Government knew consumer credit laws would close payday lenders

The Australian government was aware that the application of the national consumer credit regime to payday lenders would trigger a wave of consolidation across the sector, according to documents obtained under a Freedom of Information (FOI) request.

In 2012 the Treasury sent an executive minute to Bill Shorten, the federal financial services minister, notifying him that the proposed "20 + 4" cap on fees and interest would "allow for the continued viability of some small amount lenders (although others will be required to exit the industry)."

The executive minute referred to a Bill introduced in 2011 to modify the National Consumer Credit Protection Act 2009, affecting many small-amount credit contracts (SACCs), otherwise known as payday loans.

The introduction of the maximum 20 per cent up-front fee and four per cent interest per month has been decried by smaller lenders as forcing them out of business.

In the executive minute Treasury says that the 20+4 cap was reached following consultations with consumer groups, lenders and industry bodies.

Rob Legat, general legal counsel for the Fast Access Finance Group, said it appeared that forced consolidation in the payday lending sector was an intentional strategy on the part of the government, Treasury and the Australian Securities and Investments Commission.

He noted that a Regulation Impact Statement in June 2011 estimated that lenders who "currently provide about 25 percent of contracts" may cease operating as a result of the cap.

Industry figures such as Phil Johns, chief executive of the National Credit Providers' Association, have warned that the consolidation process is already well underway. He said this was largely due to the regulatory obligations on small-amount credit providers.
ASIC has said the NCCP regime is "scalable" for payday lenders, however, industry participants have said there are problems with this model.

Jon Denovan, partner with law firm Gadens, said payday lenders were continuing to struggle with their responsible lending obligations under the NCCP Act and the question of "scalability".

The NCCP Act states that a loan must meet a borrower's "requirements and objectives". Denovan said this was ironic as a SACC customer's prime requirement and objective was usually to secure a fast approval. He said this was frustrated by the extent to which lenders are expected to review the borrower's affairs for what is essentially a small-amount loan.

"Some lenders claim that the requirements are starting to sound like an audit of the borrower's affairs," Denovan said.

The recent ASIC v The Cash Store (in liquidation) judgment demonstrated that courts will impose significant penalties on licensees who do not comply on a systemic basis, Denovan added.

"The case demonstrated that generic statements about purpose will not be sufficient, and that more detailed enquiries and verification may be appropriate in respect of more vulnerable customers," he said.

When it comes to determining what scalability means in practice, lenders say they are struggling to get clear guidance from ASIC.

The Explanatory Memorandum (EM) provided to parliament when the NCCP Act was first put forward has offered some guidance for payday lenders, according to Denovan.

"The significance of these inquiries will be dependent on circumstances. For example, the credit assistant's knowledge of expenses such as the monthly mobile phone expense may be a proportionately significant expense for a low-income earner, therefore reasonable inquiries would seek to ensure, to the extent possible, that such matters have been included in the consumer's expenses. In contrast, the mobile phone expense may not be significant to a high net worth individual and may require little inquiry," the EM states.

The Explanatory Memorandum also indicated that it was never the intention of the legislature to define a new, higher verification standard than what was reasonable prudent business practice operating at the time the Bill was first introduced into parliament.

"Conducting a credit reference check is, for instance, likely to be an action that would be reasonable to undertake in most transactions. Credit providers are not expected to take action going beyond prudent business practice in verifying the information they receive," it said.

This is an edited version of an article that first appeared on Thomson Reuters' Accelus Regulatory Intelligence service.