Should payday lenders be regulated under NCCP?

In the wake of the Australian Securities and Investments commission's landmark victory in its case against payday lender, The Cash Store, one of the questions being asked is whether the obligations of the National Consumer Credit Protection Act are too onerous for short-term, small amount lenders.

ASIC secured a record A$18.9 million penalty against two non-compliant payday lenders - The Cash Store and loan funder Assistive Finance Australia. Cash Store breached seven separate provisions of the NCCP Act, while AFA breached six. In addition, Cash Store was held liable for the breaches of AFA for being "knowingly concerned in the breaches by AFA", pursuant to section 169 of the NCCP Act.

The defendants failed to make "reasonable enquiries" about their customers' objectives and requirements. In a sample of contracts considered by the court it was also established that the credit providers failed to take reasonable steps to verify the customers' financial situation.



Commentators have questioned whether the consumer credit regime is suitable for short-term, small-amount lenders who do not earn enough profit on each loan to justify the onerous compliance obligations associated with the NCCP.



As an example, if a payday lender provided $1,000 to see a consumer through a short-term cashflow problem, the lender is only able to charge a 20 per cent establishment fee and four per cent interest per month. If the loan is repaid within the first month the return on that credit contract would be 24 per cent, or $240.



The challenge for payday lenders is that they often struggle to justify having robust compliance controls in place for credit contracts of this size.



Jon Denovan, a partner at Gadens Lawyers in Sydney, said he had some sympathy with this view and questioned how the Government and ASIC could expect short-term, small-amount lenders to comply with these obligations.



"ASIC - and for that matter the law - wants the same due diligence for a $500 short-term loan as it does for a $5 million loan. Perhaps even more for the small loan because the borrowers are less sophisticated. While I appreciate the need for consumer protection, the issue is becoming whether these people should be prohibited by law from borrowing — a result which I think is unjust and unworkable," Denovan said.



The result of this regulatory regime is that many small-scale lenders have gone out of business and more are likely to follow. The Cash Store was put into voluntary administration because of trading losses well before this court case was decided.

Until September 2013, Cash Store was operating as a payday lender with all of its loans financed by AFA. Cash Store had around 80 stores across Australia and wrote an estimated 10,000 loans per month. The typical loan was for less than $2,200 and was for a short period — usually two weeks or less. According to ASIC the typical fees, charges and interest on these loans amounted to around 45 per cent of the loan amount.
 

The Cash Store's Australian assets were bought by Money3, a competitor, for a nominal sum in 2013. Money3 has since tried to move away from short-term credit contracts to the more lucrative personal loan market, where compliance costs can be amortized over a longer loan term and larger amounts.



The chief executive of the Consumer Action Law Centre Gerard Brody said he did not believe that the compliance obligations under the NCCP Act were "unrealistic" for smaller lenders.

"If you are selling a high-cost product that can cause significant detriment to vulnerable consumers, then additional compliance obligations are warranted. If you operate in a licensed and highly regulated industry and cannot understand your obligations, or are unwilling to comply with them, then you shouldn't be operating in the industry. Sell DVDs or something instead," Brody said.



In the case of payday loans, Brody said the responsible lending obligations were the minimum necessary to ensure loans were not lent where they would cause more harm than good.



"The problem is systemic non-compliance with this obligation, which should be of concern not only to regulators but also investors in payday lending businesses," he said.



ASIC deputy chairman Peter Kell said ASIC believed this was an area where consumers had been suffering from unsuitable credit contracts and the regulator had an obligation to enforce the law and to protect consumers.


Kell said: "ASIC is all about making sure people taking out loans have trust and confidence in the consumer credit sector and that those offering credit obey the law. And those laws have responsible lending provisions that aim to protect consumers of credit services from taking out loans they can't afford and to stop businesses from taking unfair advantage of vulnerable people."



"That is why we brought this case and this is what the Federal Court has recognised with this penalty," Kell added.


Brody said the suggestion that payday loans were not profitable due to the regulatory burden was "laughable". Lenders simply needed to become more efficient about the way that they deliver their products - perhaps relying less on high-cost bricks and mortar outlets.



"Since national consumer protections were implemented we've seen a proliferation of online lenders entering the market. One high-profile lender, Nimble, increased revenue in their second year of operation by 46 per cent to $12.7 million. Clearly there is money to be made," he said.



Brody also noted that Money3's share price has continued to rise since the acquisition of Cash Store's assets, and Cash Converters' latest annual report included an increase in personal loan interest of $29.6 million.

Nathan Lynch is the head regulatory analyst, Australia and New Zealand, for Thomson Reuters