Payday loans and consumer leases
ASIC notes that payday loans and consumer leases are functionally
similar, but that they operate very differently.
Payday loans are loans of up to $2,000 for a period of 16 days to 12
months. There are legislated caps on the fees that can be charged by payday
lenders an establishment fee of 20 per cent of the amount borrowed and a
monthly fee of 4 per cent of the amount borrowed.
Regulated consumer leases are contracts for goods (hired wholly or
predominantly for personal, domestic or household purposes) for longer than 4
months where the consumer does not have a right or obligation to purchase the
goods; and the total amount payable exceeds the cash price.
Payday lenders prefer to have their product distinguished from consumer
leases, although the two are often conflated. Payday loans are more closely
regulated than consumer leases.
Most payday loans are small amount credit contracts (SACCs). SACCs are
loans to consumers, where the credit provider is not an Authorised Deposit-taking
Institution, of up to $2,000 where the term of the contract is between 16 days
and 12 months. This is set out in section 5 of the National Consumer
Credit Protection Act 2009 (the National Credit Act). The National Credit
Act does not apply to any loans (including SACCs) to businesses. Loans for a
term of 15 days or less are prohibited.
Research for the National Credit Providers Association (NCPA) finds that
the market for SACCs is dominated by Cash Converters, Money3 and Nimble, who
make up an estimated 70 per cent of the industry's revenue.
NCPA notes that the number of SACC loans approved has fallen since Consumer
Credit Legislation Amendment (Enhancements) Act 2012 (the Enhancements
Act), the provisions of which were summarised in the previous chapter, was
passed in 2012. In 2016–17, 1.4 million applications for SACCs were
received by payday lenders of which 39 per cent were approved. This compares
with nearly 2 million applications with a 67 per cent approval rate in
2014–15. However, the fall of 57 per cent in the number of loans approved was
not matched by the fall in the amount lent. In 2014–15 it was $667 million, and
in 2016–17 it was $538.5 million, a fall of less than 20 per cent. Thus the average loan size rose from $502 to $948.
It is difficult to interpret these figures. It is possible that the
presumption, included in the Enhancement Act, of unsuitability if a consumer
has had two or more SACCs in the previous 90 days led to fewer, bigger loans.
NCPA's figures show that 81 per cent of SACC consumers were employed, up
from 64 per cent in 2014–15. They had an average of 1.66 loans each. The
proportion of repayments met was also 81 per cent.
At least one witness thought there was no definitive data:
One of the key issues we've had in entering this market and
working with this is that there is a lack of transparency in data to actually
understand the performance. There are also incredibly creative accounting
treatments for how you do defaults, arrears and all the rest. There's no
The Finance Industry Delegation observes:
Banks and other larger financial institutions (ADIs) ceased
offering SACCs over a decade ago and no other credible and lawful third party
source has emerged as an alternative to the current SACC lenders, as a real
One submitter suggested that the sector is now so tightly regulated that
it is impossible to function profitably:
We say we [Moneybox Loans Pty Ltd] were a lender because we
no longer operate as a lender and have surrendered our credit licence...as we
simply could not make a profit trading under the overwhelming compliance regime
and draconian pricing restrictions. The death knell for us was when ASIC
removed its class order which exempted direct debit fees from the SACC pricing
caps – we simply could no longer operate and make a profit.
The industry figures quoted above do not include operators in this
commercial space who are not SACC lenders. The National Credit Code applies
- the lender is in the business of providing credit;
- a charge is made for providing the credit;
- the debtor is a natural person or strata corporation; and
- the credit is provided:
personal, domestic or household purposes, or
purchase, renovate or improve residential property for investment purposes, or
to refinance credit previously provided for this purpose.
Credit with a term of less than 62 days is not covered by the National
The Consumer Action Law Centre expressed concern about other firms that
are not covered by the National Credit Act, usually because, technically, they
do not charge interest. Importantly, this means that they are not subject to
responsible lending obligations, and they do not have to provide hardship
There are several ways such arrangements can work. In deferred bill
payment business models, customers provide copies of their bills which are paid
by the company. Customers then pay back the money in four instalments. Other
'emergency cash' businesses are elaborately structured to fall within the
short-term credit exemption. Pawnbrokers are subject to state based regulation,
and so do not have to be members of the Australian Financial Complaints
Authority (AFCA). In Victoria there are no caps on pawnbrokers' fees.
A representative of ASIC also suggested that:
...there are...firms within the sector that try and avoid
complying with the obligation by structuring their business models in a way
that would seek to exploit potential loopholes in the legislation.
