Joe Hockey (North Sydney, Liberal Party, Shadow Treasurer) Share this | Link to this | Hansard source

I rise to speak on the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011. This bill has sat before the House of Representatives for nine months, since 21 September last year. The government has finally seen the light and decided to amend the bill at the last minute, with—as I understand it—70 amendments to be tabled this morning, but which have still not been circulated. These amendments will be considered by the House when it comes to consideration in detail. It would be helpful if the 70 amendments were circulated to the House for the purposes of the second reading speech and debate, because even though the coalition does have the amendments, other members should have the opportunity to change their second reading speeches in accordance with the massive number of amendments to be circulated.

For many in the sector, particularly small businesses, the past nine months has been a period of uncertainty. Businesses in the payday lending sector have been unsure whether to prepare to implement the measures or to weigh a compromise solution which is now proposed by the government. The government can hardly claim to have been caught unawares by the reaction. The coalition have long outlined serious issues with particular aspects of this bill, in particular the changes contained in schedules 3 and 4 of the bill relating to small amount credit contracts. The coalition issues constituted such concern that the bill was referred to both the Senate Economics Legislation Committee and the Parliamentary Joint Committee on Corporations and Financial Services on 22 September last year. The report of the Senate Economics Legislation Committee was released on 7 December 2011 and the report of the Parliamentary Joint Committee on Corporations and Financial Services was released on 7 February 2012. Both the report of the Senate Economics Legislation Committee and the report of the Parliamentary Joint Committee on Corporations and Financial Services address substantial issues within this bill and include a recommendation that the government revisit schedules 3 and 4 and associated provisions. The coalition is pleased to see that this has occurred, although it has been with an undue and unwarranted delay of nine months since the bill was introduced and around four months since the last committee reported. But now there is all of a sudden a rush to get this legislation through. Not surprisingly, yet again the government just cannot get the contents of their own bill right in the first place.

The coalition fully endorses the unanimous recommendation 2.1 of the Senate Economics Legislation Committee:

… that the government review the measures proposed in Schedules 3 and 4 of the bill. This review must re-engage with stakeholders to:

The coalition also endorses the unanimous recommendation 12 made by the PJC:

… that the Government revisit the measures proposed in Schedules 3 and 4 of the 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.

We are pleased that the Labor government has finally woken up to these recommendations.

Of course, the bill does not just address payday lending. Some of the other measures in this bill are very worth while. The changes to voting at annual general meetings of public companies, contained in schedule 7 of the bill, were recently passed as a separate bill—the Corporations Amendment (Proxy Voting) Bill 2012—and we welcomed that initiative by the government. The changes to the National Consumer Credit Protection Act 2009 provide for new requirements for reverse mortgages, including a statutory protection against negative equity and improved disclosure requirements. There are also changes to the terms for payday loans and other small-amount credit providers. These include caps on the maximum amount credit providers can charge and restrictions in some circumstances on multiple borrowings and small-amount contracts. There are also some new disclosure requirements. The bill also provides for changes to give greater regulatory consistency between consumer leases and credit contracts by extending the existing protections available for credit contracts to consumer leases and it makes changes to make it easier for debtors to seek a variation of the repayments under their contract due to financial hardship.

The amendments to the National Consumer Credit Protection Act relating to reverse mortgages are sensible initiatives. Consumers deserve more information about reverse mortgages and the potential risk they carry. The introduction of protection against negative equity is intended to prevent a situation where the value of the accumulated debt and interest rates exceeds the market value of the dwelling. This would result in a situation where the owner's equity in the dwelling was completely wiped out. This could occur where a reverse mortgage plus compounding interest was allowed to accumulate over a long period of time or where the market value of a dwelling declined. This would not be in the interests of the owner and would not be in the interests of the lender. The mechanism by which this is achieved is that, if the exit from a reverse mortgage results in the payment of a sum that is greater than the market value of the dwelling, then the credit provider must pay the excess to the debtor.

The more detailed disclosure requirements for reverse mortgages are, in our view, also sensible. These include providing intending mortgagees with projections that relate to the value of the dwelling or land that may become the reverse mortgage property and the consumer's indebtedness. They also include the provision of a reverse mortgage information statement. The regulations may regulate or prohibit the entry by a credit provider into a credit contract for a reverse mortgage if the debtor has not obtained legal advice.

The provisions of the National Consumer Credit Protection Act relating to small-amount credit contracts, or payday lending, are more problematic, because they may restrict access to a legitimate form of finance for many Australians. These provisions cover loans such as those provided by companies like Cash Converters. Both parliamentary committees' inquiries into the bill unanimously recommended that the government revisit the measures proposed in schedules 3 and 4 of the bill. I am pleased that the government will be moving amendments to schedules 3 and 4 and the related measures, although the proposed amendments are yet to appear.

I have been actively involved with my colleague Senator Cormann in the issue of payday lending. In my case, it goes back to my time as Minister for Financial Services and Regulation. The member for Chisholm would remember my days as Minister for Financial Services and Regulation. Back then—more than a decade ago, when I was the minister—microlending was a state responsibility. That was before we had a national consumer credit code. At the time I said:

Payday lending is part of the twilight zone of Australian finance. As such, it needs to be reformed so that Australian men and women get the full picture and don't sign up for a loan that leaves them in financial strife.

I am always wary of quoting myself—that is ultimately the grandest act of hubris, as my colleague the member for Dunkley would appreciate.

Bruce Billson (Dunkley, Liberal Party, Shadow Minister for Small Business, Competition Policy and Consumer Affairs) Share this | Link to this | Hansard source

Or giving me a note to quote you!

Joe Hockey (North Sydney, Liberal Party, Shadow Treasurer) Share this | Link to this | Hansard source

Well, I could do that! I could pass him a note to quote me, which might be a rather more elegant approach. Perhaps I could quote my actions rather than my words. When I was the minister I urged three steps for reform: firstly, for payday lending to be brought under the uniform consumer credit code by the states; secondly, for disclosure of all payday lending loan details, including terms and the effective interest rate on the payday loan; and thirdly, for uniformity amongst states on any cap on interest rates.

To be fair to the first minister for financial services, the member for North Sydney—and now I am talking about myself in the third person, like the member for Griffith!—at that time we were overwhelmingly focused on getting a referral power from the states to the Commonwealth in relation to the Corporations Act. It was the biggest referral of power from the states to the Commonwealth, arguably, since income tax, during the course of World War II—1942. It certainly was not much heralded, because it was obvious that it should happen, but the High Court was on the verge of striking down the agreement between the Commonwealth and the states that had been forged some years earlier.

