cent of the amount of
credit the borrower receives;
- a monthly fee of two per cent of the amount of credit the
borrower receives; and
- a fee payable in the event of default, not exceeding twice the
adjusted credit amount and any enforcement expenses.
For consumer credit contracts other than small amount credit contracts,
bridging finance contracts and contracts provided by an authorised
deposit-taking institution (ADI), the bill proposes that the 'annual cost rate'
may not exceed 48 per cent. The bill prescribes a formula for calculating the
annual cost rate, but also allows other additional amounts charged to be
prescribed by regulations. The Explanatory Memorandum states that this
regulation-making power is intended to circumvent some lenders' practices of
charging the borrower additional amounts that do not meet the definition of costs
to be included in calculating the cap.
Currently, consumer credit legislation in the Australian Capital
Territory (ACT), New South Wales (NSW) and Queensland applies a 48 per cent cap
that includes interest, fees and charges. Victoria applies a 48 per cent cap,
although this does not apply to fees and charges. Caps are not in place in the
Northern Territory, South Australia, Tasmania or Western Australia.
The intent of the payday loan provisions
The basic intent of Schedules 3 and 4 is to mitigate the particular
risks associated with short-term credit and thereby enhance consumer protection.
Options for a new approach to payday lending were flagged in Treasury's July
2010 Green Paper, 'National Credit Reform: Enhancing confidence and fairness in
Australia's credit laws'.
In November 2009, the federal government introduced the first tranche of
its Responsible Lending Obligation reforms. The reforms made it a condition of
holding an Australian Credit License (ACL) that lending be done responsibly. Responsible
lending has two elements: licensees must assess the unsuitability of a credit
product for the consumer and assess the consumer's capacity to repay the
proposed credit debt. Compliance with the laws therefore requires an assessment
and verification of the consumer's credit needs and financial circumstances.
This assessment is conducted by the credit provider when a consumer borrows
directly from the provider. All forms of consumer credit are subject to these
reforms and it is an offence to supply credit irresponsibly.
Of particular concern for the government is to protect vulnerable consumers
from the high cost of payday loans. As the Regulation Impact Statement noted:
The higher the costs charged the greater the impact on a
consumer's income, default rates and level of social inclusion. This means that
the most financially vulnerable consumers are paying high costs relative to
their income when using short term, non-productive forms of finance, resulting
in financial harm through an inability to accumulate savings or personal
wealth, and a risk of continuing dependency on these products.
The Assistant Treasurer, the Hon. Bill Shorten MP, described the intent
of the bill's short-term loan reforms in terms of balancing consumer protection
and industry stability. In his Second Reading Speech on the bill, the Assistant
...government strongly believes that short-term loans do have
a role in the Australian economy and should be a part of everyday life, but we
are also focussed on protecting vulnerable consumers, not terminating the
payday lending industry. We do believe it is time that the interests of
consumers are improved.
The short term lending industry in Australia
The PJC's report outlined the key features of the short-term lending
industry in Australia. It noted that the industry commenced in the late 1990s
in response to ADIs withdrawing from the short-term, small amount loans market.
There are currently an estimated 400 payday lenders in Australia and roughly
500 000 clients.
The short-term lending industry appears quite diverse. The largest
providers are Cash Converters, Cash Stop and The Cash Store.
Cash Converters' submission noted that it issues in excess of 625 000 payday
loans per year with the total value of loans exceeding $250 million.
The smaller payday loan providers include Action Cash, Fundco, Action Finance,
Moneyplus and Can Do Credit Pty Ltd. Can Do Credit described itself as a 'micro
lender', providing roughly 600 loans to 600 customers
a year. Its loans are on average '$1000 for a period of 52 weeks'.