ASIC describes the 'book up' system used in many indigenous communities
for purchasing day to day necessities. It often involves the customer leaving
their debit card at the store, and the store using the debit card and PIN to
reduce the debt as funds become available. While the system can function to
everyone's advantage, it is open to abuse, and in particular, because of the
lack of documentation, to the ratcheting up of debt.
One company that appears to have structured its operations specifically
to avoid regulation is Cigno, which is mentioned in several submissions. The
National Credit Providers Association describe Cigno Loans' business model as
Cigno Loans (previously Teleloans Pty Ltd) specialise in
emergency cash lending. Due to some of the characteristics of these loans such
as their size and term, people label them as SACC’s, however Cigno’s product is
Gold Silver Standard Finance Pty Ltd is the lender whilst
Cigno is the service provider that ‘manages’ the account. Therefore, there are
two lots of fees from both the lender and the service provider. This means that
Cigno can charge their customers fees that well exceed the legal fee cap on
...examples show consumers paying back almost 3 times the
Financial Counselling Hunter Valley Project Inc also expressed concern:
Some payday loans are not covered by the National Consumer
Credit Code this means they are not members of an External Dispute Resolution
Scheme i.e. Cigna Loans.
Cigno was invited to attend a committee hearing as a witness but did not
respond to the committee's attempts to make contact with them.
According to the Treasury review of the Small Amount Credit Contract laws,
regulated consumer leases are comparable to SACCs.
AFCA expressed concern about regulation of consumer leases:
In relation to consumer leases: unlike lenders, the
provisions of consumer leases are not subject to any restrictions or controls
on prices, and that does mean that they can often charge much more than would
ever be permitted under a loan to buy the goods. That's notwithstanding the
functional similarity between the products. This is a concern to us.
The industry association, the Consumer Household Equipment Rental
Providers Association (CHERPA), was formed '...in response to the unscrupulous
practices we witnessed from some in the consumer leasing industry.' It
represents 40 per cent of the industry, and its members subscribe to a code of
The Australian Finance Industry Association represents a further 'major
component' of the consumer leasing market: Thorn Group (Radio Rentals),
Flexigroup and Walker Stores.
The value of the leasing industry for electronic goods and household
appliances in Australia was estimated in 2014 to be $570 million.
The logic of leasing major household consumer items is plausible:
Consumer leasing...provides a manner for consumers to acquire
household appliances in a way that is affordable and flexible...
Many items of household equipment are not affordable to
purchase up-front for a large number of consumers. Washing machines large
enough to wash clothes and linen for a family, and home computers for study and
household management, amongst other items, can be too expensive for an initial
outlay...Consumer leasing provides Australians the option to acquire goods
without an upfront outlay or a debt falling due all at once – regular monthly
payments of affordable amounts can work better with household budgets.
Consumer leasing also ensures that households do not take on
the risk of goods breaking down...with the risk being absorbed by the lessor. It
also gives the customer the option to update, upgrade, or purchase equipment
during and at the end of the lease. Further, delivery, installation, and
maintenance services are included in leases, meaning consumer leasing is hassle
A witness emphasised the services offered with leasing:
Consumer leases have a major role to play within the retail
market. Many people who can't otherwise access household goods can do so
through our service. Consumer leases give benefits to consumers, such as
delivery, installation, demonstration, repair, service, upgrade and
replacement. We support our customers when goods are broken, stolen or damaged.
This is an important difference compared to a credit contract, which is simply
a financial arrangement with no ongoing obligation for the credit provider to
continue to support the customer.
Consumer leases are subject to responsible lending obligations: the
provider must assess whether the consumer can afford the payments, and the
product must meet the consumer's requirements and objectives. However, there is
no cap on the maximum cost of a consumer lease. Normally, the consumer will
eventually pay more than the cash value of the goods. Concern was also expressed that because the product is not a loan, it is not
subject to provisions restricting repeated loans; and it may not be included in
insolvency arrangements, so that collection activity can continue even after a
customer files for bankruptcy.
ASIC's submission notes that many low-income consumers make their lease
payments through Centrepay, a service by which payments are directly deducted
from the consumer's Centrelink payment. Unlike SACCs, consumer leases are not subject
to controls on prices and charges.
Consumer Credit Legal Service (WA) Inc observes that:
Consumer leases tend to attract a similar demographic to
payday loans – low-income earners from low socio-economic backgrounds who are
usually the recipients of Centrelink benefits.
