On 17 October 2018, the Senate referred an inquiry into the Credit and
financial services targeted at Australians at risk of financial hardship to the
Senate Economics References Committee for inquiry and report by 22 February
The terms of reference for the inquiry are:
Credit and financial services
targeted at Australians at risk of financial hardship, with particular
- the impact on individuals, communities, and the broader financial system
of the operations of:
- payday lenders and consumer lease providers,
- unlicensed financial service providers including ‘buy now, pay later’
providers and short term credit providers, and
- debt management firms, debt negotiators, credit repair agencies and
personal budgeting services;
- whether current regulation of these service providers meets community
standards and expectations and whether reform is needed to address harm being
caused to consumers;
- the present capacity and capability of the financial counselling sector
to provide financial counselling services to financially stressed and
distressed members of the community; and
- any other matters.
Conduct of the inquiry
In accordance with its usual processes, the committee advertised the
inquiry on its website, and wrote to relevant organisations to draw attention
to the inquiry and invite written submissions.
The committee received 69 submissions as well as additional information
and answers to questions taken on notice, which are listed at Appendix 1.
The committee held three public hearings: in Melbourne on
12 December 2018, in Brisbane on 22 January 2019, and in Canberra on
24 January 2019. The names of witnesses who appeared at the hearings
are listed at Appendix 2.
Please note that references in this report to the Committee Hansard are
to the Proof Hansard. Page numbers may vary between the Proof and Official
Structure of this report
The remainder of this chapter gives some background to the problems
involved with small amount credit and financial services, and some description
of the legal and organisational environment.
- Chapter 3 discusses payday loans and consumer leases; this
chapter also discusses general issues such as advertising, and some specific
elements of regulation, which are equally relevant to matters dealt with in
- Chapter 4 looks at debt management, debt negotiation and credit
- Chapter 5 looks at the buy now pay later market.
- Chapter 6 looks at the provision of options that people in
financial stress can take, including the financial counselling sector,
microfinance, enforcement of existing laws by government bodies, and recourse
to the Australian Financial Complaints Authority (AFCA).
Background to the inquiry
Financial exclusion and financial
For some years there has been a growing awareness of financial exclusion
and its impact on vulnerable people. A series of reports by the Centre for
Social Impact for the National Australia Bank has examined the phenomenon and attempted
to quantify its influence.
The following definition is used in these reports:
Financial exclusion exists where individuals lack access to
appropriate and affordable financial services and products—the key services and
products are a transaction account, general insurance and a moderate amount of
Twelve finance industry bodies, including the big four banks, Suncorp
and Good Shepherd Microfinance, collaborated to launch a Financial Inclusion
Action Plan in 2016, largely because:
...those impacted [experience] poorer social, health and
financial outcomes. The financially excluded are also more vulnerable to
exploitation and predatory practices from pay day lenders.
The problem of financial exclusion appears to be increasing. Big banks
and other financial institutions have been withdrawing small scale services
because of the cost of provision.
In 2014, the Centre for Social Impact estimated that more than three million,
or nearly 17 per cent of the adult population, were totally or partly financially
The Department of Social Services lists some of the consequences of
- the limited ability to smooth lumpy or unexpected expenditure,
leading to poor outcomes (such as families having to go without food or
disconnection from essential utilities);
- an increased use of sub-prime lenders with high costs and
punitive terms and conditions;
- being drawn into cycles of borrowing and increased
- a limited opportunity to build up positive credit histories to
allow the transition to mainstream services; and
- decreased financial capability.
As a result, according to the Department of Social Services:
In the absence of appropriate alternatives, the small amount
loan market (or 'payday lending'), consumer leasing and other 'buy now,
pay-later' markets have grown to meet this demand.
Stagnant wages and underemployment mean that household budgets are more
stretched. The increased cost of housing has contributed to financial stress. A
representative of the Department of Social Services noted:
Some consumers who may be vulnerable to using small amount
credit contacts have a profile of broad financial disadvantage, low income, low
financial literacy and very few mainstream alternatives.
The volume of debt owed to lenders of small amounts appears to be
increasing. It is difficult to find current data; however a 2015 Australian
Centre for Financial Studies research paper estimated that there had been a
twenty-fold increase in demand for short term, small amount loans in the previous
10 years. It estimated that over a million Australians took out a small amount
credit contract (SACC)-type loan in 2012.