In those rather harrowing negotiations back in 2000, which I and then Prime Minister John Howard were engaged in, ultimately it was Premier Bob Carr and Premier Steve Bracks who came to the party after we had to threaten to set up a Delaware-style system out of the ACT for the registration of companies. That period has not been properly documented, but I endeavour to get it on the record here today, because some will say, 'Why didn't you take over consumer credit from the states at the point?' The reason was that we were flat out trying to get referral of power in relation to corporations from the states. Rob Hulls, the Attorney-General of Victoria, described me—very generously, I thought—as 'a white George Speight' during the negotiations, because I was bullying him. I think it was George Speight who sought to strike a coup in Fiji at that time.

But this was very significant stuff. Of course, as I said, in those days we would have liked to have had uniformity among the states in relation to consumer credit, but there were other priorities. Often when we reflect on the failures of previous governments in various areas—be they the coalition, Labor or whatever—I think people fail to properly recognise the other challenges that are on at that moment and that a government may face that would prohibit it from any further reform in a particular area. The initial bill from this government tried to be consistent with the aims that I laid down in 2001 but failed in implementation because the proposals had the potential to drive the practice of payday lending underground, making payday lending all the more unregulated and dangerous.

That is a very sensitive issue. I reflect on the days when I was president of the SRC at Sydney university. One of the great challenges I had was to lend money, often to young women on campus who had fallen pregnant, did not have a partner and did not have income. I would much rather they came to me and borrow at a very modest interest rate, compared with the interest rates of those days, which were 15, 16 or 17 per cent. They could borrow money from me, from the student body, at four or five per cent to help them get through what would often be an awful time as a student, when they were unable to borrow. Because we were at Sydney uni, they could have walked down to some of the payday lender equivalents—Cash Converters or the 'money shops' in King Street, Newtown. At that time those borrowers were gouged.

So I have always been very mindful of the poorest of the poor being exposed to the hostile activities of a modern-day money lender. But rather than seek to claim a pound of flesh I have always thought that it is better to keep it above ground, with a sensible form of regulation, than to drive it underground to the point where standover men go around to those most vulnerable people in order to try to get their money back. On one hand, as I said, is the need to protect the interests of those who use payday lenders. Generally the people who use these products have lower incomes and little financial acumen. They often do not have access to cheaper and more regular sources of finance such as banks and other APRA-supervised lenders. I might add that there once was a time when we had to go to the bank to get a personal loan for $10,000. Now it is not hard to get a credit card to cover $40,000 or maybe more, which in some cases is cheaper than personal loans were in previous times. Even today, in a more credit constrained world, the fact is that credit is more available at lower levels and for people on lower incomes than it ever has been. And those are the people who have always been seen as poor credit risks or who were seeking to borrow amounts that were too small or for too short a period to be worthwhile for a lending institution. In a sense, that is why credit cards have been the saving grace in relation to this.

The interest rates charged in payday lending may seem high compared with the rates of interest available from banks, and certainly those who can least afford to pay are being charged the most. On the other hand, small and short-term loans have high costs associated with them. The administrative cost of establishing a loan does not vary with the loan size. Small short-term loans are roughly as expensive to establish and administer as large long-term ones. When I was a banking and finance lawyer at Corrs Chambers Westgarth back in the early 1990s, when we were involved in this area—in the line of credit and banking—it became patently obvious that it was much easier for banks to lend $100 million to one person, or one entity, than to lend $1 million to 100 entities, often with the same return. But the complexity and the failure rate were usually far greater with 100 at $1 million than with one at $100 million—unless you had met Alan Bond, Christopher Skase or Laurie Connell, or a few of the others!

So the result is that where administration costs are a high percentage of the loan then the interest rate is obviously higher, and that is typically the issue with payday or small loans. It is also the case that the loans are often unsecured, and so a high credit risk premium must be built into the interest rate. The industry claims that the interest rate maximums in the initial bill would make many of these small loans unprofitable and drive them underground.

The compromise situation put forward by the government this morning will make this less of an issue and impose less of a threat to small businesses in the sector. After all the delay and procrastination I do want to thank the Minister for Financial Services and Superannuation for engaging with us in this discussion. We accept that the payday and small loans sector is a legitimate industry which responds to market demand. We are not in the business of driving out legitimate market activities, especially when the business of a legitimate market crops up again in an illegitimate black market that has far more punitive measures. We also appreciate that some people who use this sector are vulnerable and require some government controls to protect their interests, but at the end of the day I am strongly of the view that people have to accept some personal responsibility for their actions. This is not an area where we should be tempted to go down the path of overregulation to the point where it no longer continues.

As expected, there has been significant concern from payday and small amount lenders regarding increased regulation. They have had five major concerns. Firstly, the proposed caps on fees and interest charged on payday and small loans are uneconomic, and will lead to many current participants withdrawing from the market. Secondly, many of the businesses that could close down are small family owned and operated businesses. Thirdly, the reduction of the availability of payday and small amount loans would result in many people not having access to the existing finance they rely on to meet unexpected expenses. Fourthly, the banks have not participated in payday and small amount lending for some time because it is uneconomic for them to do so, and they would re-enter the market to fill the gap if existing providers went out of business. Arguably, they do that anyway with credit cards. Finally, the reduction in legitimate licensed payday and small amount lenders may encourage unlicensed and illegal operators to enter this market, which would reduce consumer protection. I would just note that, after all, a number of bikie gangs and so-called 'workplace business mediators'—standover men, basically—are engaged in that sort of activity. Obviously we want to reduce it—get rid of it; we want to try and make their lives untenable.

As a starting point the amendments increase the small amount credit contracts from a 10 per cent establishment fee and two per cent interest per month to a 20 per cent establishment fee and four per cent interest per month. As an offset for the increase in interest rates of four per cent, the length of term for loans has been shortened from 24 months to 12 months. We will talk a bit more about the amendments as we get closer, but they also introduce a mid-tier model for loans between $2,000 and $5,000, for which an additional fee of up to $400 can be charged. Multiple contract prohibitions on lenders under the following circumstances have also been removed, such as when refinancing an existing small loan, when increasing the credit limit of an existing small loan or when entering into a second existing small loan where the credit provider is already a party to the existing loan. Finally, in these amendments a protected lending amount for Centrelink-dependant consumers is introduced. The amount of the repayments is to be capped at 20 per cent of their income. For example, if their weekly income is $400 the maximum amount of a repayment would be $80. This is a rather sensible move.

