2.1
This chapter considers the views expressed in evidence received by the Senate Economics Legislation Committee (the committee) on the National Consumer Credit Protection Amendments (Small Amount Credit Contract and Consumer Lease Reforms) Bill 2019 (No. 2) (the bill).
2.2
Evidence was mostly received from organisations which advocate for the financial rights of consumers. Consumer groups supported the bill's consumer protection provisions and recommended the bill's reforms be legislated. Evidence was also received from industry stakeholders, including providers of small amount credit contracts (SACCs), and consumer lease representatives. Industry stakeholders supported some of the bill's provisions and did not accept, or recommended amending, the bill's key provisions.
2.3
Evidence to the inquiry predominately addressed the following issues:
financial vulnerability and hardship experienced by Australians, including the socioeconomic factors that can impact financial inclusion;
use of SACCs and consumer leases by people who are financially vulnerable and who may not be able to afford the costs of those products;
risks that SACCs and consumer leases contribute to people becoming over-indebted and cause them financial harm;
need for reforms that support the financial inclusion of Australians who experience, or are at risk of, financial hardship;
capacity of the bill's provisions to enhance the protections for consumers of SACCs and consumer leases; and
impact of the bill's provisions on SACC and consumer lease businesses.
Financial hardship, SACCs and consumer leases
2.4
The evidence received during the inquiry described the complex circumstances that can limit the financial inclusion of Australians, and lead to financial hardship. People on lower incomes have fewer options to access mainstream credit products, are exposed to higher-cost credit products, and are exposed to lending practices which promote the use of higher-cost products. The bill's provisions, which propose to amend the law in relation to SACCs and consumer leases, regulate how SACCs and consumer leases are provided, and impact how consumers access those products.
2.5
The evidence shows SACCs and consumer leases are often used by people on lower incomes, and who may be financially vulnerable or experiencing financial hardship. In some instances, Australians are using SACCs to meet essential living costs. In turn, making repayments on SACCs and consumer leases can make affording everyday living costs—including food and rent—more difficult. After entering into a SACC or consumer lease, consumers may prioritise making repayments over their essential living costs. Several submitters described consumers of SACCs and consumer leases falling into cycles of debt.
2.6
Good Shepherd Australia and New Zealand (Good Shepherd) told the committee that 17 per cent of Australians are unable to access 'a small amount of credit, a transaction account or general insurance.' Polling by Choice similarly indicates that 14 per cent of Australian's are finding it 'difficult to get by on their current income', and a further six per cent are finding it 'very difficult to get by on their current income.' In a 2018 study, the Productivity Commission reported that nine per cent of Australians, equal to 2.2 million, lived below the relative income poverty line in 2015-16. From 2001 to 2016, around half of Australians experienced income poverty for at least a year; the average duration being 1.8 years.
2.7
At the state and territory level, NSW Council of Social Service (NCOSS) told the committee its research showed people in full time and part time employment in NSW experience poverty rates at five per cent and seven per cent respectively. Anglicare Tasmania submitted that a third of Tasmanians are 'reliant on government income support'. Data commissioned by The Stop the Debt Trap Alliance (SDTA) indicates that the use of payday loans by Tasmanian households grew by 15.5 per cent in the six month period between January 2019 to July 2019. The Consumer Credit Legal Service (Western Australia) Inc. (CCLSWA) noted that the SDTA data also indicates the use of SACCs grew 13.5 per cent in Western Australia over the same period.
2.8
The Salvation Army provided evidence from its Moneycare program that indicates 'the incidence of people with payday loan and consumer lease debts has increased significantly over the last decade, particularly for people aged 18-24 years.' The Salvation Army also submitted that in the last ten years the number of people presenting to the Moneycare program with SACCs has more than doubled (six to 13 per cent) and the amount of debt they owe has trebled. The Consumer Action Law Centre (CALC) noted data from the SDTA 'shows over 4.7 million payday loans were taken on by around 1.77 million households between April 2016 and July 2019.'
2.9
However, industry stakeholders refer to data which they maintain shows that the size of the SACC market is not growing. The National Credit Providers Association (NCPA) submitted that in 2018 there were 839 036 SACC loans approved, out of 1.36 million applications. The Consumer Household Equipment Rental Providers Association (CHERPA) indicated that, at any given time, there are up to 700 000 active consumer lease contracts.
2.10
Consumer groups encourage people using SACC or consumer lease products to consider options with less financial risk, such as financial counselling services or no interest loans. However, industry stakeholders consider that SACCs and consumer leases facilitate consumers' financial inclusion by offering access to credit in circumstances where a person may not be able to access mainstream credit products.
2.11
Consumer groups support enhancing the regulation of SACC and consumer products, and strongly supported Parliament passing the bill. At the same time, industry stakeholders have expressed concern regarding perceived shortcomings of the SACC Review. The Financiers Association of Australia and Min-it Software (FAA&MS) considered the outcome of the SACC review 'pre-determined' and a 'sham from the beginning'. However, submissions often noted significant consultation processes that have occurred in relation to SACC and consumer lease reforms, including the:
2015-16 independent review into SACCS;
2017 Treasury's consultation on the exposure draft of the bill, held between 22 October–3 November 2017; and
2018-19 Senate Economics References Committee's financial hardship inquiry.
2.12
In February 2019, the Senate Economics References Committee (references committee) reported on its inquiry into credit and financial services targeted at Australians at risk of financial hardship (financial hardship report). The report made a number of recommendations for enhanced consumer protections relating to SACCs and consumer leases. The government's response to that report is yet to be tabled in the Senate.
2020 bushfire crisis and the COVID-19 pandemic
2.13
The committee is mindful of the serious impacts that the recent 2020 bushfire crisis and the current COVID-19 pandemic are having on many Australians. These events have tragically caused the death of 33 and over 832 people, respectively. The lives of many others have been fundamentally disrupted; including through financial hardship.
2.14
Some submitters raised concerns that the bushfires will result in financial hardship for people living in effected areas. As part of its submission to the Senate inquiry into the lessons learned from the 2019-20 bushfire season, the Australian Council of Social Service warned that, for people already experiencing poverty or disadvantage, an impact of natural disasters can be to entrench and drive poverty.
2.15
The Reserve Bank of Australia (RBA) reported that many regional communities have been 'devastated' by the bushfires and noted, in addition to the loss of life, some lost property may not be replaced due to underinsurance. The RBA highlighted the disruption caused to tourism and agriculture industries which are an important component of economic activity and employment in bushfire affected areas. Regions which rely on tourism were particularly effected as fires intensified over the summer holiday period.
2.16
The COVID-19 pandemic is causing an unprecedented supply and demand shock to the Australian economy, with significant impacts for Australians' access to employment. Prior to Victoria experiencing a second wave of cases and associated lockdown measures, Treasury had projected that real gross domestic product is expected to fall 3.75 per cent in 2020, before rising 2.5 per cent in 2021. In July, the unemployment rate reached 7.5 per cent. Noting the extreme uncertainty regarding the course of the COVID-19 pandemic, the RBA expects that, under a baseline recovery scenario, Australia's unemployment rate will 'peak at around 10 per cent by the end of this year' and 'decline gradually' to around 7 per cent by the end of 2022. Over the April-May 2020 period, the JobKeeper Payment, the largest one-off fiscal measure in Australia's history, supported the income of approximately 3.5 million workers employed across 920 000 organisations.