The PJC's report also noted that there is a growing web-based cohort in
the payday loan market. These include First Stop Money, Dollars Direct and Cash
In terms of repeat lending, the PJC's report noted that industry data 'appeared
to support' claims that there is a high proportion of repeat borrowing among
consumers who access payday loans. It noted that the estimates of the total
number of customers entering into payday loan credit contracts annually are far
outweighed by the aggregate of individual lenders' estimates of total loans
issued annually. The PJC concluded:
On the basis of this information it would appear that either
industry significantly underestimates the number of consumers accessing payday
loans per year or there is extensive and substantial repeat borrowing by
In some detail, the PJC also considered the research evidence on the
profile of payday loan borrowers. It noted several sources, including the 2011
report by the Royal Melbourne Institute of Technology (RMIT) and the University
a 2010 report commissioned by the Consumer Action Law Centre
and a 2010 National Australia Bank report on the NAB's Small Loans Pilot.
Based on these studies, the PJC noted that a high proportion of borrowers are
low income earners, including Centrelink recipients. However, there is an
increasing number of middle-income earners accessing the payday loan market.
Support for the provisions
Consumer advocates, community welfare and religious groups and legal aid
organisations are among those strongly in support of Schedules 3 and 4 of the
bill. These groups identified the high interest rates of short-term loans as a
major problem, particularly for low income borrowers, and an issue that needs
addressing. Accordingly, they supported the bill's proposed 48 per cent
interest cap and the 10 per cap on establishment fees. In addition, several organisations
argued that there is a need for greater consumer awareness of the costs of payday
Legal Aid stated:
Payday lending diverts income. It goes in one hand and
straight back out by way of high repayment costs, where there is little or no
ability to reduce the balance owing. Who amongst us here could afford a credit
card with a 240 per cent interest rate? And yet, without a community norm, that
is the very rate that Legal Aid clients in Ipswich were frequently paying
before the state cap was implemented in 2008.
The Consumer Action Law Centre also identified the culprit of very high
interest rates as a significant burden on low-income borrowers. In its
submission to this inquiry, the Centre stated:
[t]hese loans typically attract effective annual percentage
interest rates (APR) of 400 per cent (and can be over 1000 per cent). Moreover,
repayments create a very large burden for borrowers on low income, particularly
due to the short term nature of many of the loans.
The Centre identified the problem of a debt spiral, with high interest
borrowings to finance existing financial difficulties:
In most cases, the high cost, short-term loans are required
because individuals have insufficient cash to meet their essential, daily needs
(such as utilities, car expenses, food and rent). They are already in financial
difficulty. The loan is repaid via direct debit from their bank account at the
same time their wages or benefits are credited into the account. Having such a
significant amount deducted from their next pay usually leads a borrower to
needing another loan within a short period of time to supplement their reduced
Similarly, the Redfern Legal Centre identified a similar payday loan borrowing
Many people who enter into short-term, small amount credit
contracts...are people on low incomes who are unable to afford to repay their
loans even at the time of entering into the contract, and are susceptible to
unscrupulous or irresponsible practices of some payday lenders. Such practices
can include: credit contracts that do not provide for the due date of payment
to coincide with the borrower's payday, providing access to further finance in
order to meet repayment obligations, and "rolling over" one payday
loan into another. These practices lead to further indebtedness on the part of
the borrower and make it unlikely that the borrower will be able to repay their
The Legal Centre further submitted that loans with costs above a 48 per
cent cap are contrary to prudent market practice:
Where the risk of lending is so high that a consumer loan cannot
be granted without charging an interest rate that breaches the 48% cap, we
submit that such a loan is irresponsible and predatory, and should not be
Financial Counselling Australia argued in its submission to the
committee that the 48 per cent cap should include fees and charges:
Our sector has long advocated for an all inclusive interest
rate cap of 48% (including fees and charges) along the lines of that already in
place in Queensland, New South Wales and the ACT. This Bill does not go this
far, instead proposing a two‐tier
structure. While this is not our preferred position, we support the legislation
as a reasonable compromise.
Several organisations noted that consumers are often unaware of the cost
of payday loans. Anglicare Sydney, for example, claimed that payday lenders:
...prey on the most vulnerable—people with mental health
issues, poor English skills or low levels of financial literacy. We would just
like to see, perhaps, a clearer display and disclosure of the actual costs involved
with these loans so that people understand, and we would like there to be
alternatives provided to them such as microfinance and financial counselling.