The government has also agreed to introduce two key changes via regulation, including a 200 per cent total cap on charges for all lending and a range of responsible lending obligations, including a presumption that a refinance is unsuitable where the borrower is already in default, a presumption that a credit contract is unsuitable where it is the lender's third or fourth loan in the last three months—and usually, sadly, that is linked to gambling or drug use—and a requirement for credit providers to consider a copy of the borrower's bank statements for the last three months before entering into the contract. Regulation will also be implemented to impose a prohibition on loans with a term of 15 days or less. These amendments are welcomed by the coalition. It should not have taken so long for them to be introduced, but let's get over that and deal with the fact that these are now before the House. Peter Cummins, the Managing Director of Cash Converters, stated on ABC Lateline Business in August last year, referring to Bill Shorten:

He's made it very clear in this draft legislation that he intends to wipe out the micro lending industry. And it's very disappointing when during two years of negotiation with Treasury and the Government we were led to believe he had no intention to do that.

I am glad that the minister is not seeking to wipe out the industry. Without revealing anything from my discussion with the minister today, it indicates that there is goodwill there, and I appreciate that. So I would say to members of the House we could have short-circuited it: instead of introducing 70 amendments in what could be the last week of parliamentary sittings for this government—but maybe we will not speculate on that—it would have been good to consult before the bill was introduced into the House, which would have provided significantly more confidence to all those involved in short-term financing.

I know there is an amendment outstanding from the Independents which we have not agreed to yet. But, with the amendments that we have seen, the coalition is not going to oppose the legislation. We continue to come to this with goodwill, noting the fact that it is often the people who need to borrow the least amount of money who are the most desperate for it. I am very mindful of so many scenarios, including where people put up wedding rings or family heirlooms as security for a short time to borrow a small amount of money to pay an electricity bill or to pay the rent. We do not want to prevent that because where people cannot get credit in those sorts of circumstances and they cannot pay the bills and could end up being kicked out of rented accommodation or have the electricity turned off, they often have to resort to petty crime. None of us would wish that circumstance on the sorts of people who have never engaged in that activity before. I have seen it in the past, and that is why I am very mindful that we need to have short-term financing available for people through a semi-regulated process to avoid a circumstance where, out of desperation, they have nowhere else to go other than to make enormous personal sacrifices, which this place would not condone.

Andrew Leigh (Fraser, Australian Labor Party) Share this | Link to this | Hansard source

Not all debt is bad. Many of us here have a mortgage. Many of us have taken a loan to buy a car. My own calculations using data from the Household, Income and Labour Dynamics in Australia Survey suggest that 60 per cent of Australian adults live in a household that has some debt and that the average is $100,000 of property debt. On average, debt levels rise with household net worth: if a household increases their net worth by $10, they will typically take another dollar of debt. Thanks to home loans, Australians are now able to buy houses at a much younger age than was the case in my grandparents generation. So credit in that sense has made us better off. Business loans also make the corporate sector grow faster; they help productive firms grow more rapidly. Car loans allow young people to take a job that requires four wheels. And although too many Australians probably carry unpaid balances on their credit cards, they are a handy source of finance to carry us through a tight spot.

It is only when sources of credit are made available to people in circumstances contrary to their interests that it becomes a problem. Care Inc., a financial counselling service in the ACT, told me the story of a client of theirs on a disability support pension, supporting her low income by selling the Big Issue magazine. She had sought assistance for a payday loan she had been paying for well over a year, and that was despite the initial loan being for one month. The client was regularly short of money to pay for food and utilities but continued to take out payday loans. Often a new loan would be provided with the outstanding amount being rolled in. That client felt trapped in a cycle of debt and felt great anxiety. Care Inc. told me that her limited understanding of budgeting and dependence on payday loans significantly affected her quality of life. Having an intellectual disability and mental health issues only compounded the issue.

The Minister for Financial Services and Superannuation referred in his second reading speech to documented cases of lenders charging $1,477 in interest and fees on a loan for $1,000 for 26 weeks, or $2,074 in interest and fees on a loan for $1,000 over the course of a year. So the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 introduces essential consumer protection reforms. It is about providing greater protection for those experiencing financial hardship, those who feel vulnerable and desperate and seek sources of credit ultimately to their own disadvantage. We need to make sure a financial rough spot does not lead to financial ruin. This bill also delivers on the reforms to reverse mortgages promised in the 2010 election. Through COAG those reforms will be national, so all Australians can benefit from the protections in the bill.

The Labor Party have a proud tradition of being the workers party, but we are also the party that looks after consumers. It was the Whitlam government that established the Prices Justification Tribunal. The Prices Justification Act 1973 was directed at foreign corporations and trading or financial corporations which had annual receipts over $20 million. Those companies were required to notify the tribunal when they proposed to raise the price of goods and services, and the penalty for breaching the act in this regard was a fine of $10,000. It was the function of that tribunal to inquire into proposed price rises to ascertain if they were justifiable or whether a lower price should be charged. Most companies did comply due to the likelihood of adverse publicity. It was later that year that Lionel Murphy began preparing a bill dealing with restrictive trade practices, monopolies and consumer protections, and the Trade Practices Bill 1973 went beyond the competition matters contained in earlier statutes. In introducing the bill to the House, Kep Enderby, Minister for Manufacturing Industry said:

The Bill will also provide on a national basis long overdue protection for consumers against a wide range of unfair practices.

…   …   …

In consumer transactions unfair practices are widespread. The existing law is still founded on the principle known as caveat emptor—meaning 'let the buyer beware'. That principle may have been appropriate for transactions conducted in village markets—

than for the modern, consumer oriented transactions of today. He continued:

The untrained consumer is no match for the businessman who attempts to persuade the consumer to buy goods or services on terms and conditions suitable to the vendor. The consumer needs protection by the law and this Bill will provide such protection.

The Trade Practices Act 1974 became operative on 1 October that year. It was the first legislation to contain consumer protection provisions. It empowered consumers to take private action to enforce their rights. It was legislation introduced by a Labor government. Until that time, through those long salad days of the Menzies government, consumers had to rely on common law remedies in matters where there was evidence of duress, negligence or unconscionable conduct.

It is no accident that Australia's most efficient and commercially successful producers are those that have been subject to strong competition. The most competitive standards are those found in world markets. Suppliers of goods or services protected from international competition are not subject to the pressures that ensure efficient management and production techniques, that require them to deliver high-quality products. They can get away with shoddy or overpriced goods and services without fear of loss of markets. The effect of this is doubly damaging and debilitating for the rest of the economy. It imposes higher prices and poorer services on Australian consumers. In this sense Labor's tariff cuts did as much to help Australian consumers through lower prices as they did to encourage Australian companies to compete on the world stage and to raise their performance to a world level.