2.17
The committee is aware that there has been media reporting which suggests that some SACCs providers are targeting people affected by bushfires and COVID-19. The committee also notes the concern that income support payments made through the Government's COVID-19 response, may be used to repay high-cost SACCs and consumer leases.
Alternatives to SACCs and consumer leases
2.18
Consumer groups outlined a number of alternative options that are available, with costs lower than SACCs and consumer leases. These options include:
…speaking to a free community based financial counsellor and emphasising that a loan may not particularly be the answer to a person's situation. Emergency relief is also available for things like food, utilities and rent; no-interest loans provided by community organisations for things like white goods and car repairs; and of course there are also Centrelink advances of up to $2,000 available.
2.19
Ms Stella Avramopoulos, Chief Executive Officer of Good Shepherd, outlined the functions of the no interest loans scheme (NILS):
NILS was established in 1981 and provides a safe and affordable alternative to high-cost finance options provided by payday loans or rent-to-buy products. Good Shepherd offers loans of up to $1,500 from 160 community service organisations at 625 locations across Australia. To be eligible for a NILS loan you must have a healthcare or pension card and earn under $45,000, have lived in your current residence for three months, and have a willingness and capacity to repay the loan. There are no credit checks with NILS loans. Women represent 66 per cent of NILS clients, and 23 per cent of clients identify as Aboriginal and Torres Strait Islander.
2.20
The Department of Social Services considered that NILS provides a 'safe and viable alternative to other forms of credit, such as payday lenders, for small amounts of credit' and noted the program's wraparound services. In 2018-19, Good Shepherd Microfinance provided 29 832 NILS loans, with a total loan value of $34.2 million. These loans were most often used by consumers to pay for car repairs and car registration, and to purchase new fridges.
2.21
Submitters acknowledged that alternative, lower-cost options may not be well known or understood by potential users, or may take longer for people to access. A NILS loan can take up to 48 hours to approve, which is a significant period when SACCs and consumer leases can be assessed quickly online. Consumer groups suggested that additional resourcing would assist to improve the alternative services being delivered.
Views relating to the bill's SACC provisions
2.22
In order to provide background and context to their consideration of the bill's provisions, inquiry participants highlighted a number of broader issues regarding SACCs.
2.23
Consumer groups gave evidence that SACCs cause financial harm to consumers through high product costs and repeat usage, noting:
evidence of increasing frequency of SACC usage, and increasing loan value;
use of SACCs by people predominately on lower incomes, including increasing use by younger people and females;
significant case study evidence indicating SACCs have been provided in contravention of the Credit Act/responsible lending obligations;
examples of SACCs causing financial harm to consumers and predatory lending practices;
financial literacy, counselling or NILS loans are better alternatives to SACCs and more resourcing is needed; and
the bill has been consulted on extensively and some frustration that the bill's reforms have not been passed by Parliament.
2.24
Providers argued that, although these products are higher-cost due to the risk-weighting attributed to the consuming demographic, SACCs are an important financial product for people who may not be able to access mainstream finance.
2.25
Providers also called for increased compliance and not more regulation. Mr Paul Baril posed to the committee, 'Is there another financial service out there that's legislated more than we are?' Additionally, Cash Converters suggested that the bill will not increase financial inclusion, and could cause consumers to turn to unregulated financial providers, including buy now pay later (BNPL) providers.
Protected earnings amount
2.26
Altering the protected earnings amount (PEA) for SACCs, (which currently stands at, 20 per cent for consumers who receive 50 per cent or more of their gross income through Centrelink) divided consumer groups and industry stakeholders. Consumer groups supported the reformed PEA, with one of two reasons commonly provided in favour; if SACC products are more affordable consumers have more income available to afford basic living costs and it protects consumers, notably the financially vulnerable.
2.27
A 10 per cent PEA was widely supported, although a few submitters indicated a preference for a lower amount. The Consumer Action Law Centre (CALC) was involved in the 2016–17 independent review. Having evaluated international research and drawn on its own experiences, CALC recommended a proposal led by Pew Trusts, that a five per cent PEA be introduced. The same recommendation was also put to the committee. MyBudget would also prefer a five per cent PEA, although ultimately proposed the PEA be no more than 10 per cent.
2.28
Industry stakeholders expressed reservations with reforming the PEA. Cash Converters is of the view that government is overreaching into a consumer's right to personal choice. Similarly, the NCPA believes that consumers should 'be free to choose the best credit option available' and Cash Stop views the application of the PEA to income earners as restricting.
2.29
Evidence from industry stakeholders indicated that a 10 per cent PEA may result in more costs to consumers, through longer loan periods. In turn, this could further disadvantage consumers. It was also noted that a consumer's ability to access credit for an unexpected expense may decrease.
2.30
Mr Paul Baril from Cash Stop, in appearing before the committee, noted his concern for the 'small guys':
When you go to 10 per cent—this is a fact—you have to have a massive amount more in your loan book. … I guarantee a lot of the small guys will close their doors.
SACC providers highlighted that a provider's rate of return is already 'so low'. Further, the Australian Finance Industry Association (AFIA) pointed out that providers may inadvertently exceed the PEA and be subject to significant breach penalties.
2.31
According to the Finance Industry Delegation (FID), there is a lack of research and economic modelling for altering the PEA. As an aside, Cash Stop and the NCPA highlighted that a 10 per cent PEA is at odds with cashless debit card in some Australian communities. Finally, a couple of industry stakeholders noted that existing legislation is working as intended.
2.32
Submitter's also provided evidence on the impact of BNPL products and the scope to regulate BNPL products under the Credit Act. Good Shepherd outlined the concerns it has with deferred payment schemes, including that it is another avenue through which an advance can be accessed and 'the high number of After Pay and similar debts that are represented in financial counselling cases'. Consumer groups supported regulating BNPL products, by extending the Credit Act or via some other form of regulation.
2.33
SACC providers raised the issue of fair competition, providing evidence that consumers are accessing unregulated deferred payment schemes including in significant numbers and observing a decline in business. Mr Smiles told the committee that providers are 'dealing regularly with people coming to borrow SACCs to pay their [BNPL] payments'. Rate City conducted a survey of 1 009 Australians, and released its results in September 2020, finding 32 per cent of people have used BNPL and of those 28 per cent found themselves in financial trouble.
Removal of rebuttable presumptions
2.34
The evidence presented to the committee on removing the rebuttable presumptions was mixed.
2.35
In its submission, LawRight suggested maintaining the presumptions on the basis they offer consumers protection, whilst acknowledging that it may not be the most effective mechanism. The CALC noted that 'the current rebuttable presumptions lead to grey areas'.
2.36
Some submissions raised the frequency and size of loans. MyBudget referred to the 2019 financial hardship report of this committee which suggested that the presumptions may have resulted in consumers taking out fewer, larger SACC loans but not limiting repeat borrowing. Further comments on loan frequency are included with the industry stakeholders' view below.
