Payday lenders not up to standard

Payday lenders are not following their own policies for protecting vulnerable consumers, are poor record keepers and are failing to meet their obligations in a number of areas.

The Australian Securities and Investments Commission has published the results of a review of the payday lending sector's compliance with consumer credit changes introduced in 2013. It found there was plenty of room for improvement.

In 2013 the National Consumer Credit Protection Act was amended to include a number of small amount lending provisions.

These included a presumption that a payday loan would be unsuitable if the consumer was in default under another payday loan at the time of application, or the consumer had taken out two or more payday loans within the previous 90 days.

Fees and charges were capped, as were charges imposed in the event of default.

Lenders were required to review an applicant's bank account statements to assess their capacity to service the loan and they were also required to advise applicants about alternatives to small amount loans.

And consumers receiving 50 per cent or more of their income from Centrelink could not pay more than 20 per cent of their income on loan repayments.

Payday lending accounts for about four per cent of the Australian consumer credit market and is growing. ASIC estimates that A$400 million of payday loans were written in the 12 months to June last year. This was an increase of about 125 per cent since 2008.

The regulator granted 68 lending licences in 2012/13 and 64 in 2013/14.

ASIC found that most lenders had systems in place to review applicants' bank account statements.

It found that all had policies for dealing with applicants who were Centrelink clients. However, in many instances lenders were not complying with their own policies.

It was the same story when it came to dealing with the presumption of unsuitability provisions; lenders had policies in place but did not always follow them.

ASIC said lenders were continuing to allow some consumers to use payday loans as part of their regular household budgeting. Lenders made only high level inquiries about the purpose of the loan, such as "personal" or "temporary cash shortfall".

ASIC said such an approach did not meet the requirements.

Some lenders appeared to be trying to avoid the cap on fees by changing loan terms so they fell outside the loan type covered by the provisions.

When it came to advising applicants about alternatives to payday loans, five of 13 lenders surveyed had statements that were not sufficiently prominent to attract attention.

ASIC also found that record keeping was inconsistent and incomplete, with important documents missing, no evidence that credit guides had been issued, or no evidence of inquiries about the purpose of the loans.

ASIC deputy chairman Peter Kell said the regulator would maintain a strong focus on the sector.