In 1995 under the Keating government the Independent Committee of Inquiry into a National Competition Policy reviewed the Trade Practices Act. Fred Hilmer's committee found that ordinary Australians benefited from the competition reforms through price reductions, lower inflation, greater economic growth and more jobs. The key institution that came out of the Hilmer committee was the Australian Competition Commission, later the Australian Competition and Consumer Commission. Again, the Labor Party were looking after consumers. The tradition of protecting consumers from unconscionable business practices continues with this government. The changes proposed in this bill are part of a broader suite of reforms to increase fairness for consumers seeking credit, to better educate consumers about what they are signing up for and to create a set of uniform laws across Australia. As the minister said in his second reading speech, this bill:

… is part of our commitment to always stand on the side of consumers.

Today this bill is part of another Labor tradition—looking out for those who are vulnerable to poor consumer practices. It introduces reforms to the regulation of payday loans. These include increasing the cap on short-term small amount contracts to a 20 per cent establishment fee and a four per cent monthly fee, introducing a mid-tier cap of 48 per cent plus $400 for loans between $2,000 and $5,000 with terms of two years or less, prohibiting loans with terms of 15 days or less, and a maximum 200 per cent total cap on charges for all lending. This bill enhances credit regulation and provides greater consistency between consumer leases and credit contracts. While access to credit can help manage unexpected expenses or see us through a rough spot, we need to remember that the most vulnerable members of our community are the ones least able to access legal advice to help them understand their rights and the obligations of credit providers.

The reforms in this bill may have an impact on some lenders and we have certainly heard from some of those lenders over recent months. We need to keep sight of the big picture. Research shows that over a third of all payday loan consumers have an annual income of less than $24,000. The majority have an annual income of less than $36,000. For those at the lower end of the income scale, the risks and consequences of getting caught in the debt spiral are all too real.

A client of Care Inc. in the ACT was a single female on the disability support pension. She had a number of health issues and had taken three short-term loans with separate credit providers. All of the loans were to cover medical and living expenses. Soon she was repaying by direct debit a third of her net pay. As a result there was not enough left to cover the rent and over a few months she had built up substantial arrears and was at risk of being evicted from her government rental property. In the meantime the credit card debt was increasing and that was exacerbating her existing health issues and she became stressed by it. With the assistance of a Care Inc. financial counsellor she was able to access emergency relief to buy food and negotiate an arrangement to repay her rental arrears. She eventually paid out the short-term loans, but not without considerable stress.

The bill also introduces statutory protections for those taking out a reverse mortgage. Just as a regular mortgage allows people to live in a house while they are paying it off to the bank, a reverse mortgage allows someone to live in a house while receiving regular payments from the bank. A regular mortgage ends when the house is paid off. A reverse mortgage ends when both members of a couple pass away. Reverse mortgages have the potential to allow older Australians to access the equity that is in their home for living expenses. But it is important that we put statutory protections around them. This bill introduces statutory protections against owing more than the value of the asset, effectively against negative equity, and puts in place additional precontractual disclosure requirements.

It was good to see in the chamber today the member for North Sydney claiming paternity for parts of this bill, which is certainly true. I have a press release of 3 April 2001 from the member for North Sydney when he was the Minister for Financial Services and Regulation in which he said, 'Payday lending is an insidious practice.' But it is Labor that finally brought these reforms home, as we have done with other reforms. The Howard government talked about education reform and structural separation of Telstra. I was reminded on reading the member for Moreton's 'Moreton report' that it was the Howard government which in 2007 said:

In the years to come it will provide a model for other nations to follow. Being among the first movers in carbon trading in this region will bring new opportunities and we intend to grasp them.

But, while John Howard just talked about pricing carbon, it is this government that has done it.

The Labor Party takes care of the vulnerable in our society, be it with the pension in 1909, Medicare in 1984 or the National Disability Insurance Scheme we are working towards today. It is what we do. Good government involves the economic and the social; they are not mutually exclusive. For pensioners and retirees taking out reverse mortgages, we understand the risks they take. For those who need payday lending, we understand that it is important to place protections around them. Taking the sharp edges off predatory business practices is a social responsibility that this government takes seriously.

In my electorate there are organisations working with people experiencing credit and debt problems. Some of the organisations doing this marvellous work include Moneycare, provided through the Salvation Army, and Care Inc., which includes the Care Inc. Financial Counselling Service and the Consumer Law Centre of the ACT. I have met with Moneycare at their Dickson offices and seen how hard they work to provide assistance to people in the community who are under pressure from their debts. Moneycare reminded me that many people suffering from financial difficulty are also experiencing high levels of depression or anxiety as a result—that financial pressure and financial stress can trigger a number of other burdens that reduce a person's quality of life.

Care Inc. are the main consumer law advocacy body in the ACT and also provide advice and assistance to consumers. They rightly point out that, even though low-income earners carry less debt than high-income earners, the potential for that debt to have a negative impact is far greater.

Moneycare told me of a client whose wife had an addiction and left him when the youngest of their four children was only a baby. Raising their four children by himself, he eventually got into another relationship. By his own admission, he was so in love with his new partner that he bought her whatever she wanted. Making purchases on multiple credit cards and short-term, no-interest loans, he accumulated a significant debt. His new partner then also left him. With $140,000 worth of debt and on a single income, he could not keep up with repayments. He became suicidal and tried to kill himself. He felt like a failure who was no good to anyone, but, with help from Moneycare, things are now going well for him and his children.

The history I have outlined, demonstrates that it is vital to look out for the interests of consumers as well as the interests of the workers. This bill reflects the values of the Labor Party: care, decency and respect are at the heart of decent, humane and responsible government. I commend the bill to the House.

Bruce Billson (Dunkley, Liberal Party, Shadow Minister for Small Business, Competition Policy and Consumer Affairs) Share this | Link to this | Hansard source

The purpose of the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011, which has subsequently been varied by an indication of further amendments today, is to amend the National Consumer Credit Protection Act 2009 and the National Credit Code. The amendments in the bill aim to enhance access to hardship provisions under the code; to introduce protections against negative equity for holders of reverse mortgages; and to introduce a cap on the cost of small-amount credit contracts—and I will come back to that in some detail shortly, given that there have been changes in what is proposed from the original legislation—and also a cap on the annual cost rate for certain small-value transactions. The bill also aims to bring about some consistency between the treatment of consumer leases and credit contracts.