2.37
Case studies were included in the evidence, to illustrate providers entering into SACCs in contravention of the presumption provisions. For instance, 'Caitlin' started taking out small amounts of credit which increased over time, to cover her basic living expenses and this resulted in 45 loans over six years and significant debt. According to LawRight 'many of [Caitlin's] loans triggered the presumption of unsuitability'. The story of 'Ryan' is also worth mentioning due to his 'income being sufficient to rebut the presumption of unsuitability', however, he had a gambling addiction. Between 2015 and 2017, 'Ryan' obtained at least 43 SACCs and three credit cards, from ten different lenders to fund his addiction. 'Ryan's' legal representative CCLSWA stated:
Many of these SACCS were approved concurrently, with lenders aware that Ryan was already servicing up to 12 other SACCs, a credit card debt and a car loan at the time of approval… Based on the documents CCLSWA managed to obtain, it appears that many of these SACC lenders failed to conduct assessments of suitability or to take reasonable steps to verify Ryan's financial situation.
2.38
It was suggested that a 'bright line test' could potentially replace the presumption. CALC explained that a bright line test would 'offer better protection to consumers, be easier for lenders to comply with…and make it easier for the regulator to enforce'. Whilst the CCLSWA supported a bright line test and considered it 'superior to a rebuttable presumption from a regulatory perspective', its preference was for a database system.
2.39
Industry stakeholders are in favour of removing the rebuttable presumptions. Cash Converters outlined that the presumptions were originally designed to reduce loan frequency and stated that the responsible lending obligations are working. An industry snapshot of 2018, provided by NCPA, stated the average loan frequency per year was 1.3. FID argues that the number of SACCs held by a consumer, or default events, is not a 'pivotal' issue. Further, whilst supporting the repeal, FID noted that a properly regulated rebuttable presumption provision could work.
Equal Repayments and Repayment Intervals
2.40
Despite having different perspectives, evidence to the inquiry highlights wide support from consumer groups (affordability perspective) and industry stakeholders (best practice perspective), for the bill's provisions to have equal payment and repayment intervals.
2.41
Legal Aid Queensland commented favourably that this provision would limit instances of providers reducing repayments over time, to extend the loan period. This reasoning is consistent with that of the Review Panel of the Independent SACC laws (the Review Panel), who recommended this issue be addressed in the same way as this provision sets out.
2.42
Evidence from industry stakeholders suggested their support for this provision is due to it being best practice. For example, FAA&MS pointed out that it made the Review Panel aware of the unequal payments issue. In addition, FID described front-loading as 'unscrupulous and unconscionable conduct' although was less supportive of the Australian Securities and Investments Commission (ASIC) being granted legislative instrument powers.
2.43
There was some concern from two industry bodies that the provision will prevent providers from arranging a repayment schedule that aligns with a consumer's salary. To overcome this potential issue, FAA&MS recommended amending:
…the drafted wording for subsection 133CE(1)(b) with 'the interval between the first repayment date and all other repayment dates are not identical'; so that consumer suitability can be maintained.
Monthly fees where a SACC is repaid early
2.44
The prohibition on unexpired permitted monthly fees, received widespread support from consumer groups and industry stakeholders, following the same line of reasoning presented directly above—affordability and best practice respectively.
2.45
In support of its position, Legal Aid Queensland explained that this provision will 'reduce the fees and charges payable by the consumer'. It is recognised that SACCs are high cost due to the prescribed fees.
2.46
Two industry submitters provided evidence to indicate SACC lenders may already be complying with this prohibition. FID noted that this provision is consistent with the intent of the current legislation and Cash Converters highlighted it 'does not charge an early repayment fee'.
2.47
A couple of concerns were raised by industry stakeholders in relation to a monthly fee being withdrawn by accident or deliberately at the finalisation of a loan, in light of the strict liability penalty.
2.48
Evidence alerted the committee to the potential scenario of a monthly fee being drawn soon after a loan is finalised, by accident. Mr Smiles explained via example that in the two days after a loan is finalised, a monthly fee can be withdrawn due to administrative processes. In that case, Mr Smiles recommended, 'insist[ing] in a very timely manner that the lender refunds the money to the consumer' rather than be penalised.
2.49
FAA&MS raised concern that the provision may be misused by a disgruntled consumer or advocate to cause a provider to be non-compliant for the purposes of the consumer/advocate raising a complaint with a regulator.
Unsolicited SACC invitations
2.50
The provisions of the bill prohibiting SACC providers from making unsolicited invitations to people who have a held a SACC in the last two years was supported by consumer groups. Evidence from consumer groups referred to the initial temptation of entering into another SACC and the impact this can have on a consumer's circumstances.
2.51
Mr Brody, from CALC, in responding to questioning from the committee explained that:
One of the situations that people who use payday loans find themselves in is this repeat use, and they tell us that that repeat use is often promoted by the lender. So, once they have had one loan, they will continue to receive unsolicited communications to take out further loans, often seemingly timed at moments when they've just repaid a loan, so they can get another one.
2.52
In consumer groups' submissions, consumers referred to the 'temptation' of SACCs and described being 'bombarded' and 'harassed' to enter another SACC.
2.53
The CCLSWA explained that '[f]or consumers with addictions, unsolicited small amount credit contract invitations can be particularly hard to resist' and provided the example of a client obtaining several SACCs from different lenders to purchase illegal drugs, who in the end did not obtain a refund from one lender due to the temptation associated with making contact.
2.54
Legal Aid Queensland echoed and expanded on this sentiment as it:
…regularly sees vulnerable consumers, in extremely difficult financial circumstances, accepting new and unaffordable SACC loans after being approached by a SACC provider. These unsolicited loans always worsen the vulnerable consumer's circumstances and often lead to them being unable to pay their rent or afford food and other necessities…
2.55
Industry stakeholders were unsupportive of the prohibition. Cash Converters argued this provision is unnecessary for two reasons. First, responsible lending obligations are in place to 'prevent unsuitable loans, whether they are the result of unsolicited marketing or not'. Second, '[i]t is unnecessary to limit marketing in circumstances where only customers who have consented to marketing contact will receive SACC related marketing anyway'.
2.56
Cash Stop stated, '[t]his is the most restrictive type of legislation ever proposed in a democratic country'. A couple of industry submitters were of the understanding that generic advertising would be banned under the law, however, as noted above, the ban would not apply to general advertising relating to SACCs.
2.57
Some consumer groups and industry stakeholders raised concerns with the length and who/what the prohibition applies to, and offered amendments. NCOSS raised two issues with the two year limitation period:
The ease with which organisations hold onto large amounts of data removes any unreasonable burden on the licensee creditor to keep records of customers longer than a two-year period. Further, the two year limitation period is arguably inconsistent with the total prohibition of unsolicited selling of financial products pursuant to the Corporations Act 2001.
Two submitters, Cash Converters and Cash Stop, were of the view that the ban should only apply to pre-approved loans.
2.58
The NCPA suggested amending the wording of proposed paragraph 133CF(5)(a) to make clear that a SACC provider can still contact its customers.
2.59
Both the FAA&MS and FID outlined potential issues in relation to third parties and recommended reviewing the wording.
2.60
In terms of the strict liability offence penalty, NCOSS and MyBudget consider the evidential burden to be too high. To rectify this, both consumer groups recommended the fault element be removed.
Breaches
2.61
Civil, criminal and strict liability offences' provisions were not a significant feature of the evidence base. Where a penalty relates to a provision addressed above, that evidence has already been outlined.
2.62
The SACC penalties were described as 'rigorous', 'tougher' and 'strengthened'. Whereas FID rejects the penalties, calling them 'draconian' and asking for them to be reviewed.