Perhaps because they have to date been regulated differently from payday
loans, consumer leases attracted a lot of comment in submissions to this
Impact on consumers
An attachment to the NCPA submission, written by an academic with
experience in financial counselling, lists the reasons consumers seek payday
- Mainstream lenders no longer provide small amount, short term
Customers often experience financial exclusion from other forms
of credit (e.g. credit cards);
- A SACC loan provides customers with the credit they require in a
relatively quick timeframe;
- Clear repayment dates (often short term, meaning the customer is
freed from debt quicker than other forms of credit); and,
- A reluctance of customers to seek assistance from charitable
However, Financial Counselling Australia noted that:
Like all credit, the whole purpose of any credit contract has
got to be to leave you in a better financial position, and we just see the
opposite too often...Our experience in the financial counselling sector would be
that the majority lead to more financial hardship rather than alleviate it...I
have not seen an instance where a payday loan has been helpful to a client.
A Legal Aid lawyer expressed a similar view:
Typically, we see those clients end up in a financially worse
and, often, legally worse position as a result of taking up any one of these
Submitters from the community sector suggest that payday loans are too
easy to access. For example:
Our casework experience indicates that pay day loans and
consumer leases are far too easy to access (digital access has grown rapidly)
with few barriers to qualify. They put people already in hardship into worse
positions. People take them out as they are easy to obtain and view them as a
way to deal with a financial issue immediately.
They say that loans are often over short periods with unaffordably high
repayments, which means consumers may seek another loan to meet the repayments
and thus get into a debt cycle. A witness enlarged on this idea:
The industry often claims that the loans are necessary
because people get hit with one-off emergencies—they need to replace
whitegoods; they need to move urgently; they might even experience domestic
violence, and therefore those loans are absolutely essential to meet those
purposes. When we look at our clients' actual experiences, in the vast majority
of cases they're not the things they're paying for—they're actually just
meeting a cash shortfall, so they can't pay their rent, they can't buy their
food or they can't pay their electricity bills. Quite often, that shortfall is
fuelled by loans they're already paying, so they will then go and get another
loan to meet the next lot of essential expenses and partially to pay off that
Many submissions and witnesses spoke of the personal impacts of
indebtedness. Mr Tony Devlin, of the Salvation Army's Moneycare Program, said:
He was talking about suiciding. I don't know the numbers,
but, sadly, a reasonably high proportion of the people we work with have
suicidal ideation. A large number of people have very serious mental health
issues. Financial hardship causes great stress, anxiety and sometimes
suicidality for people. I think it's the number one reason for relationship
breakdown in Australia.
Consumer and community groups were, if anything, even more critical of
consumer leases than of payday loans. They asserted that consumer leases
resulted in consumers paying many times the value of the goods but they did not
in the end own the goods—which
some consumers did not understand at the outset. There are few limitations on cost or contract length, and companies use
aggressive marketing tactics and a lack of transparency.
The Mentone Community Assistance and Information Bureau Inc found that:
The prime elements of such rental contracts that concern
those who are or have been in [them] are essentially the following:
The exorbitant amounts that some
clients can eventually pay for items that retail at prices multiple times below
the eventual cost; and
The ongoing deductions from
ASIC reports that competition does not seem to drive down prices in the
sector. Different providers 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
Source: ASIC, Submission 21, p. 10
ASIC also found 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:
Source: ASIC, Submission 21, p. 10
The impacts of indebtedness are increasingly being felt by younger
people. The average age of customers of Good Shepherd Microfinance is 32. Mr Devlin of the Salvation Army noted:
In the payday lender area we did some recent research on our
Moneycare database—over the last 10 years up till the end of the last financial
year—and we found that the 15- to 20-year-old group made up 20 per cent of the
people using those products or was the biggest group of any group using them.
Over that same time 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 period...
Conduct of providers
NCPA notes that there is a high level of compliance in the industry,
with a very small number of sanctions issued by ASIC. There were 110 complaints that went to external dispute resolution, which was
0.02 per cent of the loans involved.
Marketing and consumer behaviour
Several contributors to the inquiry gave evidence as to the
vulnerability of people who are financially excluded. The Salvation Army put it
Behavioral science tells us that people in crisis experience
cognitive overload, which impacts their decision making and focus. Their focus
is on meeting their pressing need and their decisions in times of crisis can
and often does put them in a worse financial position in the longer term... when
people are in crisis they will do whatever they need to do to survive. People need
to find a way to pay the rent so they don’t get evicted. They need to find a
way to pay the car loan to stop repossession. They need to find a way to pay
the bigger than expected electricity bill to keep the lights on. They need to
find a way to repair the car to get to work. They will access whatever finance
they can to get through that week.
