The below statement was delivered on 31 July 2019 by Consumer Action Law Centre CEO, Gerard Brody to the New Zealand Select Committee on Credit Contracts Legislation Amendment Bill.
High cost credit, including payday lending, causes misery. My organisation, Consumer Action Law Centre which is based in Melbourne, Australia, speaks to hundreds if not thousands of individuals each year that are over-burdened by unaffordable credit. A number of our clients were witnesses at the recent Royal Commission into misconduct in the banking and finance sector.
Let me share just one example:
Susan is 70 years old. Her only income is state superannuation, and the only asset she owns is her car. Susan has entered into around 20 payday loans over the last few years. Susan says that once she finishes paying one loan off, she takes out another, and the only way she is able to pay back these loans is to go without food. Repayments eat up over 20 percent of her pension.
Australia has had national consumer credit laws since 2010, and much of it is world-leading. But high cost credit continues to cause misery for hundreds of thousands of people. Let me explain briefly how this happens with respect to payday loans.
The key problems are the following:
- Payday loans are extremely expensive;
- Payday loans are predominantly issued to people on low incomes or those in financial stress;
- Payday loans are predominantly used to pay for basic recurrent expenses, not to build assets or wealth;
- Payday loans prioritise repayment of the debt over other more essential expenses by using direct debits; and
- The growth of online lending is providing quick and easy access, inhibiting people’s ability to think through the consequences of borrowing.
Furthermore, responsible lending laws, present in Australia and New Zealand, which require lenders to inquire as to a borrower’s objective for borrowing and to ensure repayments do not cause substantial hardship, have been found to be ineffective. There are two primary reasons.
The first is because of the vulnerability of the borrower – if the borrower is in real distress and feels like they have no other option than a high-cost loan, they will not volunteer information that may prevent them getting a loan. And lenders may not look too hard to find it. Vulnerability also means that indebted borrowers are less likely to complain, meaning the regulator isn’t alerted to problems in the market.
The second reason is that responsible lending laws focus on the risk of harm at the point of lending, rather than addressing risks associated with repeated use of high cost credit. The risk here is that, over time, an increasing proportion of a borrower’s already low income will need to be used to meet repayments. Instead of improving someone’s standard of living, further lending leaves them financially stranded.
That’s why the Australian Government implemented a cap on the cost of certain high-cost loans in 2013. The problem with that reform, however, was that the cap was increased during the parliamentary process to an amount proposed by the lenders themselves. The cost cap imposed is complex but, for example, a $500 loan with fortnightly payments over a term of 12 weeks comes with an annual percentage rate of 223 percent.
An independent review of laws applying to high cost credit was conducted in 2016. The reviewers found that a key objective of the law should be to facilitate financial inclusion, but that the high cost caps were inconsistent with that objective. The reviewers said that access to finance, irrespective of the cost, does not mean a consumer is financially included. Financial inclusion is a broader and more complex concept that takes into account the relationship between high charges and broader social consequences, such as financial hardship, insecurity in housing tenure and adverse impact on the consumer’s health. Financial inclusion is about improving the consumer’s situation, rather than deteriorating it.
The review panel recommended simplifying responsible lending requirements by introducing a ‘bright line’ limit on repayments, capped at ten percent of a borrower’s net income. This extends an existing rule that repayments are capped at 20 percent of gross income for those whose predominant source of income is social security. This recognises that the majority of a person’s income should be available for essential expenditure like housing, utilities and food, rather than repaying high cost credit. This is simpler for lenders to determine because a consumer’s net income ordinarily appears on a borrower’s bank statement.
The consumer advocacy movement in Australia maintains that more stringent price control is the most effective measure to prevent harm associated payday lending. We have long called for a comprehensive interest rate cap, inclusive of fees and charges, set at a 48 percent per annum – a level that the law previously imposed before credit markets were deregulated. There are similar caps in a number of OECD jurisdictions, including Finland, Japan, and sixteen states of the USA, and the evidence is that consumers save billions of dollars in fees every year.
I would encourage NZ to implement such a reform. As demonstrated by our recent Royal Commission, Australia’s financial services regime has been too weak. It’s time for finance sector laws to benefit the customer rather than the industry.