2.63
In responding to questioning by the committee, Mr Gerard Brody, from CALC, outlined two observations regarding SACC businesses and penalties. One, the fear factor is not there as SACC businesses lack the reputational capital of a larger provider. Two, the 'the penalties and the likelihood of being caught are not significant enough … [and] might be seen as a cost of doing business'.
Views relating to the bill's consumer lease provisions
2.64
The committee received significant evidence relating to the bill's consumer lease provisions. Consumer groups outlined ongoing and serious concerns regarding consumer lease conditions, particularly the high costs of leases, and welcomed the bill's provisions to regulate costs. In the view of consumer groups, the bill's provisions will reduce the financial impacts on consumers.
2.65
CHERPA, the peak industry body for consumer leases in Australia, submitted that it is 'broadly in favour of federal regulatory change for the industry', including to the costs and affordability of consumer leases, however, it is opposed to the 'specific numbers' proposed by the bill for capping costs and introducing a PEA.
2.66
As noted in Chapter 1, there is currently no legislated cap on the total costs which lessees may be charged under a consumer lease.
Cap on costs
2.67
The bill proposes to cap the costs of consumer leases to 4 per cent of the base price of the good for each whole month of the lease term, for a maximum period of 48 months. The bill defines the base price for new and used goods with reference to a good's recommended retail price (RRP).
2.68
Consumer groups were supportive of a cap on costs at the bill's proposed rates. TasCOSS stated it would oppose a cost rate higher than what it currently proposed, as this 'would most likely cause significant detriment to low income consumers.' TasCOSS also suggested the provision for the cost cap provisions could be simplified by 'aligning it with the 48 per cent annual cost cap' applicable to the sale of goods by instalments and suggested the separate definitions for the base price and cash price of a good may be confusing.
2.69
Industry stakeholders raised concerns that the cap on costs provisions do not adequately account for the costs incurred by consumer lease providers, and argued the provisions would adversely impact businesses' viability.
2.70
ASIC considered that the high costs of consumer lease products is driven by 'both lessors maximising the return on transactions and the inability of consumers to exert competitive pressure on lessors to reduce prices.'
Proposed base price
2.71
LawRight submitted that even if the bill's proposed cost cap is implemented, consumer leases would still attract significantly higher costs than other credit products:
The current proposed cap will allow consumer lease providers to charge an amount equivalent to 82% APR over 12 months, 76% APR over 24 months and 72% per cent APR over 36 months. This is significantly more than the cap of 48 [per cent] APR applied to credit contracts (other than SACCs and [Medium Amount Credit Contracts]).
2.72
AFIA was supportive of the cost cap, but was concerned that the wording of proposed section 175AA was inconsistent between including GST in the calculation or the RRP and market value, but not including GST in the agreed purchase price.
2.73
CALC expressed a concern that lease providers may inflate the RRP of goods:
Our concern is that it's very easy for these providers to inflate a recommended retail price, particularly if they're offering products that aren't available elsewhere. Some providers do that. They have their own branded products. So there isn't necessarily a marketplace where you can identify the recommended retail price. We think that issue could be dealt with better in the current bill.
2.74
Legal Aid NSW did not consider that lessors should be allowed to charge a separate cost for delivering a leases good (under proposed subsection 175AA(8)), and raised a concern that the fee could be used as a cost shifting mechanism.
High cost of consumer leases
2.75
Consumer groups told the committee that regulation to cap costs for consumer leases is both necessary and overdue. This view was frequently premised on consumer groups' experiences with assisting clients manage financial challenges. Consumer groups reported their clients' financial challenges were worsened through high-cost consumer leases obligations.
2.76
Ms Karen Cox, Chief Executive Officer, Financial Rights Legal Centre, told the committee of one of the centre's clients who had experienced high cost leases:
Amanda is an Aboriginal woman in her mid-40s who lives in a regional New South Wales town and is reliant on Centrelink benefits. In 2016 she entered a four-year consumer lease contract to acquire a seven-piece dining set and a three-pce lounge suite. The sum of the payments under the contract was $9,000. Our best estimate of the value of the goods, some of which were second-hand, was $1,550. That would amount to an equivalent interest rate of about 150 per cent per annum. A year later she entered another contract for two years to get a Samsung Galaxy mobile phone. This phone retails at $997 but the repayments under the two-year contract came to almost $4,900. Again, this is an effective interest rate of roughly 240 per cent. When she came to us she'd already paid $8,350 under these contracts. The only thing she had left in her possession was the second-hand dining set. The lounge had been repossessed at some point, and the phone had been stolen at a local fair. The lease provider was still claiming another $4,300. This is less than the original contract price but still a significant amount of money.
Our financial counsellor looked into the client's situation, determined that her budget was well in deficit—a result of the payments required under these leases—and raised a dispute with the lease provider. Their reaction to that was to approach our client numerous times in her home, pressure her to stop dealing with us, offer her a $1,500 refund, imply that it would be a lot easier for her and her extended family if she resolved the dispute directly with them, and even offered her a commission on payments that might be made by the rest of the family.
2.77
Consumer groups provided a number of case studies of consumer leases that had high costs, and appear to cause financial detriment to the consumer. The key, and often reoccurring issues, described in those examples, include:
a significant variation between a leased good's retail price and the total lease cost paid, which often resulted in lessees paying costs equivalent to multiples of a good's retail price;
consumers struggling to repay there consumer leases, or not having enough money left after repaying the leases to afford basic living costs;
consumers reliant on income support payments for income and a high proportion of their income being used to repay consumer leases;
complex health or social challenges contributed to the consumer's experience with financial vulnerability and hardship;
lease providers acting inappropriately when responding to repayment difficulty concerns;
consumers having an incomplete understanding of the lease provisions, including the total costs payable under the lease or believing they will own the goods at the end of the lease period;
consumer leases being provided using unsatisfactory suitability assessments; and
consumers repaying multiple leases or other debt types, and experiencing repayment difficulties.
2.78
At the centre of the criticisms of the high costs of consumer leases is evidence that lease repayments result in lessees repaying multiples of the value of a good which, when considered as a percentage, results in lease costs equating to several hundred per cent. For example, without a regulatory cost cap, the HRCLS told the committee that one client's held multiple consumer leases with a total repayment obligations of over $12 000, for household goods that HRCLS estimated to be worth approximately $4500. Another HRCLS' client held a consumer lease for a dishwasher that had a total repayment obligation of $3000, while the appliance retailed for just over $800.
2.79
In a particularly concerning case, Care Inc. told the committee of the experience of 'Merinda', an indigenous Australian women—living with serious mental and physical health conditions, residing in public housing, and whose only income is the Disability Support Pension (DSP)—who was paying 36 per cent of her income for nine consumer lease items, which will require total repayments of over $32 000.
2.80
CCLCSA described another concerning case in which Jamie, a person living with an intellectual disability, who receives income through the DSP, lives in assisted accommodation and is supported through the NDIS, entered into lease agreements at a store for six items and which obligated him to make total repayments of over $17 000. The goods had a total insured value of $7280. After making lease repayments and paying for accommodation, Jamie did not have enough money left for food, transport or clothing.
2.81
Maurice Blackburn Lawyers (MBL) noted that consumer lease providers may structure their leases in a way that avoids the product from being defined as 'a sale of goods by instalments', under which there is an annual cost rate cap of 48 per cent (under Division 4A of the Credit Code). To avoid the cost cap, MBL suggested some consumer lease providers may structure there products so that lessees do not have the right, or obligation, to purchase a leased good.