Cap on default charges for small
The PJC's report also noted that the proposed cap on the fee payable in
the event of default on a small amount credit contract seems to have general
support, even from payday lenders. Indeed, Money3 questioned whether the
proposed default fee cap was sufficiently comprehensive to cover all potential misconduct:
They will get the repayment in a week or a fortnight and then
charge an obscene default fee that is not captured under the bill. The only
people who will go will be the credible and transparent businesses. I see that
as missing that as a major flaw [sic].
The PJC concluded that on the basis of the evidence, repayments required
under relatively short-term loans 'can constitute a significant proportion of
the borrower's income'.
It emphasised that borrowers must be given a reasonable opportunity to repay
credit contracts and that in this context, it may be appropriate to introduce a
minimum payday loan contract period (such as three months).
The PJC also suggested that the government could explore the feasibility
of limiting the overall remuneration that a credit provider can receive for
issuing a credit contract to which Schedules 3 and 4 apply to 100 per cent of
the principal advanced. This would include remuneration obtained by third
parties, all costs associated with product add-ons, such as DVDs, and fees payable
in the event of default.
Opposition to the provisions
Unsurprisingly, several short-term loan providers argued that the
proposed amendments would shift the balance too far in favour of consumers to
the disadvantage of the industry. Submitters to both this inquiry and the PJC
inquiry considered that reforms would render short-term lenders unviable.
The PJC report identified four main concerns among industry
representatives with the proposed measures:
- first, and most fundamentally, they questioned the need for phase
two reform to payday lending, arguing that the responsible lending obligations
are effectively regulating industry practice;
- second, they challenged the Government's conclusion that the
industry can remain viable under the caps proposed;
- third, they argued that the proposed restriction on refinancing,
multiple concurrent contracts and increasing existing credit limits will
disadvantage, rather than assist, vulnerable consumers; and
- finally, some advocated for the measures in Schedules 3 and 4 to
be extended to apply to ADIs.
In terms of the first two points above—the need for the reforms and the
effect of the reforms on the industry—some payday lenders underlined the
commercial importance of only lending to those who can repay their debts. Cash
Converters, notably, argued that under the responsible lending requirements
(RLOs), consumers' borrowing capacity is adequately assessed to ensure that
they are able to properly service their debts. Managing Director Mr Peter
Cumins told the PJC at its hearing that:
Again, under the responsible lending obligations you are
required to reassess every application. It is not a question of people just
coming in and you giving them another $200. We have to get the bank statements
and have to assess the application again on its merit. If you are in the
business of lending money unsecured, why would you lend somebody some money if
you knew right at the beginning that they could not afford to repay it? It
would be a pretty dumb business practice. All of our processes are about
identifying how much income a person has available to meet repayments. A
customer may come in and ask to borrow $800 but leaves borrowing $200 because
that is all they can afford to repay. There is no point from a business
proposition to lend more than they can afford to repay.
Cash Converters also told the PJC that not only have phase one RLO reforms
already imposed a substantial financial burden on the industry, but the phase
two reforms threaten to make obsolete those of phase one.
In response, the PJC properly drew attention to the Regulation Impact
Statement, which disputes that the RLOs have resulted in significant changes to
First, the responsible lending obligations require the credit
provider or lessor to assess whether or not the consumer can afford the
repayments under the contract without substantial hardship, and do not directly
impact on the cost of credit. Credit providers and lessors therefore cannot set
the repayments at a level the consumer cannot afford to repay. In some
situations, this may result in the consumer having to meet lower repayments
than would otherwise be the case. However, this would apply on an individual
basis, and does not provide a comprehensive response in the same way that an
upfront limitation on costs would.
It is noted that the introduction of the responsible lending
requirements could be expected to have the greatest impact on very short-term
loans with a single high repayment. However, there do not appear to have been
any significant changes to practices in this area.
Secondly, the responsible lending obligations require each
contract to be considered in isolation. In the case of repeat borrowings this
will mean that it is not possible to consider the cumulative effect of a series
of contracts with the same lender.
Finally, there are practical limitations in establishing
whether or not a consumer can afford the repayments under short-term contracts.