Mr Paul Holmes of Legal Aid Queensland framed the issue in economic
What we have is buyers who feel that they have no choice but
to take up the [credit] product. So what you end up with is almost a very flat
type of demand curve, in the traditional economic sense. In a lot of these
areas, what you see on the supply side is that there's almost no price
competition that would be indicative of a functioning market.
Typically, what we also see is that there's a large power
The actual price of the credit may not be the highest priority:
What we find, particularly with payday loans and with
consumer leases as well, is that the cost of the product is very low regard; it
is about obtaining the funds to do whatever is needed... 
Mr Holmes agreed with this, when asked if price was a factor for clients
making their decisions about financial products:
I would say almost never, and the reality of why I say
'almost never' is because, with the type of client we typically see, it's about
finding a way of paying a bill that's due in two days.
Dr Paul Harrison of Deakin University discussed the issues in detail in
a hearing for the inquiry. His assumption is that:
...businesses aren't necessarily in the business of consumer
wellbeing; they're in the business of making profit and selling their product.
He emphasised 'decision making asymmetry', a psychological power
imbalance between the credit provider and the consumer:
This is because the provider has significant data analytic
capacity, they are able to adapt their offer as it virtually follows and tests
consumer responses and, through technology such as neural networking, is able
to anticipate consumer responses and intervene to lead the consumer to make
choices that suit business.
He noted that once a consumer had decided to buy something, it was in
the seller's interest to make achieving that 'goal' as fast as possible. Online
shopping enabled products to be 'clumped' with finance, so the process of
acquiring a desirable object was bundled with getting the credit to buy it.
There was little reflection by the consumer:
...the critical issue is the speed with which consumers move
through the online environment as opposed to, perhaps, a bricks-and-mortar or
traditional face-to-face context...
Online marketing also enables closer targeting, and it also means that
it is harder for the consumer to ignore the advertising:
...digital marketing means that there is a substantial amount
of funds being spent on targeting customers. I think it becomes very difficult
to put a lot of the onus back on the borrower, because the information is
coming up in their feed, whether it's Facebook or wherever, at the point in
time when they're potentially vulnerable.
In particular, marketing targets the young:
...It's the younger generation, if you look at their
advertising. They're always down at the beach, they're relaxing, they're having
a drink and stuff like that. It's very much targeted towards the younger
Payday loans are aggressively marketed, so that people use them instead
of more suitable alternatives such as financial counselling or low interest
loan schemes. ASIC noted that lenders invite consumers to take out new loans when they detect
fluctuations in their income or when an existing loan is due to be repaid. Ms Karen Cox, of the Financial Rights Legal Centre, suggested that payday
lenders will on-sell the details of people whom they have rejected for loans.
The Queensland Council of Social Service noted that payday loans and
consumer lease businesses were concentrated in areas of higher unemployment,
large proportions of single-parent families, and low gross income. The
companies targeted areas of social and economic disadvantage.
Practices of lenders
Many submissions gave concrete examples and case studies of poor conduct
by lenders. For example, the Tasmanian Council of Social Service asserts that
Cigno provided a loan to a person assessed as having gambling issues. An individual submitter, 'Ian', says:
My Son Jesse was approved 3 loans for 200.00 [by Cigno] while
on Centrelink payments and suffering Schizophrenia and in a residential drug
rehab program. His entire Centrelink money was assigned to the rehab. He has no
employment history, or assets...They say they charge no interest. Instead the
charge large admin, and loan origination fees. And the default fees are
Even when lenders are regulated, compliance with responsible lending
obligations is lacking. In particular, lenders do not inquire thoroughly as to the circumstances of the
customer, they do not check the accuracy of income and expense figures provided
to them, and even where they obtain three months bank statements as required by
law they do not analyse them properly.
The Consumer Credit Legal Service (WA) Inc gave an example:
Trish obtained multiple payday loans, ranging from $250 to
$1,300, comprising 24 separate advances from one lender between March 2010 and
July 2016. She had also obtained a home loan, a personal loan and other bank
loans that she was unable to service. Our review and assessment of Trish's
various loan applications reveals that Trish's need for payday loans was
fuelled by her inability to service other unsuitable debt.
...Trish's bank loans were unsuitable, no sensible assessment
could have determined that the eight payday loans she obtained subsequent to
the home loan were suitable, given that they post-dated and helped to service
those unsuitable bank loans.