2.82
LawRight consider that, as the bill's proposed cost cap exceeds the cap on cost applicable to other credit products, financial services providers may be incentivised to favour consumer leases over other product types.
2.83
In its final report, the Review Panel noted many consumer lease products include mechanisms that allow a lessee to purchase the leased good at the end of the lease period. The Review Panel saw this as evidence of the 'artificiality' of the distinction between consumer leases and goods sold by instalment under the Credit Code as artificial and based on 'form rather than substance'. CHERPA refuted the Review Panel's view and suggested the two products have different risk profiles as, under a consumer lease, a lessor is obligated to maintain a leased good.
2.84
Mr King, CHERPA, responded to the issue of the high-cost of consumer leases and noted the industry does use percentages to calculate costs but there are high costs associated with leasing the goods:
Again, we don't work on percentages. But the reason we have the costs that we do is because we are not lending money; we are leasing out a product that has to be delivered, maintained and serviced et cetera throughout a process. Hence, the costs that we charge, the multiples that we've suggested, are there to allow for people to stay in business and to allow the client to have the service that they require…
2.85
In responding to the variation between the RRP and the actual price of the good under a consumer lease, Mr King, CHERPA, told the committee that '[i]f a client could purchase outright then they would most likely get a better price—but they can't; otherwise, we wouldn't be leasing the product to them.'
Costs of providing consumer leases
2.86
In its submission, CHERPA emphasised the high costs associated with providing consumer leases, and considered that the bill's proposal to cap costs contributed to a 'profound threat' to the viability of the consumer lease industry and the financial inclusion of consumers.
2.87
CHERPA argues that the consumer lease industry 'suffers from a high degree of risk exposure from consumers'. Goods that are retained by the consumers in cases of lease default, or damaged and broken goods were highlighted as significant costs to the industry. CHERPA also submitted that there are additional costs to consumer lease providers that are not experienced by SACC providers, including costs for: purchasing goods for leasing; warehousing those goods; and staff to provide the goods.
2.88
CHERPA maintained that lessors have limited ability to recover goods in cases of default, which has led to an understanding in the industry that it is necessary to 'charge sufficiently' for all consumer leases to 'offset the risks' associated with leases that default. In CHERPA's view, charging an early termination fee, or a fee for the value of the goods, to lessees is not practical, in part, as the '…general consumer in the industry often has little if any cash in reserve, and is simply unable or unwilling to pay the defaulted amount'.
2.89
In the interest of ensuring the consumer lease industry remains competitive, profitable and able to provide services to consumers, CHERPA proposed that the cap on costs be calculated using a multiple of base principle.
Potential amendments to the bill's cap on cost provisions
2.90
MBL recommended that Part 4A of the Credit Code be amended so that the interest rate cap includes establishment fees and to cause consumer leases to be subject to the cap (of 48 per cent). LawRight similarly encouraged Parliament to consider capping consumer lease costs at an equivalent annual percentage rate of 48 per cent.
2.91
CHERPA recommended the bill be amended to incorporate its proposed method of capping costs with a base price multiple, using the following rates:
for a 12 month lease, a base price multiple of two;
for a 24 month lease, a base price multiple of three;
for a 36 month lease, a base price multiple of three and a half; and
for a 48 month lease, a base price multiple of four.
2.92
FAA&MS went further and recommended that section 175AA be deleted because it views the four per cent monthly fee as too low:
The issue we have is SACC fees and charges are GST exempt whereas consumer lease payments are subject to GST. That means instead of a return of 4 [per cent], the actual rate would be 3.64 [per cent].
2.93
In its submission, FAA&MS noted a series of concerns in relation to section 175AA, including that:
the bill's provision to cap the cost of indefinite term leases at a multiple of 1.92 of the base price 'is leaving the floodgate open for any lessor determined to maximise the financial return to deliberately misrepresent the lease as an indefinite lease and run it for a shorter period' (ss. 175AA(3)); and
the bill's provisions to cap the cost of a leased good with reference to RRP could induce 'statutory cartel conduct' by requiring all lessors to refer to RRP (ss. 175AA(5)).
2.94
NCOSS recommended that the cap on cost provision 'be calculated by reference to the cash price of the goods as defined under section 204 of the National Credit Code.'
2.95
The AFIA supported the cap on costs, but noted that section 175AA requires that the RRP and the market value are calculated exclusive of GST, while the 'treatment of GST for the agreed purchase price is not articulated.' AFIA recommended that GST should be explicitly included in the purchase price calculation.
2.96
AFIA raised a concern that the definition of the base price may lead to unintended breaches by providers where the RRP changes between the time of a lease application and the lease being entered into, or where the RRP is not known for imported goods. AFIA recommended that sections 175AA(5)(a) and (b) be amended to 'include concepts within control of the lessor (e.g. the RPP known by the lessor).'
2.97
AFIA also recommend omitting the words 'accept payment' from proposed sections 156C and 175AC, so that the lessor may not require a lessee make payments in excess of the permitted caps, but the lessor would not be penalised if they did not initiate or cause the overpayment.
Bank statements
2.98
The bill creates a requirement for lessors to obtain and consider
90-days of lessees' bank statements. Legal Aid Queensland supported this proposed requirement and reasoned that this would provide lessors with improved visibility of consumers' financial circumstances; leading to fewer instances of leases entered into by vulnerable consumers. The provisions (sections 140(1) and 153(1)) were similarly supported by the CCLSWA.
2.99
However, MyBudget suggested that this provision may not be enough to ensure lenders comply with responsible lending applications, and noted examples of providers obtaining statements from consumers but not considering the statements appropriately. The committee notes case study evidence, provided in relation to SACCs, suggests that bank statement may not always give providers a complete view of a consumer's financial circumstances.
Protected earnings amount
2.100
A protected earnings amount (PEA) for consumer leases, which would prevent lessees from being required to make repayments at a rate more than 10 per cent of their net income, was widely supported by submitters as an effective affordability protection for consumers.
2.101
The bill amends the Credit Act to establish provisions which would give effect to a PEA for consumer leases, such as prohibiting a lessor from accepting payment from a lessee in excess of the PEA, and establishing penalties for contravention. However, the bill itself does not establish the PEA, as this is a change required to the Credit Regulations. MyBudget submitted that it is imperative that the amendments to the Credit Regulations take effect at the same time as the bill.
2.102
Financial Counselling Australia (FCA) considered that the proposed PEA for consumer leases are a 'vital consumer protection' to ensure consumers do not end up in a debt trap.' NCOSS strongly supported the 10 per cent PEA for consumer leases and stated the changes will ensure lessees 'will not be able to overcommit their income and will have money for cost of living expenses.'
2.103
CCLSWA argued that current responsible lending laws are inadequate and the 'only way to protect vulnerable consumers is to make consumer leases safer by introducing safeguards such [as] extending the application of protected earnings to consumer leases.'
2.104
AFIA emphasised the 'importance of balancing the needs for consumer protections for vulnerable customers with continuing access by all customers to the consumer lease market.' AFIA noted its concern that a flat PEA of 10 per cent for all lessees 'across the entire customer demographic unreasonably restricts lending to customers who do have the capacity to repay a proposed lease of household goods.