Madam Deputy Speaker, you would be interested, as I am, hearing colleagues talk about this issue. So often it is referred to as 'payday lending', and there is undoubtedly some concern and some hardship caused by an inappropriate use of that form of financing, but in some respects it seeks to guide one's attention to a very specific concern, a legitimate concern, without necessarily going into how the measures in this bill address that matter and in fact go far beyond payday lending. That is something that has caused great concern and consternation amongst the microfinance community—that a term such as 'payday lending' gets thrown around rather carelessly at times, as if that is all this bill seeks to address. That is not the case. This bill has far wider application and implications, and this in part is why there has been such concern about the consultation process that surrounded this bill and the amendments that are before the House today.

Short-term credit or microfinancing is an important part of our financial services system in Australia. The Centre for Social Impact report for the National Australia Bank back in May last year, called Measuring financial exclusion in Australia, found that 15.5 per cent of the adult population—that is 2.65 million Australians—are either fully or severely financially excluded. They are not able to access the kinds of financial services that many would take for granted. Amongst that group, more than half were unable to raise $3,000 in the case of an emergency. Faced with a personal or a family emergency, half of that group—so we are talking about 1.3 million people—were not in a position to raise $3,000. That is just a snapshot of the financial circumstances that a large proportion of the Australian population face. This is in part why we have seen the development of the microfinance industry, where there are cash advances of around $800 million plus each year to half a million consumers.

There are cases, there are examples and there are providers of payday lending and microfinance services that have let down an important industry. They deserve to be scrutinised and they deserve to be sanctioned for their conduct. They deserve to be highlighted as contributors to the hardship and stressors that led to the need to seek the finance in the first place and, in some cases, they have in fact compounded that financial distress by extending it from a potentially short-term period of hardship and distress into a longer term sentence that will colour and impact on a person's life for decades to come. That should be the focus of the work. That should be where the attention is given. Instead, the government has gone about regulating an entire sector as if all participants in it are characterised by the distressful circumstance that I just characterised, when that is clearly not the case. What we have seen and what the coalition has been concerned about is the way in which this has been progressed. The government has ignored best practice, the positive experiences, the valuable service that microfinance providers offer, how they go about their business affairs, their relationship with their borrowers and how positive that can be. That seems to have been pushed to one side to focus almost exclusively on the minority of cases where that positive experience is far from the case. It is like asking a doctor about the general health of the population. They only see sick people, and if they imagined that the only people in the population were sick people they would be misguided, yet that seems to have been the approach that some in the consumer advocacy area draw from. They only see those who are in financial distress. That is appropriate and they have an important role in advocating on their behalf, but there are hundreds of thousands of other Australians that they do not see for whom these short-term credit arrangements not only are important but are a positive and essential part of their own financial management, employment and life circumstances. What I am concerned about and what the coalition has been pursuing is the impact that these changes the government initially identified some nine months ago would have on a very positive and legitimate area of the market for short-term credit.

As was foreshadowed by the shadow Treasurer, it may be that the parliament will not sit again. There may be an election or something else may happen. There is a breathless haste to bring about a conclusion to this matter, given that it has sat around for some nine months. I had contact this morning from the industry groups and small businesses that are directly impacted by these changes. They have had no consultation about these changes whatsoever. They have not seen the legislation.

Graham Perrett (Moreton, Australian Labor Party) Share this | Link to this | Hansard source

Rubbish!

Bruce Billson (Dunkley, Liberal Party, Shadow Minister for Small Business, Competition Policy and Consumer Affairs) Share this | Link to this | Hansard source

It is convenient for a Labor member to heckle, but he has not seen the legislation either. We have not seen the legislation and we are relying on briefings provided by the minister, and hopefully those briefings will be an accurate portrayal of the amendments when they arise and reflect the conversations with the coalition. So he might be more circumspect before he jumps in and should apprise himself of the facts. The legislation has not been seen by the industry and the opposition has not seen the legislation either. That is a simple fact. Those involved in microfinance are distressed by the fact that they, having been assured of consultation, now know, as we do, that the government will bring fairly detailed amendments into this chamber that no-one has seen yet. When I asked them what their position is in relation to these amendments, they said, 'We haven't seen them.' This was as recent as 10 minutes ago. That is the reflection of an industry directly impacted by these changes: they are distressed that they have not even seen what they are or the detail of them in order to be able to offer a considered view.

What they have done in the past when there have been opportunities for consultation is invest time and money in providing a more full picture of the microfinance space to make sure that those who rely upon microfinance are working cooperatively with competent and reputable providers and not overextending themselves. Where is that story in this debate today? It does not get the look-in it deserves. When the industry goes back to Minister Shorten to discuss foreshadowed changes—and there is no indication whether this will reflect the government's position or not, and we learned this morning that the government's position is having caps on establishment fees and monthly fees—the government has before it actuarial data that shows that that will present a loss-making proposition for many small microfinance providers on what are fairly common amounts of money that are sought from them. There are case studies that talk about a $320 loan and how under the construct of this bill and under some options that are being floated by Treasury there will be a loss of nearly $20 on that one transaction. Despite that, we are clearly under the impression that the government will push on regardless. What the coalition has sought to do is make bad provisions less bad. But I have not found anybody in the consultations who is happy with what the government is proposing, save to say they are less bad than the provisions that were originally in the bill.

I will point to some examples. In the community that I represent, centres like the Cash Loan Money Centre are run by extraordinarily decent people who are not just there as a finance provider; they have a relationship and an ongoing engagement with their clients. They are already registered with ASIC, and that is a good thing. They already need to pass the test of being responsible people, and that is a good thing. They need to satisfy police checks, and there are good reasons for that. The shadow Treasurer pointed to some of the less scrupulous providers of microfinance that live on the fringe, and they will continue to operate on the fringe, notwithstanding these changes, and may in fact get a leg-up from these changes because the more reputable providers will not be able to participate or survive. They have training requirements. I am talking about people with financial services degrees needing to get additional requirements. This is before they have even done anything. That is what is required of them, and those are reasonable things to make sure competent people and people of good standing are involved in this industry.