Financial Counselling Australia also cited specific cases:
I see loans issued where there's clearly no capacity to repay
that loan. A lady I met last month had 30 Cash Converters loans in the last
four years. Three of those loans were issued after a Cash Converters loan had
been defaulted and not repaid, and 17 of those loans had been issued when she
had two or more loans in the previous 90 days, and that would indicate that she
has an incapacity to meet that loan, particularly when you look at her bank
statements that show several overdrafts...
Legal Aid Queensland pointed to unacceptable practices such as securing
a loan against an asset such as a car that is worth less than the value of the
loan but is essential for the borrower to have. This creates a way of ensuring
that the repayments get top priority:
...I call it 'coercive': the pressure's on them to continue to
pay it, because without it they don't get to work and they don't keep their
Lenders also use direct debits that apply immediately after Centrelink
payments are placed in the consumer's account.
Good Shepherd Microfinance had seen instances where lenders pushed
applicants to ask for a loan over $2000, because the conditions on SACCs are
tighter than those on medium amount credit contracts. They also engaged in other practices not conducive to consumer welfare:
It's about trying to get as many loans in as possible. The
establishment fee is much higher than the monthly fee...also...a lot of the market
is making its money on people falling into arrears and hardship, because it's
the penalty fees where you actually make all the money. So, to try and push
people into contracts that are very tough to service but that they don't fall
over on is actually an optimal business model.
The consumer leasing industry recognises that there is bad behaviour in
It is beyond contention that there are some rogue operators
in the consumer leasing industry. These unscrupulous businesses have preyed on vulnerable
consumers, causing financial hardship for lower socioeconomic Australians and
bringing the industry into disrepute.
During the hearing, Mr Steven King, the President of CHERPA elaborated:
We have found that with some of our clients suppliers have
supplied them with goods to the amount of seven or eight times the value of the
goods, which disturbs us greatly. We've found that some people have been loaded
up well over what our code of conduct ensures is 20 per cent...
Submissions used case studies to illustrate poor behaviour on the part
of consumer leasing companies, including bullying and invasive practices.
They (along with payday lenders) have been accused of targeting indigenous
ASIC's finding that they regularly charge Centrelink customers more suggests
that they are taking advantage of their vulnerability.
ASIC has also noted that consumers in remote communities throughout
Australia, who are particularly vulnerable because they have few options when
buying household goods, limited understanding and experience with credit and
consumer lease products, and often limited English comprehension, have been
targeted, especially by consumer lease providers:
ASIC has publicly reported on instances of consumer lessors
entering remote communities and engaging in poor practices such as offering
inducements to a senior or respected community member to obtain introductions
to individuals in the community so that they can make as many sales as
possible. In our submission, ASIC provided examples of exploitative behaviours
seen on Palm Island, and by operators such as Zaam Rentals and Local Appliance
Several contributors to the inquiry pointed to the lack of transparency
in consumer leasing contracts, and noted that consumers responded only to the
affordability of fortnightly payments. The Mentone Community Assistance and Information Bureau expressed concern
The ongoing deductions from Centrelink accounts when items
should nominally have been paid for and the deductions ceased. It would seem
that unless these deductions are formally ceased, they continue ad infinitum.
The terms and conditions that allow the above to occur are not readily apparent
to those signing up for such arrangements.
A witness suggested that the tactics of lenders are sometimes aimed at
ensuring that borrowers cannot seek help:
...once the financial counsellor got involved, the lender then
contacted the person in quite an intimidatory way...
...And what happens then is that really the clients have some
remedies. They can take that dispute around that intimidation to an external
dispute resolution scheme and possibly get compensation. But they can be so
intimidated and worried that they won't pursue their rights so it can be quite
an effective strategy...
Industry witnesses insisted that the honest players in the industry were
cautious in their lending and respectful of their customers. One pointed out:
Our customers are the lifeblood of our business and, if
reputable providers such as Cash Converters do not provide these services, we
question who will.
Another pointed out that many of the horror stories are not from the
regulated SACC sector, detailing examples from submissions to the inquiry. He
said later, 'Particularly in the regulatory environment, there are very few
real stories that I've seen in the submissions from the SACC industry...'
His colleague added:
CoreData, an independent research firm, collates factual
information on the industry each year, and their stats suggest that contacts
with lenders from organisations such as Financial Counsellors Australia run at
about four in 10,000 loans...
...the SACC approval rates for 2016 and 2017 were only 39 per
cent so, as you can see, 61 per cent of consumers were deemed to be ineligible
and were, in essence, turned away from a SACC loan.