2.105
CHERPA went further in its arguments and proposed that consumer leases should not be subject to a 10 per cent PEA, as is being proposed for SACCs, because there is 'clear ongoing utility provided by consumer leases.' That is, consumers acquire a benefit from the good obtained under the lease which, CHERPA suggests, is not provided through a SACC.
2.106
CHERPA also suggest that a PEA rate of 10 per cent has the potential to cause financial exclusion by preventing consumers from accessing consumer leases in an environment where 'there is often no other recourse for obtaining essential household items.'
2.107
As such, CHERPA submitted that it is preferable for industry to adhere to responsible lending practices rather than implementing a PEA for consumer leases. However, if a PEA is to be implemented, CHERPA proposed that it be set at a rate of 20 per cent, noting feedback from CHERPA members indicates that consumers may encounter financial difficulty when making repayments at a rate of approximately 17.5 per cent of net income.
2.108
The committee notes CHERPA's code of conduct currently requires its members not to enter a lease agreement where the rental payments exceed 20 per cent of a lessee's income after tax.
2.109
CHERPA, has suggested that the rationale for the 10 per cent relies on a 'somewhat arbitrary justification'. Other industry stakeholders criticised the Review Panel's formations of the suggested 10 per cent PEA, indicating it does not have a sound basis.
Potential amendments
2.110
AFIA recommended that the bill's proposed 10 per cent PEA be limited to people who receive more than 50 per cent of their income through Centrelink. AFIA also recommended amendments that remove or qualify sanctions for lessors that accept payment in excess of the permitted earning cap. It suggested this could be achieved by removing the 'accept payment' from sections 156C and 175AC, or introducing words to qualify that the lessor knowingly accepted payment, or providing that on becoming aware of an overpayment the lessor account for that in the customer's favour.
2.111
CHERPA recommended implementing a PEA at a rate of 20 per cent of a consumer's net income.
Ban on door-to-door selling of consumer leases
2.112
The bill prohibits credit assistance providers from attending places of residence for the purpose of inducing residents to apply for or obtain a consumer lease. Several submitters supported banning the door-to-door selling of consumer leases.
2.113
Legal Aid Queensland submitted that is has seen the 'most vulnerable consumers in our society placed in dire financial circumstances as a result of the door-to-door selling of goods through consumer leases.'
2.114
Ms Lisa Garlick, a financial counsellor from Victoria, described a provider selling consumer leases by attending an indigenous community with a 'van full of household goods' and door knocking within the community.
Ms Garlick noted the community made a complaint to ASIC regarding the provider's conduct and the provider closed shortly after, and has since started another company.
2.115
The CCLSWA described a similar situation in which a young mother of two, living in a remote town in Western Australia, entered into a consumer lease for a television that was retailed through a van visiting her town, with a repayment amount of $186 per fortnight. That person fell behind on their repayments and 'ended up owing $4000 for the TV.'
2.116
Ms Gemma Mitchell, Managing Solicitor of Consumer Credit Legal Services (Western Australia) told the committee that the ban on door-to-door selling did not go far enough to protect people in remote indigenous communities, because a provider may visit a community in a van and, through word-of-mouth, people may obtain a consumer lease at the van's location.
2.117
Submitters also noted that consumer lease providers may use text messages to advertise leases, and that leases can also be accessed online.
Potential amendments
2.118
NCOSS suggested removing the words 'except by prior arrangement' from proposed section 179VA, so that there are 'no circumstances where door-to-door sales of consumer leases are permitted'.
2.119
Legal Aid NSW submitted that it regularly sees clients who enter into consumer leases while visiting family and friends, particularly for clients living in remote indigenous communities. To avoid this, Legal Aid NSW recommended section 179VA be amended to prevent a lessor consumer lease provider, or credit assistance provider, from attending residence for the purpose of facilitating a person visiting the house to enter into a consumer lease.
2.120
The FAA&MS said it 'fully supports' the intent of the provision, however objects to the existing penalty provision in Section 156 of the Credit Code being different to the penalty for proposed section 179VA. Section 156 of the Credit Code provides that credit providers must not attend a place of residence to induce a person to apply for or obtain credit, except by prior arrangement, and imposes a civil penalty of 5000 penalty units. The FAA&MS recommended that the penalty for lease providers that contravene section 156 be reduced to 2000 penalty units, to match the penalty which would be applicable to consumer leases under proposed section 179VA.
2.121
Good Shepherd suggested that it is worth exploring:
…the ease and availability of SACCs and consumer loans online and ensuring that anti-avoidance protections extend to the online domain. Feedback from Good Shepherd practitioners reveals that the convenience and ready availability of payday loans and rent to buy schemes online makes them attractive for consumers.
Base price disclosure
2.122
The bill's provisions to require a lessor to disclose to a lessee the base price of a good being leased was supported by some submitters as a beneficial measure for information transparency.
2.123
The Hume Riverina Community Legal Service (HRCLS) suggested that if people were aware of the costs they will incur under a consumer lease then they 'would be much less inclined' to make those financial commitments. MyBudget shared this view and noted that if pricing information was transparently disclosed, then people would look for an alternate to consumer leases and avoid becoming indebted to providers.
2.124
HRCLS highlighted examples where information on consumer lease pricing was not understood by their clients, either in relation to the total amount they would have to pay under the consumer lease, or difference between the total cost of the lease compared to the actual value of the goods. Legal Aid Queensland concluded that the proposed disclosure provision will go some way to addressing this 'information asymmetry'.
2.125
The FAA&MS did not object to the principle of disclosing the finance amount, however, did not support the bill's disclosure requirement as FAA&MS disagrees with the proposed method for calculating a good's base price.
Potential amendments
2.126
MyBudget recommended that the requirement to disclose the base price of a good be extended to require disclosure in the advertisement of consumer leases, and that disclosures be prominent in advertisements, 'similar to the requirements of section 164 of the National Credit Code'.
2.127
The FAA&MS recommended amending item 57 of the bill (subsection 174(5)) to remove the capacity for ASIC to determine, by legislative instrument, the particulars of how lessors would be required to disclose base price information to consumers. Conversely, the CCLSWA supported this provision and recommended it be adopted.
Breaches
2.128
The bill introduces significant civil and criminal penalties for consumer lease providers who engage in conduct which the bill seeks to prohibit.
2.129
The Banking Royal commission was told that ASIC receives a large amount of complaints relating to consumer leases (and payday loans). Mr Brody indicated that between 2013 to 2017, enforcement action taken by ASIC resulted in consumer lease providers being fined, or making community benefit payments, of over $1.4 million and $8 million of remediation to customers.
2.130
Anglicare Tasmania was broadly supportive of measures which ensure 'consumer lease providers abide by the Credit Act and are suitably penalised for breaches.' CCLSWA was similarly supportive of the bill's 'strengthened penalties to incentivise SACC providers and lessors to comply with the law.' CCLSWA was particularly supportive of breach provisions for 'voiding monetary liability above the base price of the goods as a genuine deterrent to consumer lease providers entering into consumer lease agreements with costs above the permitted cap.'
2.131
The FAA&MS remained 'at a loss to know why' criminal and civil penalties are proposed under section 156B, applicable to lessors that accept payment above the proposed PEA, given the Credit Act includes '…significant ability to deal with errant lessors' through court actions. FAA&MS also considered that the drafting of the proposed subsection 175AA(1), relating to lessors that breach cost caps, is 'sloppy'.
