Sid Sidebottom (Braddon, Australian Labor Party, Parliamentary Secretary for Agriculture, Fisheries and Forestry) Share this | Hansard source

Good afternoon, colleagues. I just remind the member for Moncrieff that it is not so much about expanded regulation or more regulation; it is about much-needed regulation. The Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011, amongst other things, will amend the National Consumer Credit Protection Act 2009 to significantly reform the regulation of short-term small-amount credit contracts, commonly referred to as 'payday loans'. Payday loans have uncontrolled costs, and significant financial harm can arise when vulnerable consumers who cannot access credit elsewhere are prepared to pay excessive interest rates and fees. Repeated use of these loans can create a debt spiral where repayments can exceed the consumer's income. There is no obligation on lenders to disclose alternative sources of finance that may be available to at-risk consumers. So the proposed amendments aim to ensure that reputable payday lending services remain viable, while providing a safety net for those in the community who can least afford excessive credit charges.

Research suggests, Mr Deputy Speaker Leigh—and you more than anyone in this House would probably know this—that payday lenders typically target consumers who have limited access to credit, including consumers with low incomes or poor credit records, and offer easy and fast application processing and provision of funds. These loans generally have short repayment terms and fixed fees or charges, with low or unexpressed annual interest charges that require repayment via a direct debit authority. Consumers often seek out lenders based on easy geographical access and who will lend to them, as opposed to who is the best lender. It could be argued that payday loans have a high risk to the lender, as a low-income borrower is more likely to default. This high-return enterprise gains security by drawing payments on the consumer's payday, and that is why we call them payday loans.

The national consumer credit protection amendment bill aims to protect vulnerable consumers who can least afford hefty credit interest rates from being taken advantage of by unscrupulous payday lenders—I emphasise 'unscrupulous' payday lenders, not all payday lenders nor indeed a majority. The bill amendments include imposing an establishment fee cap of 20 per cent and an interest fee cap of four per cent of the loan amount for payday loans under $2,000 and a one-year term, and a cap of 48 per cent per annum on loans between $2,000 and $5,000, with an additional $400 that can be charged to the consumer as costs or interest. It imposes responsible lending obligations for small-amount credit lenders and brokers to address the risk of a debt spiral for consumers, and it requires lenders and brokers who provide payday loans to disclose the availability of alternative sources of finance or assistance. Payday lenders can take advantage of consumers who find they are confronted with the urgent need for finance and who are unable to access alternative forms of credit to pay for things such as rent, car registration, utility bills and day-to-day living expenses. Research indicates basic living expenses account for the motivation of between 50 and 70 per cent of consumers. These consumers are vulnerable to exploitation and may be ill-informed of exorbitant payday lending fees and charges. The government is not proposing to ban small-credit loans but is proposing to make them fairer for the consumer.

Payday lenders often do not account or make allowance for cost-of-living and other expenditure obligations in order to set repayments at a level the borrower can afford. In contrast, for example, home loans are assessed on an individual's ability to repay, such as 25 per cent of expendable income. Supported by Treasury and other research, payday lender customers consist of approximately 46 to 50 per cent of Centrelink beneficiaries. Financially disadvantaged consumers are often willing to pay any cost to alleviate their immediate financial pressures even if that means their problems are exacerbated in the future. The bill proposes that the amount of the repayments for Centrelink-dependant consumers is to be capped at 20 per cent of their income. The bill provides protection for consumers on low incomes from being overcommitted and exacerbating financial disadvantage.

The bill amendment to prohibit payday loans with a term under 15 days also aims to protect consumers with a low fixed income. The average annual percentage rate on payday loans with a 14-day term ranges from 652 to 886 per cent, with a 30-day term ranging from 304 to 413 per cent. Prohibiting loans with a term under 15 days aims to ensure the situation of financially disadvantaged members of our community is not exacerbated, while at the same time protecting the reputation of payday lenders.

Payday loans are often a first resort, rather than a last resort, for financially disadvantaged consumers. To address this failure to utilise alternatives, the bill requires payday lender advertising to incorporate a generic disclosure statement providing possible alternatives, including financial counselling services and specialist consumer legal advice services. Alternatives to high-cost short-term loans also need to be disclosed. These include: advances on Centrelink payments such as no-interest loans and low-interest loans; negotiating with existing creditors; and seeking hardship relief with utility providers. Payday loan fees and charges need to be understandable to consumers and provide information for alternative financial options.