Similarly, the consumer lease industry association asserted that its
members operated conscientiously:
Could I just say that anyone who can't afford our products
doesn't get our products. It's that simple with responsible lending. Only one
in four clients get through the process. It's a rigorous process for people to
get through the system and be able to lease a product.
Representatives of Thorn Group detailed the company's methods for credit
assessment, and also for checking that an item is appropriate for the customer.
But when asked directly if there were any consumer lease organisations
that provided a genuine and valuable service, a representative of the
Queensland Council of Social Service responded bluntly: 'Not that we've come
Perhaps the greatest concern in the community group submissions was that
consumer lease companies had access to Centrepay, a government bill paying
service for Centrelink recipients. As one submission observed:
Centrepay’s original purpose was to ensure that essential
costs such as rent, electricity and water were paid and not to provide a
payment collection service for non-essential, profit driven goods and services.
Similarly, AFCA voiced its reservations:
The team who work in financial hardship do raise
concerns...[about]...the issue of direct payments going from Centrelink through to
these providers, which actually does take priority over other debts which
actually may be more important in terms of the livelihood and wellbeing of the
The Department of Human Services, which administers Centrepay, explained
that anyone on a Centrelink payment can use Centrepay. There is a strict
framework around which merchants can access Centrepay, including legal and
professional, utilities, rent or other accommodation, household (which includes
most consumer leases), education, some limited financial products, health
costs, travel, transport and some social and recreational things. Each merchant
is approved individually.
All up, we have around 14,600 merchants approved for
Centrepay nationally. As at the end of December, around 638,718 of our
customers use Centrepay, with around 26 million transactions and deductions a
year. The total value through Centrepay was $6.2 billion in 2018.
There is no limit on the proportion of income that can be paid out
through Centrepay, because a person could be using the service to pay a large
proportion of their household expenses. Payday lending and buy now pay later
products are not part of Centrepay. Approximately 10 per cent of payments made
through Centrepay were for consumer leases.
Mr Tim Luce of Thorn Group noted that 52 per cent of Thorn Group's
consumer leasing customers paid via Centrepay. He said that, while Centrepay
did reduce default and administration costs for the company, the overall
default rates for Centrepay customers were about the same as those not on
Centrepay. His colleague pointed out that if customers used direct debit, they would be
charged fees in the case of late payment, whereas they were not with Centrepay.
The Department of Human Services does not itself police providers under
Centrepay, relying on the regulation of consumer leases to protect its clients:
In terms of the more regulatory aspect of it, I think the
debate about whether prices are fair et cetera essentially falls back on the
regulatory environment that exists for the provider.
It is a condition of access to Centrepay that providers are part of the
appropriate regulatory framework, so if ASIC has taken away a company's
financial licence it will be excluded—and, apparently, only then:
ASIC obviously will make a range of decisions. They may
remove licences but they may not. So it may be that they find some behaviour in
the organisation, the organisation remediates that behaviour and ASIC don't
find any further behaviour. Then we wouldn't necessarily remove them from
Centrepay for that, because there is action underway from the regulator to
ensure that the business is complying. But if the business is not licensed and
ASIC has taken that action then, yes, we would remove them from Centrepay.
If the Department of Human Services does become aware of abuse, it
relies to a great extent on ASIC's regulatory enforcement:
Our staff will have contact with the various legal aid
centres and financial counsellors, and if we have particular concerns about a
provider then absolutely we will launch our compliance activity against that
provider. If the nature of those is around, say, responsible lending and those
types of matters, then either the financial counsellor would refer it to ASIC
or we would, so it would be somewhere between us and ASIC that would then
investigate depending on the nature of the allegation.
The Department does compliance audits to check that the customer is
giving informed consent, but does not otherwise scrutinise their financial
situation, and in particular their level of indebtedness.
A witness told the December hearing:
In relation to Centrepay why not use direct debit?...The fact
that Centrepay becomes the preferred method tells you something about the way
this industry [consumer leasing] is operating...There's an ASIC report into this
industry from a couple of years ago that shows interest rates up to
884 per cent.
ASIC noted that although Centrepay lowered the risk of default on rental
payments, the companies still charged Centrepay customers more. Because Centrepay customers are on lower incomes, the terms of their loans are
longer, which also increases the final cost.
There was concern about the lack of visibility of Centrepay payments:
There is a high degree of inertia, therefore, because it's
not a meaningful amount of money once you sign up to these contracts. In
circumstances where some consumer leases have indefinite terms or essentially
operate indefinitely, that creates a real problem because lack of visibility,
inertia and indefinite terms mean that people keep on paying and paying and
paying when they should not be.