Another study, by Gillian North, notes that the rate of growth in this type of
credit between 2005 and 2015 exceeded those of other credit products.
The Australian Financial Security Agency (AFSA) points to a growth in
the proportion of SACCs and similar debts in the total debts of personal
bankruptcies and insolvencies.
Bankrupts owed a median of $1,200 to payday lenders. 1,891
bankrupt estates included debts to payday lenders, which is around 17 per cent
of bankrupt estates. Debt agreement debtors owed a median of $950 to payday
lenders, and that occurred in around 40 per cent of debt agreements.
Both the Tasmanian Council of Social Service and Anglicare Tasmania
quote North's figure of 22 per cent of Tasmanian households using SACC loans in
North points out that the level of borrower households by state appears to
correspond to the average household income by state: in particular Tasmania has
the lowest average household income and the highest use of these loans.
This growth is not just in terms of volume or value. The market has also
grown in terms of product variation, including a strong online presence.
The Salvation Army has found that payday loans are featuring more in their
Over [the last 10 years] the number of clients we had who
accessed them moved from six per cent to 13 per cent—more than doubled over
that period—and the amount of debt that was outstanding tripled over that same
Meanwhile, there appears to be a generational shift away from credit
cards to other forms of credit, particularly buy now pay later products.
Younger consumers may be incurring higher levels of debt than previously.
However, old problems also persist:
Credit card debt is still by far the No. 1 form of presenting
debt that we have with people coming to our service. It always has been. It is
the most concerning type of debt that we deal with. It has been and certainly
still is. It's interesting you comment about the older demographic because it
is true. We've noticed quite a change in our research over the last 10 years.
That over-55-year-old age group has more and more credit card debt and they are
still in rental accommodation longer than they have been in the past.
Recently, high-profile legal cases, like a class action against Cash
Converters, have revealed unconscionable conduct by several firms and
considerable detriment to users of credit and financial products.
Regulation and research
There have been several moves to protect consumers by regulating the sector.
Commencing in 2010, the National Consumer Credit Protection Act 2009
(the National Credit Act), and Schedule 1 to that act (the National Credit
Code), improved protection for borrowers and included measures to deter
predatory lending practices.
Following the introduction of the National Credit Act, the Consumer
Credit Legislation Amendment (Enhancements) Act 2012 (the Enhancements Act)
created additional protections for vulnerable consumers in the small amount
lending sector. Among other measures, the Act required lenders to examine the
financial situation of the borrower; it limited total repayments to 20 per cent
of income; and it capped costs at a 20 per cent establishment fee plus
4 per cent a month. It also set out circumstances in which a loan would be
presumed to be unsuitable, such as that the client is already in default on
The Bankruptcy Legislation (Debt Agreement Reform) Act 2018
commences in June 2019. It extends the powers of the Inspector-General in
Bankruptcy to supervise debt agreement administrators, among other reforms to
The Treasury Laws Amendment (Design and Distribution Obligations and
Product Intervention Powers) Bill 2018, which is currently before the
Parliament, would cover some, but not necessarily all, of the products
discussed below. The bill creates an obligation for designers and distributors
of certain financial products to define a target market and ensure that the
product is marketed only within that market. It gives the Australian Securities
and Investments Commission (ASIC) the power to withdraw a product temporarily
from the market where it sees the prospect of consumer harm from the product.
There have been calls to extend the bill to all products regulated under
the Australian Securities and Investments Commission Act 2001 (the ASIC
Act) and the National Credit Act. This would mean that the design and
distribution obligations and product intervention powers would cover credit
products, buy now pay later products, and products that are substitutes for
products regulated under the Corporations Act and the National Credit Act.
These obligations would complement the responsible lending obligations and the
obligations on financial advisers to act in the best interests of the customer (which
apply to individuals rather than products). A broader coverage would mean that
the bill was simpler and therefore more easily enforced.
It was, however, noted that the bill had been drafted so that it was easy to
add products to the regime by regulation.
There were also calls for the definition of a target market to include
specification of non-target groups. This might be particularly important for
Australians at risk of financial hardship.
ASIC also argued that it should be given standing under the regime to seek
compensation for consumers who are not party to legal proceedings. This would
be consistent with existing provisions in the ASIC Act. Again, such a provision
might be of particular relevance for vulnerable consumers.