Then there are regulatory requirements that have already been introduced. Credit guides need to be provided, and this is an exceptionally good thing. These providers, like so many, engage in budgeting with people who are seeking money from them, even modest amounts, because that is an important contribution. They do credit checks on their clients. They seek three-monthly bank statements. They urge people to stay involved where a change in circumstances might make the full disclosed financial transaction that someone has entered into difficult to service. They do all that. Not only are they themselves registered and do they meet certain thresholds but the way in which they conduct their business is regulated and regulated, I think, quite reasonably to make sure that people are fully aware of what they are entering into and that there is advice and information provided to those intending to borrow so that people are fully aware of their circumstances. There are checks and balances, there are safeguards and there are risk management strategies that make sure microfinance is not to the detriment of the person seeking it, and nor is it a cost to the business that is making that facility available. Just recently there was a client who was earning an income of over $300,000 a year and wanted to borrow a few thousand dollars. Upon reviewing the bank statements it became clear that the individual was earning about $26,000 a month but spending a hell of a lot more through gambling. They were not provided with the facility that they were seeking, because the checks and balances are in place. But, not satisfied with ASIC registration and oversight, and all the preconditions to be a participant in this field, and then the regulations that are imposed—and they seem reasonable and fair with appropriate checks and balances—plus all the costs that are involved, now the government wants to say, 'For all of these services which we have found you to be a competent person to provide, with all the right systems in place, we are now going to tell you what you can charge.'

The simple reality for many of the small microfinance providers is that, in the bulk of the funding envelopes that they work within, these changes will make their businesses unviable. What will happen is that you will end up not protecting those people but actually pushing them into the shadowy areas where finance might be available: the bikie gangs, the consultants in avoidable problems who make money available without all of these safeguards. Or they might say, 'With these parameters in place, I know you only want a modest amount of $300 to $500, but why don't we lend you more, over a longer period of time?' So, notwithstanding the discipline that is needed by individuals who face an enormous range of stressors, or who have to cope with short-term changes in their financial situation, these measures actually encourage people who are thought to be at risk—if you listen to what the government says—to borrow more money over a longer period of time.

I mentioned earlier those who are on the periphery of the financial services industry in our country and who could not seek the 2.65 million people who are already fully or severely financially excluded, to encourage them to borrow more over a longer period of time—so these are confounding consequences as result of these changes. I am pleased that the minister has seen that a change needed to be made, and I am pleased that Senator Mathias Cormann and the shadow Treasurer have been able to negotiate changes. But this does not solve all the problems in this legislation; there is still work to be done. At least with these yet-to-be-seen changes the problems are a little less worse than they were before this morning. (Time expired)

Graham Perrett (Moreton, Australian Labor Party) Share this | Link to this | Hansard source

I rise to support the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011. As the member for Dunkley has stated, there is a very strong case for reform in this area. Unfortunately, to date no-one has been able to find a solution. It is a difficult area to regulate. We are talking about real people's lives, and often there are significant impacts on the lives of children. There are very few jurisdictions across the world that have been able to do it, but I am proud that the Gillard government has been able to step up and attempt to get this right. Obviously, in a perfect world every person who deserved credit would have the appropriate credit history looked at, and they would go along to a bank, a credit union or an appropriately regulated lending institution and receive credit at the appropriate interest rate. We do not live in a perfect world. We live in Australia in 2012, and people have been taking advantage of people who need credit for thousands of years. That is the reality. Whether you go back to the Merchant of Venice or the Bible or the Koran, there are always examples of people taking advantage of others who need to borrow.

Credit is one of the wonderful things in society. It lets us accumulate extra wealth by speculating, and obviously we need proper regulation around it. Sadly, for people who are not able to go through the doors of banks and credit unions and other lending institutions, we need respectable businesses, like Cash Converters in Moorooka in my electorate, or some of the other independent lenders down at Acacia Ridge. There is a market there for people. There is no point saying to someone whose car has broken down and needs it repaired so that they can go to work, 'You need to go to a bank. You will get a much better interest rate.' The reality is: there is no job tomorrow if you do not turn up, so you need to get your car fixed right now. How do you get your car fixed right now? You have got no money. You go down to one of these credit providers.

There is no point saying to a mum when her washing machine has broken, 'You can't wash any of your kids' clothes and they will have to go to school stinking and smelling and be teased. You should go down to a bank.' That is just not the real world. We do know it is a difficult issue in terms of getting this right. In 2001 the shadow finance minister, Mr Hockey, when he was Minister for Financial Services and Regulation, recognised the issue, and he said, 'Payday lending is an insidious practice that targets the less prosperous men and women of our society, the less financially savvy and the people who can least handle spiralling debt.' That was 11 years ago. Unfortunately, he must have had other concerns at the time, but he was not able to do anything about it. Nothing actually happened for the next seven years, when those opposite were in government. I have got the Treasury portfolio minister's media release—with a photo of a slimmer version of Joe Hockey—which has the heading 'Action needed on payday lending'.

Unfortunately, Mr Hockey found reform to be a bridge too far. I understand that; I appreciate his endeavours. At the time, he called on the individual states—I guess there would have been a lot of Labor states then—to address this issue. As a Queensland member of parliament, I was pleased that the former Queensland Attorney-General, the Hon. Paul Lucas, was actually so proactive and enthusiastic about consumer affairs—perhaps from his time as a lawyer—that he displayed his attention to detail when it came to protecting consumers. We saw this when he overhauled the terms and conditions for something as simple as a gift card. Thankfully, Queensland led the way on further protecting vulnerable consumers. I am sure the new Queensland Attorney-General will be as proactive about protecting people and protecting consumers—hopefully.

Unfortunately, many low-income consumers do take out short-term loans as a first port of call rather than using them as a last resort. I have had meetings with two or three different groups of short-term lenders in my electorate and they made the point that they have had clients on their books for 10 years who come back every month for the same amount, something like only $200 or $300. Obviously part of this reform is to make consumers think about other options when they are faced with a temporary financial shortage. I commend the great work that Centrelink do in this area. They are able to provide some options, but obviously they cannot cover the field. Sometimes it may appear easy to take out a short-term loan, but for many, due to the costs involved, they are just delaying the inevitable and making their situation worse down the track. Some people get into that debt spiral, but others are just regular users of these short-term loans.

As part of these reforms, the government is considering ways to inform consumers that they do have other low-cost options to meet their daily and weekly expenses. In fact, most utility providers have hardship arrangements to help people pay off their bills over time at a substantially lower interest rate than for a payday loan. It is preferable that consumers are aware of and use these arrangements which are available to them, rather than rushing down to take out a high-cost loan. I know that sometimes there is a language barrier, where the utility provider does not necessarily have adequate language facilities. Representing a multicultural electorate, I know that sometimes people go to the person who can speak their language or whom they are comfortable with.