However, a representative of CHERPA protested that customers are not helpless:
Centrepay is a bill-paying service for the client, run by the
client...We don't put clients into financial stress. If we do responsible
lending, they can afford all the other things that they're supposed to have at
the same time. Yes, it is a benefit to us to receive that payment before anyone
else. We don't deny that for one minute, but we're not in control of it.
Similarly, Mr Luce of Thorn Group noted that customers kept control:
I would first like to address the misconceptions about
Centrepay as a payment mechanism. Lessors do not have access to a customer's
Centrepay account. That remains within the total control of the customer.
Importantly, Centrepay deductions are not a payment guarantee, as customers
can, and often do, choose to stop Centrepay deductions.
The Salvation Army agreed with the general aims of Centrepay but did not
like the outcomes it produced:
I definitely think companies are abusing that system.
Centrepay we set up under really good principles to be a money management tool
to help people put aside funds for real essentials like rent and utilities so
they can have those covered by choice and live on the remainder but over the
years we've seen all sorts of other things go on like consumer leases so people
don't have that discretion so much...
Nature and adequacy of current regulatory arrangements
The current regulatory arrangements (which are described in Chapter 2
above) rely on a responsible lending framework.
The National Credit Act and the National Credit Code provide a number of
protections for consumers who borrow money for personal, domestic or household
needs. Credit providers must hold an Australian credit licence and have
policies and procedures as to how they comply with the law. They must also have
no-cost dispute resolution schemes, both in-house and external, the latter
requirement in effect meaning membership of the Australian Financial Complaints
The Enhancements Act specifically addressed payday loans. Among other
provisions, it created a presumption of unsuitability, if the consumer is
already in default on another small loan, or has had two or more small loans in
the last 90 days; capped fees and charges; and required lenders to consider the
borrower's account statements for the last 90 days.
Changes included in current draft
It is not controversial that further regulation of the sector is needed.
The circulation of the 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, is
evidence that the Government once believed that action was necessary.
Many of the perceived shortcomings in current regulation would be
addressed by the SACC Bill, in conjunction with the Treasury Laws Amendment (Design
and Distribution and Product Intervention Powers) Bill 2018 which is currently
before the Parliament.
With regard to SACCs, the SACC Bill would:
- remove the rebuttable presumption that a SACC is unsuitable if
the consumer entered into two or more SACCs in the last 90 days, or is in
default under a SACC;
- require SACCs to have equal repayments spread over equal
- prevent SACC providers from charging monthly fees in respect of
the residual term of the contract where the contract has been paid out in full
early by the consumer; and
- prevent SACC providers from making unsolicited credit invitations
and offers to current and previous SACC consumers.
With regard to consumer leases, the SACC Bill would:
- impose a cap on lease payments that applies to all consumer
leases (referred to as the 'cap on costs');
- improve affordability of consumer leases by:
- introduce obligations for lessors of household goods to obtain
and consider 90 days of bank statements before entering into a lease with
a consumer; and
- prohibit lessors of household goods from entering into leases
that do not meet certain requirements prescribed by the Credit Regulations
(referred to as the 'protected earnings amount');
- prohibit door-to-door selling of consumer leases for household
- require lessors of household goods to disclose the base price of
the goods and the difference between the total payments and the base price.
For both categories of credit products, the SACC Bill would:
- place restrictions on the use or disclosure of account statements
that are received in connection with a SACC or consumer lease;
- require providers to document their assessment that a SACC or
consumer lease for household goods is not unsuitable for a consumer;
- require lessors to provide consumers with a warning statement to
assist them in making a decision whether to enter into a consumer lease for
household goods; and
- explicitly identify family violence as a reasonable cause of
The SACC Bill would also introduce broad anti-avoidance measures:
- a prohibition on business model avoidance schemes that are
designed to prevent a contract being a SACC or consumer lease regulated under
the Credit Act;
- a prohibition on internal avoidance schemes that are designed to
avoid the application of a provision of the Credit Act that applies only to a
SACC or consumer lease; and
- the regulation of indefinite-term consumer leases under the
Separately, the Credit Regulations would be amended:
The existing protected earnings amount for SACCs will be
extended to cover all consumers and the portion of income that can be devoted
to SACC repayments will be 10 per cent of a consumer's net income. Currently
the SACC protected earnings amount only applies to persons who receive 50 per
cent or more of their income from Centrelink and the portion of income is 20
per cent of gross income.