The government has introduced a bill amending the Competition and
Consumer Act 2010 to establish an Open Banking regime which creates a
consumer data right, which will enable consumers to have access to data
businesses hold on them, and will enable sellers of credit products to check
the indebtedness of applicants for credit.
In 2015 the government commissioned a review of small amount credit
contracts and consumer leases, as required by the National Credit Act. In March
2016, Treasury published its Review of the small amount credit contract laws.
The report focused on the notion of financial exclusion. Among its
- For small amount credit contracts (SACCs)
- reduction in the cap on the total amount of all SACC repayments
from 20 per cent to 10 per cent of the consumer's after-tax income;
- equal repayments over the life of the loan, and where this
requirement is not met, a maximum annual percentage rate of 48 per cent;
creation of a national SACC database;
- prohibition of fees after early repayment of a debt;
- prohibition of unsolicited offers to current or previous
customers, and of payments for referrals made to another SACC provider; and
- default fees that are limited to the actual costs arising from a
default, to a maximum of $10 a week.
- For consumer leases:
- a cap on the total amount of the payments for leasing a household
item, calculated at the base price plus 4 per cent of the base price for each
month of the lease, with a maximum of 48 months;
- a base price that is no higher than the recommended retail price;
any costs added on should be included in the cap (except
- a cap on all consumer lease payments of 10 per cent of net income;
- early termination fees based on a reasonable estimate of costs to
the lessor; and
- a ban on unsolicited marketing of consumer leases.
In November 2016, the government announced its response to the review,
and supported in part or in full 21 of the 24 recommendations. Treasury met
with industry players, particularly in the consumer leasing sector, in the
months after that announcement.
In October–November 2017 the Treasury conducted consultations on an
exposure draft of the National Consumer Credit Protection Amendment (Small
Amount Credit Contract and Consumer Lease Reforms) Bill 2017 (the SACC Bill),
the government's response to the SACC Review. The exposure draft accepted many
of the recommendations listed above. It also introduced broad anti-avoidance
provisions and strengthened penalties for failure to comply.
Treasury officials indicated that the government is considering feedback
on the exposure draft bill and would wait for the final report of the Royal
Commission into Misconduct in the Banking, Superannuation and Financial
Services Industry before introducing legislation.
The final report of the Commission has now been tabled in Parliament.
A bill using the text of the exposure draft bill was presented by Labor
(in February 2018) and by Ms Cathy McGowan MP (in October 2018).
Work by the Australian Securities
and Investments Commission
ASIC has undertaken work in this area since the passage of the National
- March 2015 Report 426 Payday lenders and the new small amount
report reviewed the response of the payday lending industry to the provisions
of the Consumer Credit Legislation Amendment (Enhancements) Act 2012.
- September 2015 Report 447 Cost of consumer leases for
report found (p. 4) that over the term of a consumer lease, the consumer will
pay significantly more than the retail price of the goods and be charged more
than a lender is permitted to charge under a small amount credit contract.
Further, different lessors charged significantly different amounts for the same
goods, and the same lessor would charge significantly different amounts for the
same goods for different customer segments. In both instances, the consumers
that are more likely to pay the higher amounts are Centrelink recipients.
- January 2016 Report 465 Paying to get out of debt or clear
your record: The promise of debt management firms
report found (p. 7) that debt management firms might offer multiple services to
the same customer, or refer them to related firms (including lenders). Their
fees were often high and often not transparent, so that it was difficult for
customers to know what they are paying. Often they were charged before services
were provided. The firms rarely referred consumers to free, alternative sources
of help—such as financial counsellors, consumer law services or ombudsman
schemes—or advised consumers they could resolve the problem themselves at no
- November 2018 Report 600 Review of buy now pay later
This report noted (pp. 9–15)
that 'buy now pay later' is a rapidly growing industry and the firms operating
in it have a variety of business models. In particular, they vary as to the
proportion of revenue extracted from merchant fees, missed payment fees and
other customer charges. Users of the services tend to be young, and may be led
to overcommit themselves. The responsible lending obligations in the National
Credit Act do not apply to buy now
pay later arrangements. In ASIC's view, many of the contracts
included potentially unfair conditions, such as allowing the provider to
unilaterally vary the contract.