On this side of the House, we are committed to protecting the cohort of vulnerable people who are unable or do not want to access credit from the mainstream providers. The introduction of a national interest rate cap will limit the cost of credit for consumers so that they will no longer be charged relatively high costs for this type of credit. There have been cases where people who borrow $300 can be charged over $100 for a seven-day loan and can then only meet the repayment by not paying other bills such as the rent or power, which then gets them into the debt spiral that I talked about earlier. For short-term, small amount contracts of less than $2,000 and 12 months duration, a cap on costs of 20 per cent of the credit provided plus four per cent of the credit provided for each month of the credit contract will apply. I have had representations from people in my electorate who lend out money saying that this will be prohibitive, but I think this is an appropriate compromise. Then, if we go to mid-tier loans of $2,000 to $5,000 and two years duration or less, a cap on costs of $400 for the establishment fee and 48 per cent per annum for interest will apply. For other loans, a cap of 48 per cent per annum on the credit balance similar to the existing caps that are already in operation in Queensland, New South Wales and the ACT will apply.

The bill will also introduce a specific requirement for credit providers to obtain and consider a copy of the borrower's bank statements for the last three months before entering into the contract—if, indeed, they have them. This will supplement responsible lending obligations to ensure the lender obtains and considers the details of payments in the statements. As an aside, in talking to people who make these short-term loans in my electorate, they certainly made it very clear that it is not in their interests to lend to people who are addicted to pokies, have a heroin addiction or something like that. Obviously, it is a business decision they are making which involves minimising the risk so they get a return on their capital. They investigate as much as they can to made sure that the people are responsible and are able to handle the commitment.

The reforms introduced by this side of the House continue the Gillard government's reform agenda to ensure that all Australians can make better and more efficient use of credit products and, importantly, provide additional protections for consumers who take on credit. I see that credit and the ability to then pass on assets to your children is one of the great poverty circuit breakers in society. It is hardly a new theory; it has been around for 5,000 or 6,000 years. You can give your children some opportunity by holding assets and then giving them to your children—they may be tangible assets like the family home—which Australia has done very well compared to the rest of the world. If you look at mortgage default rates, Australia is head and shoulders above the rest of the world. From memory, we are looking at about 0.5 per cent of the mortgage market. If you look at other parts of the world, especially some states in the US, it is a phenomenal story of letting the market rip and deregulation and some shonky practices. Looking after credit for all is a very good thing and something to be proud of as a Labor government.

Regarding how this legislation will affect the industry, some lenders will of course be impacted more than others, depending on the extent of their current practices and costs and how they will comply with the proposed new national law, but I am sure that has all come out in the consultation process, which has been wide and extensive. Despite the representations of the member for Dunkley, I am assured that the consultation has been long and hard. The reality is that there are some business models that intersect here and we cannot necessarily make everybody happy, but nor do we want to close down this section of the industry.

This bill sends a very clear message to predatory lenders who charge consumers excessive amounts that this will not be tolerated. Predatory lenders will need to either change their approach or exit the industry. These reforms will strike an appropriate balance between a sustainable and a responsible industry and will go a long way to increasing consumer protection and confidence. The government has undertaken extensive community consultation, including through two parliamentary committees, not mentioned by the member for Dunkley in his speech, and, most importantly, has directly consulted with payday lenders and consumer groups—I am receiving assurance from the advisers box—and has changed provisions in the enhancements bill in response to issues raised by both. For example, the prohibitions on refinancing a payday loan have been replaced with responsible lending requirements that give greater flexibility to lenders.

Unfortunately, the shadowy world referred to by the member for Dunkley—the bikie gangs and the like—will always exist. There will always be people basically extorting money out of people. The best regulation in the world will not change that. That is a job for law enforcement. For the rest of society, the best approach is to have the carrot for responsible lenders and the stick of law enforcement to counter that shadowy world occupied by the standover merchants and loan sharks and the like, which will always exist. We know that when people rush to embrace those services children suffer and adults suffer and people make bad decisions and get into more and more trouble. We have heard about situations where they have then gone on to undertake criminal activities because they are in debt to some standover merchant. Obviously, in a perfect world no one would ever choose to take these high-interest loans, but these short-term loans are the reality of the world we live in. The government has taken some sensible measures and combined them with our endeavours in Centrelink to make sure we offer support wherever possible. I am very comfortable with this legislation. It is a considered bill and I am proud to be on this side of the House supporting it, because I know it will help out people for many years to come. I commend the bill to the House.

Paul Fletcher (Bradfield, Liberal Party) Share this | Link to this | Hansard source

I am very pleased to rise to speak on the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011. This is a bill dealing with the regulation of the market for the provision of short-term, small amount loans. At first blush, the issues in this area of policy seem to be very straightforward: moneylenders are charging high rates for small loans for a short period of time. Battlers are being ripped off! The solution is very simple: ban that conduct and prevent the rip-off. As is so often the case, however, the picture is much more complex. What is at stake here is the very real risk of shutting down an industry which today serves many thousands of Australians, including those who find that its services are a better solution to their needs than other forms of short-term finance such as credit cards and those who find it simply impossible to obtain finance from any other source.

The Parliamentary Joint Committee on Corporations and Financial Services conducted an inquiry into this bill last year. The report of that inquiry raised significant concerns with a number of aspects of the bill as it then stood, a bill which embodied the kind of simplistic approach which I described at the start of my remarks. In the time I have available today I will highlight three points in relation to the bill before the House. The first is that this is a complex and difficult area of public policy, but it is not correct to assert, as the government appears to, that all users of the services of moneylenders in this area are victims who are being ripped off. The second point I will make is that the approach with this legislation is, sadly, all too characteristic of the responsible minister, the Minister for Financial Services and Superannuation, Mr Shorten. It is driven by a grab for headlines rather than a detailed and careful analysis of the underlying issues. The third point is to highlight the significant risk of this industry, or large components of it, being driven out of business and the implications that will have for the thousands of Australians who rely on its services today.