At present, consumers have few available remedies where a small-amount credit contract is unjust or a fee or charge is unscrupulous. Under the unfair contract term provision in the ASIC Act 2001 a borrower has no recourse on the basis the cost is unfair. The bill requires payday lenders after the first two years of implementation to report information annually to ASIC. Reporting requirements include the number of loans, average default rates, a list of all fees and charges and compliance disclosure details.

Currently there are no uniform national laws regulating short-term small-amount credit contract interest and associated costs, such as establishment, monthly, default and government charges. The ACT, New South Wales and Queensland state governments have taken steps to address the issues of payday loans. This bill proposes a uniform national approach to regulate small-amount credit contracts.

My electorate of Braddon, on the north-west coast of Tassie, has a higher-than-average rate of unemployment and a high percentage of constituents who rely on Centrelink benefits. Sixty-nine per cent of areas are ranked in the lowest socioeconomic percentile in Australia. Statistics indicate that Braddon has the highest poverty rate in Australia, with 15.1 per cent of the population living in poverty. Poverty, as defined by the Henderson Poverty Line, is a measure of the minimum liveable income and is regularly updated according to ABS data. These factors may indicate a lack of capacity to manage personal finances and of understanding of alternative financial support for those in financial hardship. Within this low socioeconomic demography with high poverty rates many people are at risk of being taken advantage of by unscrupulous payday lenders, and of becoming reliant on payday loans. These pockets of disadvantage exist throughout Australia.

Most payday lenders oppose the proposed 48 per cent annual cap for interest rates on the ground it makes the service unviable. This is due to the short-term nature of the loans. For example, a cap of 48 per cent annually correlates to four per cent per month, which the industry argues is not enough to cover the costs of setting up a payday loan and covering losses arising from default loans. However, fee based caps are an appropriate mechanism to allow for sustainable and fair payday lending services. Unsecured loans under $2,000 with a term under a year will be able to attract an establishment fee of up to 20 per cent and ongoing fees and interest of up to four per cent per month. Loans between $2,000 and $5,000 will be subject to a 48 per cent per annum cap, with an additional $400 that can be passed on to the consumer as fees or charges or by raising the interest rate to 56 per cent per annum. This model therefore strikes a balance between protecting consumers and allowing lenders to charge a reasonable and fair fee. A national approach to deter unscrupulous payday lenders from taking advantage of at-risk individuals and to protect the reputation of the industry is in the interests of all stakeholders. It would appear this sector concedes there is a need to improve accountability and transparency of industry practices. For example, my electorate office has received in excess of 60 letters of objection from payday lending consumers who are under the impression that the proposed legislative changes will mean they will not have access to payday lending at all. This is of course incorrect.

Financially struggling consumers may take out a payday loan to pay for basic living expenses such as rent, electricity, registration et cetera. To meet loan repayments, the ability of vulnerable consumers to meet their living expenses decreases and their standard of living, quality of life and wellbeing reduce. The cycle of disadvantage and financial exclusion is often self-reinforcing, resulting in a continuing dependence on obtaining multiple payday loans from payday lenders. The proposed amendments aim to ensure that reputable payday lending services remain accessible while providing a safety net for those in the community who can least afford excessive credit charges.

I finish my contribution by pointing out the consequences of someone getting lost in a spiral of debt from taking out loans that they are unable to service. I take the example of a person on a fortnightly Centrelink benefit. They are caught short one week and take out a $300 loan, filling in a direct-debit form with the paperwork for the day their next payment hits their account. Typical fees on that loan will be around $105 or 35 per cent. On their next payday $405 comes out of their account, leaving them short the next week as well, so they take out another loan—and so the spiral of debt begins. That we regard as unfortunate, and this legislation seeks to strike a balance between protecting the rights of consumers and at the same time giving them access to cheaper loans and to other loans, while also maintaining the integrity of the industry that assists them to meet their financial responsibilities.

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