Additional
Comments by Coalition Senators
1.1
Coalition Senators make the following additional comments concerning the
Committee’s inquiry into the Consumer Credit and Corporations Legislation
Amendment (Enhancements) Bill 2011.
1.2
Coalition Senators fully endorse Recommendation 12 made by the Parliamentary
Joint Committee on Corporations and Financial Services that:
the Government revisit the measures proposed in Schedules 3
and 4 of the Bill and Enhancements Bill. Further consultation with stakeholders
should be undertaken to address the concerns identified throughout the inquiry
and to develop measures that will ensure cohesive and consistent national
consumer credit legislation and an appropriate balance between consumer protection
and industry viability.[1]
1.3
The Committee received evidence that the payday lending industry is
meeting significant consumer demand for short term, small amount (STSA) loans.
One lender, Money 3, provided evidence in its submission to the Committee that
the industry provides cash advances totalling $800 million and serves 500,000
customers annually.[2]
1.4
Accordingly, Coalition Senators are of the view that consideration of
any regulatory restrictions on STSA loans must take into account the potential
detriment to consumers of further restricting the availability of a financial
product for which there is proven and consistent demand.
1.5
When Minister Bill Shorten announced the measures in the Bill he stated
in his media release that these measures were intended to ‘protect ... vulnerable
consumers’.[3]
This statement suggests that the Bill is based on an assumption that all STSA
loans are inherently harmful and that all consumers who access such loans are
inherently vulnerable to the extent that they require special government
protection. Based on the evidence presented to the Committee, Coalition
Senators do not think that is a correct assumption for the government to make.
1.6
Coalition Senators acknowledge the important, challenging and sometimes
confronting work that is performed by consumer legal services and financial
counsellors throughout Australia. But we do not agree with the contention that
all STSA loans are inherently dangerous and that the provision of such loans
should be tightly restricted, or even prohibited.
1.7
Coalition Senators acknowledge that there are some people whose ability
to make sensible financial decisions is impacted and impaired by various
factors including addiction, substance abuse, and other limitations.
1.8
However the Committee received persuasive evidence that many STSA loans
are provided to people who are in employment and who have made a rational and
balanced decision that an STSA loan is the most appropriate financial solution
in their own individual circumstances.
1.9
In fact, submissions made to the Committee and to the PJC from lenders
such as Money Plus, Money Centre, Dollars Direct, Cash Doctors and First Stop
Money indicated that many STSA loan providers had specific requirements that
borrowers must be employed or had rules that did not enable them to lend money
to people who relied solely on government benefits.[4]
1.10
The evidence provided to the Committee highlighted several serious
concerns about the approach taken by the government in the Bill.
1.11
Coalition Senators are concerned that this Bill is not based on a
thorough process which adequately considered the legitimate policy concerns
about the current regulatory framework in relation to STSA loans, but was
rather more focused on the perceived short term political objective of being
seen to be doing something.
1.12
We are of the view that if this Bill is passed in its present form it
would cause serious damage to the market for the provision of STSA loans. In
particular, the proposed caps on fees and charges would make existing STSA
business models unsustainable.
1.13
The Australian Bankers Association submitted to the Committee that in
this Bill the government had adopted the flawed and simplistic 48 per cent cap
that had been introduced by the former NSW Labor government without any
consultation with industry whatsoever prior to its introduction:
The proposed model for calculation of the “cost rate” is
based on a model legislated under the Credit (Commonwealth Powers) Act 2010
(NSW) upon which there was no prior consultation with the credit industry.
Subsequent representations to the New South Wales government were to no avail.[5]
1.14
This 48 per cent cap means that almost any loan for a short term would
likely be unviable for a provider based on a cap that is calculated on an
annualised rate. For example, on a loan of $100 for a two week period the cap
would be breached by any fee greater than $1.85. Therefore, the cap would make
the provision of short term loans practically impossible, which highlights the
inherent flaw in the proposed 48 per cent cap. This 48 per cent cap is proposed
to apply to all loans other than ‘small amount credit contracts’.