The Royal Commission into
Misconduct in the Banking, Superannuation and Financial Services Industry
During the last year, the Royal Commission into Misconduct in the
Banking, Superannuation and Financial Services Industry has heard horror
stories of the poor behaviour of financial institutions in terms of predatory
marketing, unconscionable lending, and targeting of the vulnerable. It has also
heard of the catastrophic effects such conduct can have on ordinary people.
While most of the products examined in this inquiry were outside the ambit of
the Banking Royal Commission, there is every reason to believe that the same
misconduct, or worse, prevails in the market for small credit products.
The final report of the Banking Royal Commission was released on 4 February
2019. It noted that the inquiry which led to the establishment of AFCA also
recommended the establishment of a compensation scheme of last resort,
and recommends that such a scheme be implemented.
It discusses the 'responsible lending' provisions of the National Credit Act
and concludes that the legislation is adequate. It emphasises the 'desirability
of predictable and stable funding' for financial counselling and legal aid
services. It proposed the exemption of retail dealers from the operation of the
National Credit Act 2009 be abolished. And it makes remarks about fees for no
service which may have some relevance to the debt repair industry.
Organisations relevant to people in
There are several sources of very small loans at low or no interest.
These microfinance services generally use finance provided by banks as a
community service, and have some of their administrative costs provided by the
Department of Social Services. There are several different models, with
different conditions as to the purpose of loans and the requirements borrowers
have to meet. Administration of these programs is resource intensive.
Financial counselling services are operated by various professional and
charitable organisations, many of which have made submissions to this inquiry.
Eleven of these organisations are funded by the Department of Social Services.
There is also a Commonwealth supported financial counselling Helpline.
Department of Human Services (DHS) administers the payments system for
social services payments through Centrelink. It provides some supplementary
assistance in specific cases of hardship. It also administers Centrepay.
Centrepay is a voluntary bill‑paying
service for Centrelink customers. It helps customers to manage their expenses
by providing customers with the option of making regular deductions directly
from their welfare payments to businesses. Centrepay is free for customers,
while businesses are charged a fee to recover Centrepay operating costs.
The Australian Financial Complaints Authority (AFCA) was formed in 2018
by an amalgamation of the Financial Ombudsman Service, the Credit and
Investments Ombudsman, and the Superannuation Complaints Tribunal. Its
function, according to its website, is to 'provide consumers and small
businesses with fair, free and independent dispute resolution for financial
complaints'. It also has responsibilities to identify and resolve systemic
issues and it reports serious contraventions to the relevant regulator.
AFCA is not a government agency. It is established under the
Corporations Act, and its decisions can be binding.
AFCA hears complaints only about member bodies. Membership of AFCA is a
condition of holding an Australian Credit Licence or an Australian Financial
Services Licence. Unlicensed bodies are not required to join, although some
choose to so that they have access to an external dispute resolution scheme. In
particular, credit repair agencies are not required to be members of AFCA.
AFSA is an executive agency in the Attorney-General's portfolio. It
administers the Bankruptcy Act 1966. AFSA's chief executive officer is
the Inspector-General in Bankruptcy, who has powers to regulate bankruptcy trustees
and debt agreement administrators. AFSA's purpose is to maintain confidence in
Australia's personal insolvency and personal property securities systems.
AFSA does not regulate debt management firms, debt negotiators, credit
repair agencies and personal budgeting services.
AFSA assesses the performance of personal insolvency practitioners, with
a particular focus on untrustworthy advisers. Such advisers are often
unregulated. AFSA engages in some public education activities including warning
of the dangers of using untrustworthy advisers.
ASIC is Australia’s national consumer credit regulator, with oversight
of lenders, consumer lease providers and brokers who offer consumer credit
products to Australians. It administers the National Credit Act and National
Credit Code. It would have considerably enhanced powers if the Treasury Laws
Amendment (Design and Distribution Obligations and Product Intervention Powers)
Bill 2018, which is currently in the Parliament, and the SACC Bill, of which an
exposure draft has been circulated, were passed.
ASIC has an enforcement role, and also a program to improve financial
literacy. As mentioned above, it has published a number of papers on sectors of
the industry, including payday lenders, consumer leases, debt management firms
and buy now pay later schemes.
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