Use of Centrepay for consumer leases
2.132
While not an amendment proposed by the bill, submitters and witnesses frequently suggested that Centrepay deductions for consumer leases should not be permitted. This suggestion was premised on consumer groups' experiences that: consumer leases impose high costs for low value and Centrepay deductions prioritise lease repayments over living expenses.
2.133
The HRCLS submitted that three of its clients had used Centrepay to pay for consumer leases, under which 'exorbitant rates' were charged for the goods and the use of Centrepay, resulted in prioritising of the clients' lease payments over 'food and other essentials.' The CALC described the conduct of some lease providers in relation to Centrepay:
We have also seen consumer lease providers restart Centrepay deductions after consumers have cancelled payments without obtaining the consumers' consent. We have seen subsequent Centrepay forms with different customer signatures. We have also assisted consumers who have suffered harassment as a result of cancelling deductions, or have had consumer lease providers continue to deduct payments through Centrepay after the relevant contracts had finished.
2.134
Conversely, CHERPA submitted that 'consumers have all the power to cease any payments they make', including via Centrepay.
Centrepay policy and complaints
2.135
Centrepay policy is administered by Services Australia. The policy provides that payday loans and other goods and services, including those which 'have significant potential for high costs but low value' or 'expose Centrelink customers to unacceptable risks of financial stress or exploitation', cannot be deducted through Centrepay. Services Australia has received complaints relating to consumer lease providers' access to Centrepay. Services Australia told the committee it takes those complaints 'very seriously to make sure [businesses] are complying with Centrepay policy and terms.'
2.136
Services Australia provided examples of complaints it received which allege that a particular lease provider contravened the Credit Act by failing to lend responsibly and, as such, considered that the provider was not compliant with Centrepay policy. The documents provided by Services Australia indicates it replied to some of those complaints and, in doing so, Services Australia advised that: the Credit Act is administered by ASIC; the complaints related to regulatory matters for which it has 'no visibility of or jurisdiction'; it is not aware of relevant action taken by ASIC; and considers the provider 'suitable to be approved as a Centrepay Business.' In subsequent letters from October 2019, it appears Services Australia referred details of those complaints to ASIC. The committee is aware of adverse court findings against that provider in relation to its conduct in providing consumer leases.
2.137
Separately, the provider was found by the Federal Court to have contravened the Credit Act in relation to 275 000 leases, for which it 'failed to make reasonable inquiries about each consumer's financial situation'. The provider was ordered to pay a pecuniary penalty of $2 million. The provider was also the lead defendant in a class action, which settled for $29 million in December 2019.
2.138
MBL was also critical of consumer lease providers using Centrepay to 'exploit vulnerable consumers'. MBL observed that Centrepay can cause lessees to 'set and forget' their repayments, which can often result in lessees to continue to pay for a good after their initial lease period as the contract is rolled on to an indefinite period.
2.139
CCLSWA's submission suggests that the introduction of a PEA for consumer leases will 'curtail the exploitation of Centrepay.'
2.140
The committee notes that references to the committee's financial hardship inquiry report recommended Centrepay 'should only be available to entities that can demonstrate historic and ongoing compliance with relevant regulations, and that provide products at a fair price and in a fair manner.'
Views relating to provisions that apply to both SACCs and consumer leases
Commencement date
2.141
If passed, this bill will commence twelve months after the date of Royal Assent. The FID supported the commencement date and considered the timeframe 'essential' for SACC lenders and lessors to become compliant—seek advice, update IT software programs, conduct training, develop documentation and manuals—and accommodate the associated costs.
2.142
An earlier commencement date was suggested by two submitters. NCOSS and the FCA recommended the bill take effect three and six months after Royal Assent, respectively. A number of submitters expressed concern, and frustration, that the bill's reforms have not been implemented already. Ms Fiona Guthrie, from FCA, justified an earlier commencement on the basis that the benefits will be received earlier.
2.143
As the bill provides for amendments to the Credit Regulations, 'MyBudget recommends that there be minimal delays between the implementation of the [b]ill, and the [r]egulations'.
Use of bank statements
Potential amendments
2.144
FID recommended amending section 160G to provide clarity on the actions that providers can take under the section, including that providers should be allowed to use statements for the purposes of considering postponement applications and be able to provide consumers' statements to other lenders and their professional advisors.
Assessment of consumers' suitability
2.145
In supporting this requirement, consumer groups indicated that suitability assessments in the past have been subpar. Anglicare Tasmania described the assessments as 'poor quality' and Mr Anthony Devlin, from the Salvation Army, stated that payday lenders are not doing a 'proper assessment'. Legal Aid Queensland explained its experience with suitability assessments:
…consumers have difficulty in obtaining information about a lender's assessment of suitability. This requirement will improve the transparency of the lending assessments made by SACC and consumer lease providers.
2.146
Cash Converters 'fully supports' documenting suitability assessments.
2.147
Different concerns with this requirement were raised by two industry stakeholders. FID considers the assessment in writing to be unnecessary on the basis that it is 'already covered by timetable … [and] must be provided to requesting consumer ([s] 132)'. The FID also questions ASICs 'expertise' for determining the form of the assessment and views ASICs power to make legislative instruments as 'a profoundly unacceptable usurpation of the Minister's and Parliament's role'.
2.148
FAA&MS outlined several issues with this requirement. First, it disagrees with a number of the civil penalties of this requirement, calling them 'outrageous' and 'excessive' when accompanied by a strict liability offence or recommending the penalty be reduced from 2000 to 50 penalty units. Second, it recommends for flexibility that 'the assessment' be amended to 'an assessment', so an interim assessment can be made. Third, it considers the new sections requiring a written copy to be given to the consumer in accordance with the Electronic Transactions Act 1999 as 'superfluous' and recommends they be deleted. Fourth, FAA&MS suggests there is an inconsistency between subsection 132 of the bill and the Electronic Transactions Act 1999, however the exposure draft explanatory materials explains that the new provisions ensure compliance and allow the assessment to be provided in an electronic form.
Warning statements
2.149
Whist the Consumer Credit Law Centre South Australia 'observes that warning statements are not sufficient', most arguments were made by industry stakeholders against reforming warning statements.
2.150
Both Cash Converters and Cash Stop contend that there are already warning materials in place for consumers.
2.151
Evidence suggested that there is too much information in the warnings. FID described the warning as 'information overload' and also referred to research that says by the lending day the consumer has already made up their mind to borrow and is unlikely to read the warning statement. By introducing the reforms, FID made a similar argument to Cash Converters that '[f]urther warnings will add to the complexity and distract customers'. Cash Converters recommend that simplifying the warnings would be a better approach.
2.152
FID indicated opposition towards ASIC's power, stemming from the uncertainty of what ASIC will request of industry in relation to the warning statements. FID predicted that it could lead to further documentation and may be unclear, at times, what is required. It also noted that this provision will require regular liaising with ASIC to present industry views and incur costs to SACC lenders in becoming compliant with the warning statement.
Anti-avoidance measures
2.153
The anti-avoidance measures were widely supported amongst consumer groups. Submissions referred to the ease with which unregulated products are avoiding the law, describing such acts as 'exploiting loopholes' and 'circumventing the rules and protections'.