For these consumers, it depends on being able to precisely establish what their
living expenses are, and this can be difficult in practice.
Restrictions on refinancing and
multiple concurrent contracts
Recall that Schedule 3 of the bill places a restriction on refinancing
payday loan contracts and on multiple concurrent payday loan contracts. The PJC
report noted the concerns of both Cash Converters and First Stop Money that
limiting the number of loans permissible will unfairly restrict consumers'
financial capacity, irrespective of their personal circumstances and ability to
service the loans.
First Stop Money's submission to this inquiry argued that:
By providing such a restriction, consumers are excluded from
accessing credit, irrespective of their personal circumstances. This directly conflicts
with the Bill’s purpose and the responsible lending requirements of the
existing NCCP Act that decisions should be based upon the consumer’s personal
A consumer who is more than capable of affording the
repayments on two or three small amount credit contracts is therefore prevented
from accessing credit which may help them out of short term financial distress
thereby snowballing into long term hardship.
Mr Paul Baril of the Financiers' Association of Australia, argued that
the bill's proposed restriction on recurrent contracts will reduce consumer
choice and competition within the industry:
If I go to Cash Stop and my disposable income is $2,000 and I
borrow $300 – and we do it over three or four payments – and then something
breaks down or my car breaks down, I cannot go to another lender and get
another loan until that loan is paid off. It also reduces competition because
the customer will be stuck to stay with the same lender to do the loan.
First Stop Money and Cash Converters also raised the possibility that
the restrictions on refinancing and multiple concurrent contracts will compel
consumers to borrow higher amounts.
Moneyplus told the PJC that these arrangements may require consumers to take
longer loans over longer periods which will lead to a greater incidence of
default and indebtedness.
The PJC concluded that the proposed restrictions on multiple concurrent
contracts, refinancing and increasing credit limits 'did not appear to be an
appropriate means of increasing consumer protection'.
It expressed concern at industry views that these provisions may lead to
increased financial hardship form consumers. The PJC also noted that the
provisions are at odds with the RLOs. It considered that the most appropriate
option is to strengthen the operation of the RLOs in relation to payday loans
by requiring payday lenders to consider whether the proposed payday loan or
increased credit limit is unsuitable given the consumer's repayment obligations
under existing credit contracts.
Opposition to the proposed caps on
In its hearing on the provision of the bill, the PJC heard various industry
concerns of the deleterious effect that the proposed 10 per cent establishment
fee and 2 per cent monthly cap for small credit contracts would have on the payday
lending industry. Mr Baril from the Financiers' Association told the PJC that
the caps are inconsistent with ASIC's requirements that lenders can make a
Money3 also argued that the proposed caps on fees and interest will render the
payday lending industry unviable.
First Stop Money argued in its submission that the 10 per cent fee and the 2
per cent monthly fee are insufficient to recoup costs.
Cash Converters and Super Nexus both presented data showing the amount that
each company is likely to lose per transaction based on its current fee
The PJC noted that Treasury did not provide details of any economic
modelling it used to devise the 10 and 2 per cent caps. Treasury did observe
that in developing its model, it did look to 'both allow some upfront costs and
also try not to distort the market for very short-term loans by allowing a
return over time'.
The PJC concluded that, on the basis of the evidence before it, the caps
will threaten the viability of the payday loan industry. Its assessment was
that the evidence strongly indicates that the availability of this type of
finance will be significantly reduced, with providers withdrawing from the
market and moving to larger amount credit contracts. The PJC recommended that
the government should consult further on the level of these caps.
Submitters to this inquiry suggested various alternatives to the current
provisions in Schedules 3 and 4. Cash Converters, for example, proposed a 20
per cent cap on establishment fees and a 4 per cent monthly fee.
The National Financial Services Federation suggested a 28 per cent cap on
establishment fees and a 2 per cent cap on monthly fees.
The Financiers' Association of Australia recommended a 28 per cent cap on establishment
fees and a two per cent monthly fee cap.
Other submitters proposed changes to the 48 per cent cap. The National
Financial Services Federation argued that the cap should be removed, and
replaced with 'a Permitted Establishment fee and Daily Reducing Interest capped
The Financiers' Association recommended that the formula be modified to avoid
'distortions where there are irregular payment amounts and dates'.