A new protected earnings amount will be introduced for
consumer leases for household goods, whereby lessors cannot enter into a
contract that would require a consumer to pay more than 10 per cent of their
income in rental payments under consumer leases for household goods. Under the
protected earnings amount, the total rental payments (including under the proposed
lease) cannot exceed 10 per cent of net income in each payment period.
Other proposed changes
In the case of unlicensed products ASIC notes that it can take action
against providers only for breaches of the ASIC Act, that is, for misleading or
deceptive or unconscionable conduct. It recommends that the product
intervention power contained in the legislation currently before the Parliament be extended to all products regulated by the ASIC Act. This would include the
buy now, pay later products, debt management products, and 'book-up'
arrangements. The government has already announced its intention to extend the new product
intervention power to short term credit by regulation.
More generally, ASIC noted:
We also see a need for further powers to address more complex
and emerging areas of concern and for ASIC to have a flexible toolkit to
address the selling and marketing of unsuitable financial products and services
AFCA argued that the legislation should include a general obligation to
treat customers fairly. It declared:
Instead of providing for separate functional activities, we
believe conduct regulation should be more clearly based on the fair treatment
of consumers at all stages of what is an increasingly integrated product design,
origination and distribution system...
AFCA considers that threating consumers fairly should be made
a standalone and enforceable standard for financial services entities and
individuals working for them.
The Australian Financial Security Authority endorsed AFCA's view.
The Consumer Action Law Centre called for the extension of the National
Credit Act to cover buy now, pay later providers, short term credit providers
Dr Paul Harrison called for a slowing down of the process of obtaining
credit for a purchase 'through something akin to a double opt-in process'. He
also wanted to force credit providers to conduct due diligence on their
products in relation to consumer detriment prior to release and require them to
release their findings for scrutiny (which might be met by the Design and
Dr Harrison also recommended making it practically and psychologically
easier to withdraw from debt agreements if they can show they did not
understand the terms and conditions of the agreement prior to signing.
Views on proposed changes
Many submissions called for the SACC Bill to be passed, with several
noting that a long time had passed since its drafting, and in particular since
the ASIC reports detailing problems with the industry (see Chapter 2).
The Australian Finance Industry Association supported it, with
relatively minor reservations. CHERPA also supported it, but suggested a change in the cap on costs and argued
that the case had not been made for the Protected Earnings Amount of 10 per
cent of net income, and that the present 20 per cent cap is working.
Mr Robert Bryant, the Chairman of NCPA, who had argued that many of the
poor outcomes attributed to his sector were actually to do with non-SACC
products, applauded extension of the SACC regime to consumer leases: 'That will
solve our problems'.
The NCPA argued that extending the Protected Earnings Amount to all
borrowers (rather than the present scope, those who receive 50 per cent or more
of their gross income from social security) would cause working Australians,
who are responsible for 81 per cent of small loans, to be financially excluded.
NCPA also argued against reducing the cap to 10 per cent. It was concerned that
the ban on unsolicited offers would give an advantage to unregulated lenders.
Compliance with, and enforcement
of, current regulation
Regulation is only as good as compliance with it and enforcement of it.
Improved legislation will not improve outcomes if it is not complied with.
Lenders claim that they operate within the responsible lending
requirements of the National Credit Act and the Enhancements Act. These require
them to inspect bank statements and make reasonable inquiries to check that the
loan is suitable, that the borrower is able to meet the repayments, and that
total credit repayments will not exceed 20 per cent of the borrower's income. But if that were the case, it is unlikely that many of the problems reported
above would have occurred.
ASIC points to a good deal of enforcement activity. In particular, it
noted that the performance of two firms which had operated under enforceable
undertakings, Thorn and Flexigroup, had improved their practices and met their
undertakings. On the other hand, Cash Converters, which had restructured its business model
partly as a result of legal action, was still accused of recalcitrance:
last month we sent a group complaint to ASIC alleging breaches of the National
Credit Act by Cash Converters, all of which involve loans over the last 18
months... In one example, our client told
us they had 20 payday loans for Cash Converters in a 12-month period, including
eight at once.
Ms Miranda Nagy of Maurice Blackburn Lawyers was not convinced that
enforcement was effective, because regulators preferred negotiation, and did
Firstly, regulators charged with enforcing protective laws,
such as the national consumer credit legislation, have too often preferred
negotiating outcomes rather than taking action to vindicate breaches...
If regulators don't have the resources to litigate and are
unlikely to litigate, then credit and consumer lease providers are entitled to
see the regulator as not carrying a big stick but, rather, a party to sit down
and do a deal with...
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