2.154
Expanding on this point, Mr Tim Gough, from ASIC, explained in his evidence that the anti-avoidance measures would protect compliant businesses and competition:
…as gaming the system can result in a race to the bottom where compliant businesses lose market share to their competitors and may feel compelled to engage in similar conduct. Protecting compliant businesses and ensuring the competitiveness of compliant business models would be an important outcome of these reforms.
2.155
Case study evidence from HRCLS demonstrated the downside to entering a contract with an unregulated credit provider, as 'Tia'—who also had other outstanding loan products (not her real name)—was unable to negotiate a resolution when she borrowed $350, incurred an additional $262.50 'fee' and was receiving demands for payment of nearly $1300.
2.156
FCA commends the forward-thinking nature of the measures, 'as no one can predict what new avoidance scheme will be dreamed up by these kinds of lenders'.
2.157
Consumer groups, including Legal Aid Queensland commented on 'the importance of the [ASIC] having strong product intervention powers'. ASIC's witness, Mr Tim Gough, was supportive of the anti-avoidance provisions, noting that the product intervention powers have limitations such as the duration of an order, which is not the case with anti-avoidance provisions.
2.158
Industry stakeholders opposed the anti-avoidance measures. FID views the measures as 'absolute over-kill, given the mass of existing regulation' and recommends they be 'dropped' due to conflicting with the approach to justice, lacking reasonableness and conflicting with explanatory materials. Together with FAA&MS, it was also raised that the prohibition may stifle innovation.
2.159
There appears to be conflicting evidence from Cash Converters. Mr Budiselik appeared before the committee on behalf of Cash Converters and spoke in favour of legislating for anti-avoidance. In contrast, Cash Converters submission stated the company 'does not support' the anti-avoidance provisions.
2.160
In terms of the drafting of these measures, Queensland Law Society made the general point that these provisions are 'complex and vague making it difficult for a person to be certain they do not fall foul of the civil penalty provision without undergoing unreasonable expense'.
2.161
Piper Alderman brought to the attention of the committee the need to amend proposed section 323A, explaining:
…the current drafting of section 323A of the bill is in conflict with the intention stated in the Government's Exposure Draft Explanatory Materials (EM), being that section 323A should apply to non-regulated credit contracts. As currently drafted the section applies to regulated credit contracts.
2.162
In the appendix to its submission Piper Alderman included two amendments that it supports and would rectify this drafting error; one amendment proposed by itself and the other by the CALC, both of which insert 'regulated' so that the proposed section reads 'from being [a] regulated …'.
2.163
Further, some submitters and witnesses called for the anti-avoidance measures to go further and cover credit products more broadly. Mr Brody, from CALC, views the proposed anti-avoidance measures as 'narrowly construed'. Legal Aid NSW recommended sale by instalment contracts be included in proposed paragraph 323C(4)(a), noting their 'artificial distinction' with consumer leases and illustrating this through the case study of 'David' who went to his local consumer lease provider for a replacement phone and left with a two year $4052 lease for a phone valued at $822.50 and being told that he would give the phone to his partner but not understanding why.
2.164
To limit avoidance, CCLSWA supports a SACC database regarding it as 'highly likely to have ensured compliance with responsible lending, where instead the clients were merely asked whether they had two or more SACCs on foot'.
Committee view
2.165
The committee notes that views on the bill's provisions were polarised with consumer lease groups highly supportive of further intervention while industry stakeholders rallied against any increased regulation of their market.
2.166
The inquiry has highlighted to the committee, the strong correlation between Australians experiencing financial vulnerability or hardship, and the use of SACC and consumer lease products. Evidence previously considered by the Senate, and provided to this inquiry by consumer groups and industry stakeholders, reinforces that SACCs and consumer leases are often used by Australians on low incomes.
2.167
Evidence shows that many people on low incomes face additional cost of living pressures and in difficult circumstances, require access to some form of consumer credit. However, the committee heard that low income earners often participate in the credit market at a significant disadvantage; they are not competitive in accessing lower-cost credit products and consequently are compelled to access higher-cost products, such as SACCs and consumer leases, to support their needs—particularly in times of difficulty.
2.168
The committee notes that the costs imposed under SACCs and consumer leases are often significantly more than mainstream credit products. Even higher cost mainstream credit options, such as credit cards, are significantly cheaper than the costs charged under SACCs and consumer leases. The committee acknowledges the commercial reality that those with higher credit-risk ratings are charged more to access credit. The committee considers it appropriate that regulations are commensurate with this risk and that, at the same time, the regulation is sufficient to ensure consumers are appropriately protected.
2.169
Additionally, the committee is particularly concerned that those with the greatest need to access affordable credit are also those who often lack the financial awareness and understanding of the high total costs of SACC and consumer leases. Features of the SACC and consumer lease markets, particularly the high costs incurred by low income consumers and the financial harm which can result from the use of those products, suggests to the committee that SACC and consumer lease markets are not operating efficiently.
2.170
The committee notes the bill's provisions were strongly supported by consumer lease groups, and generally were not supported by industry stakeholders. The committee recognises that consumer groups and industry stakeholders approach the regulation of SACCS from different perspectives. The committee also recognises that the competitive landscape relating to SACCs is changing; increasingly those products are offered online, and they are in competition with buy now pay later (BNPL) products. The committee notes that as the use of BNPL increases, regulation will also need to adapt to help manage the risk of those new types of financial products.
2.171
Unlike SACCs, consumer leases are not subject to regulatory costs caps. The committee is particularly concerned that, according to the evidence, high cost consumer leases are causing consumers' financial harm. Consumer leases often impose total repayment obligations on consumers at multiples of the reasonable value of those products. The committee is aware that consumers may also be repaying multiple consumer leases concurrently, and not have enough money left over for essential living costs.
2.172
The committee also acknowledges that lessors incur costs for providing leased goods, however the committee did not consider that evidence compelling relative to the multiples being charged for leased goods. Given many consumers are often limited in accessing products at retail prices, and the leased goods are priced at a rate that appears disconnected from their value, the committee further highlights its concern that the consumer lease market is not operating effectively. Furthermore, the committee is particularly concerned regarding the ease to which consumer lease providers can continue to access consumers on Centrepay even after products have been paid for. Noting the evidence from the Services Australia and its inability to deal with such indiscretions, the committee is of the view that providers should be banned from accessing income support recipients through Centrepay.
Effective regulation relies on regulatory provisions which are commensurate with responding to the respective problem or harm incurred. In the case of SACCs and consumer leases, the committee considers that there is scope to improve the regulations so that SACCs and consumer leases are offered in a safe and affordable way.
2.173
The committee is cognisant of the fact that this is identical legislation to that proposed by government previously. As such, it has already been through a thorough consultation process. Moving forward, it is imperative to consider feedback and public submissions raised in the consultation period. The committee notes it is important the government strikes the right balance between enhancing consumer protection, while ensuring these financial products and services can continue to fulfil an important role in the economy.
2.174
The committee recommends that the government table its response to the recommendations of the Senate Economics References Committee's inquiry into credit and financial services targeted at Australians at risk of financial hardship, prior to the bill being debated in the Senate.
2.175
The committee recommends the government reports and builds upon the outcomes derived from the consultation period of the exposure draft, and with that, continue to diligently progress sensible reform and strengthen regulation in the area of small amount credit contracts and consumer leases.
2.176
The committee recommends that the Senate not pass the bill.
Senator Slade Brockman
Chair