There were also calls for the provisions to be amended to allow caps for
lower income earners. First Stop Money suggested a tiered approach to fees and
capping whereby for consumers with incomes below the Henderson Poverty Line, an
establishment fee of 30 per cent should be charged with a daily reducing
interest of 48 per cent per annum.
Cash Converters proposed a ten per cent and two per cent model as the bill
Loans to these customers will occur below cost but the
trade-off will be that the customers who are better off pay the market rate which
effectively subsidises the low income consumer. This is a win-win solution. On
the one hand, the Government has genuinely addressed the 'vulnerable'
consumer's hardship. On the other hand, industry has a free market to do
business with those who do not need the protection of caps.
The committee notes that the proposed amendments in Schedules 3 and 4 of
the bill, as they may affect the payday loan industry, have been the subject of
considerable debate in the submissions to this inquiry and in the PJC's
deliberations. The strong support of consumer advocacy groups, community
welfare and religious organisations and legal aid providers has been offset by the
various concerns of the payday loan industry that the reforms will damage its
profitability and even its viability. This debate broadly reflects the policy
challenge that Treasury faced in devising this legislation: how to adequately
protect (often low-income) consumers from the pitfalls of high interest,
short-term loans while ensuring that these protections do not distort the commercial
viability of the payday loan industry.
The committee notes the concerns of the PJC that in conducting its
inquiry, it lacked adequate evidence from Treasury on:
- the need for the measures in Schedules 3 and 4 in addition to the
how the provisions would interact with the RLOs; and
- why the measures were preferred to other options to protect
This committee also notes the lack of substance in the Regulation Impact
Statement to the EM relating to these three issues. It draws attention to
inadequacies in Treasury officials' verbal evidence to the PJC, particularly on
how Treasury sought to model the effect of the proposed caps on the payday loan
The PJC's report observed that the key question is whether the bill's
provisions achieve the right balance between these two imperatives.
This committee makes two observations about the need for the provisions. First,
and most fundamentally, vulnerable consumers must be protected from the spiralling
costs associated with high interest rates and fees from short-term loans. Notwithstanding
the increase in the payday loan industry's middle income earning web-based
client base, the committee notes that small amount short-term loans do attract significant
numbers of consumers in financial hardship on low incomes. The risks of high
interest rate loans to these consumers tend to be greater than for other
consumers. Further, the rates and fees of many payday loan providers in
Australia do seem excessive.
The second observation is that the national consumer credit reforms are
based on the need for nationally consistent legislation to strengthen consumer
protection. As mentioned earlier, the ACT, NSW and Queensland already have
legislation capping interest rates, fees and charges for short-term small
amount loans at 48 per cent. Victoria has legislated a 48 per cent interest
rate cap. The committee notes the comments of National Legal Aid to the PJC that
there was a fall in the number of clients fronting for assistance after the cap
There is, therefore, a sound and principled case for national
legislation to curb excessive interest rates, fees and charges by the payday
loan industry in Australia. Like the PJC, however, the committee is concerned
that these provisions do not strike the right balance between consumer
protection and industry viability. Further, in some cases, there appear to be
unintended consequences from the provisions which may hurt consumers. There is
also concern that some of the provisions may be ineffectual.
The PJC's report recommended that the Government revise the measures in
Schedules 3 and 4 of the bill with a view to examining these matters. It
proposed further consultation with stakeholders 'to develop measures that will
ensure cohesive and consistent national consumer credit legislation and an
appropriate balance between consumer protection and industry viability'. The
committee endorses this view and makes the following recommendation.
2.48 The committee recommends that the government review the measures
proposed in Schedules 3 and 4 of the bill. This review must re-engage with
- carefully assess claims that the current provisions may have
adverse consequences for consumers;
- carefully assess the merit of alternative approaches to focus the
provisions on borrowers with low incomes; and
- review and publish modelling on the effect of the proposed 10 per
cent, 2 per cent and 48 per cent caps on the commercial viability of the
payday loan industry.
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