1.15
The Bill proposes a separate cap for ‘small amount credit contracts’
which are defined as contracts for less than 2 years and for less than $2,000.
The cap for these types of contracts would be an upfront fee of 10 per cent of
the principal amount and a monthly fee of 2 per cent.
1.16
Coalition Senators were concerned to note comments made by the PJC in
its report that Treasury officials were not able to provide details of any
economic modelling that supported or underpinned the development of the ‘10/2’
fee structure.[6]
1.17
Additionally, no evidence has been provided to indicate that any
assessment or modelling has been conducted by Treasury or the government to
determine the impact of this proposed ‘10/2’ fee structure on the ongoing
viability of STSA loan providers.
1.18
Coalition Senators are concerned that if the provisions of this Bill
lead to STSA loans by private sector providers becoming uneconomic that there
will be few viable alternatives for the provision of such loans to satisfy
existing demand for such loans by consumers.
1.19
Although the Minister’s media release did identify some alternatives,
there was no evidence provided that such alternatives would be available in
sufficient volume or in a timely manner to meet consumer demand.
1.20
Coalition Senators are also concerned that the Bill specifically does
not apply to Authorised Deposit-taking Institutions (ADIs) such as banks and
credit unions. Competitive neutrality should be a core public policy principle
that underpins legislation, especially in the provision of financial services
so as not to discriminate between market participants. By exempting ADIs from
the provisions of this Bill the government has transgressed the principles of
competitive neutrality and discriminated against one sector of the financial
services industry, being the providers of STSA loans.
1.21
STSA lenders submitted to the Committee that they are already prevented
from making loans to customers who will be incapable of repaying them by the
existing responsible lending framework which was introduced by the National
Consumer Credit Protection Act 2009 and which applies to all lenders in
Australia including ADIs and STSA lenders.
1.22
No evidence has been provided by the government to indicate that this
responsible lending framework fails in any way to provide sufficient regulatory
oversight and consumer protection in the provision of STSA loans, including
protection for disadvantaged and vulnerable consumers.
1.23
Coalition Senators believe that a full examination of the application
and suitability of the existing responsible lending framework to STSA loans
should be conducted prior to the introduction of the highly prescriptive and
potentially crippling provisions contained in this Bill.
1.24
Other measures in the Bill contain some highly detailed and prescriptive
interventions in existing business practices including restrictions on multiple
concurrent contracts and on increasing credit when an existing loan matures.
1.25
Coalition Senators believe that the principle of such prescriptive
interference is undesirable and that the measures introduced by this Bill will
be unworkable in practice.
1.26
We are unconvinced that the proposal to set a cap on prices that STSA
loan providers are able to charge is appropriate. Whilst we support full
disclosure of fees and charges and a requirement to disclose annualised rates
to customers using standardised methodology. The Coalition is sceptical about
the desirability to cap prices without an evidence-based approach which has
fully assessed the impact of such proposed caps on both business and consumers.
1.27
Coalition Senators recommend that the Productivity Commission (or a
similar independent body) would be the most suitable body to undertake a
comprehensive evidence-based study to determine:
(a) whether the existing responsible lending framework is appropriate for
the regulation of STSA loans or whether alternative regulation is required;
(b) to assess the impact on the business models of STSA lenders of various
alternative pricing models; and
(c) the best model to ensure the appropriate balance between the ongoing
capacity of STSA loan providers to respond to consumer demand for these types
of loans and appropriate levels of consumer protection.
1.28
If the government is serious about achieving reforms that strike the
right balance between consumer protection and the industry’s capacity to meet
legitimate consumer demand for these products and services, as recommended by
the PJC, it would reconsider its current proposals and develop a better
considered evidence-based policy approach.
Senator David Bushby
Deputy Chair
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