Let me turn first to the proposition that this is a complex and difficult area and that it is a simplistic caricature to assert that all who use the services of those providing short-term, small amount loans are victims, are vulnerable and are being ripped off. Let us start with the proposition that a large number of people use these services. One witness before the parliamentary joint committee in its inquiry last year told the committee that it estimates that the industry provides cash advances of some $800 million a year to some 500,000 customers. On any measure, a large number of Australians are requiring these loans. Accordingly, one of the compelling issues which must be addressed here is the detriment that consumers would suffer if the industry were materially reduced in its extent because of regulatory measures. Where is the sense in reducing the availability of a product for which there is a proven demand? Minister Shorten said in the media release announcing the measures contained in the bill that the measures are intended to 'protect … vulnerable consumers'. That is a good indication of the premise that underpins the government's introduction of this legislation. This bill is based on the assumption that all loans for a short term and for a small amount are inherently harmful and that all who take them out are inherently vulnerable. I do not believe that that is a correct assumption. There were certainly witnesses who appeared before the committee who put that particular proposition. Let me quote, for example, Ms Catriona Lowe of the Consumer Action Law Centre, who said:

What we are saying is that the product is harmful in the sorts of circumstances which are typical for the user of the product. Where a product is harmful, there are countless examples of where we as a society make a judgement that, if we are making that product available, we will regulate the basis on which it is available because of its potential for harm.

I quote the comments of Ms Lowe because I think they are an articulate summary of the premise on which this legislation is based. I hasten to add that the work done by consumer credit legal centres is of the first importance. It is difficult work, it is demanding work and the people who do it are very much to be admired and respected. They do extremely important work. Let me make it absolutely clear that I acknowledge, as any sensible person must, that there are plenty of people who are incapable of making sensible financial decisions, for a whole host of reasons—it may be due to addiction, substance abuse, intellectual impairment or limited decision-making capacity for other reasons. There are a range of reasons why a proportion of people will be incapable of making sensible financial decisions, but it is not correct to claim that all who use short-term, small amount loans are, by reason of that fact, people who have demonstrated themselves incapable of making a sensible financial decision. The premise that we ought to regulate on the basis that everybody who is a consumer of these products is being ripped off is a premise which has not been satisfactorily demonstrated to be valid by the government in the rationale it has put for the measures contained in the bill before us today.

There was evidence provided to the inquiry that, for a number of consumers, taking out a short-term small amount loan is a rational decision on the basis that it is the best source of finance compared to the alternatives. In particular, there are consumers for whom a credit card is a less attractive proposition than a loan of this kind. It is also noteworthy that a number of providers told us that they do not make a practice of lending to those whose only income is government benefits or, alternatively, they specifically require that their customers must be in paid employment.

The issues here are complex, and the appropriate and pressing objective for the government and for the parliament is to strike the right balance. There certainly are consumers who are vulnerable, and sensible measures to protect them are obviously worth considering. But it is very important to ensure that short-term lending remains available, accessible and as cost-effective and competitive as possible.

This brings me to the second proposition I want to argue to the House this morning, which is that the bill before the House today is not based on a careful analysis of the policy issues which present themselves in this area but is a cobbled together exercise driven by a desperate desire to grab headlines. The first piece of evidence for that proposition is to look at the minister who is bringing forward the bill, but the second piece of evidence is based upon an analysis of the existing regulatory framework and asking ourselves whether the additional measures contained in this bill are required or justified. For example, a number of parties appearing before the committee's inquiry pointed out that the recently introduced responsible-lending framework closely constrains their capacity to lend to precisely the class of consumers who, it is argued, are to benefit from the protections contained in this bill. This raises the question of the justification for the additional set of complex prescriptive measures contained in the bill we are presently considering if the responsible-lending framework only recently introduced already imposes restrictions on, for example, loans made specifically for the purpose of daily consumption needs or paying bills.

Another piece of evidence that this bill is primarily motivated by a short-term grab for headlines emerges from an analysis of some of the provisions contained in the bill. In particular, the bill, in the form in which it was first presented, adopted the simplistic 48 per cent cap, the cap that was first passed into law by the hopelessly incompetent New South Wales Labor government in its dying days. The Australian Bankers Association in its submission to the inquiry had this to say:

The proposed model for calculation of the "cost rate"—

that is, the 48 per cent—

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.

Simple mathematics means that any short-term loan for a few days or even a month is likely to breach a cap calculated on an annualised basis. For example, consider a loan of $100 for two weeks. Any fee greater than $1.85 produces an annualised interest rate of more than 48 per cent. More fundamentally, the premise which is effectively given effect to by this measure is that short-term loans are inherently problematic and objectionable. A formula which automatically deems short-term loans to be problematic and objectionable is one which I do not believe should be supported.

The bill in the form in which it was originally put imposed this 48 per cent cap for all loans under small amount credit contracts, and for small amount credit contracts there was a separate cap mechanism involving an upfront fee of 10 per cent of the principal amount and a monthly fee of two per cent. Small amount credit contracts were defined as being for less than two years and less than $2,000.

I hasten to add that the government has advised that it has a range of amendments which it says will address a number of the clear drafting and implementation problems contained in the bill as it was originally proposed. The difficulty is that this is a very complex area. It is not easy to quickly understand and analyse provisions. It is easy to make mistakes, as the New South Wales provisions demonstrate. And yet at this stage the actual drafting of the amendments has not yet been provided, simply a conceptual description of some of the amendments. So, while we on this side of the House are pleased that at least there appears to have been some movement and some recognition of the inherent flaws in the approach contained in the measures in the original bill, it is too early to be able to say that the amendments as drafted achieve the effect the government promises when it claims they will address many of the concerns raised.

Let me turn, thirdly, to the risk of driving the industry out of business. This is a risk to which the government appears to have given little consideration. The original media release by Minister Shorten did identify some alternative sources of short-term finance, but there was no evidence which emerged during the committee process of these being available in sufficient volume, remembering the estimate of some $800 million of advances being provided each year by the current industry. It is clear that the banks do not participate in payday and small amount lending and have not done so for some time, and there is no basis for thinking that they are going to return to that area of activity. The Treasury told the committee that the government's objective is to maintain a viable short-term small amount lending industry. Ms Vroombout from the Treasury said that maintaining a viable industry was the government's objective in setting the cap. But it is very unclear how this is to be achieved on the basis of the provisions of the bill before the House and it is very unclear how the detailed and prescriptive interventions in the business practices of the short-term lending providers are consistent with the government's stated objective of maintaining the existence of this sector.

This is a complex area. It is an area which, sadly, is all too susceptible to caricature and extremely simplistic approaches. That is the basis on which the government brought forward its initial legislation. That legislation, on any analysis, is deeply flawed. We are promised that there are amendments which are going to solve the problem. You will forgive us, Mr Deputy Speaker, if, based on experience, we are highly sceptical. We await the amendments but I conclude with the point, in weighing up the costs and benefits here, that to willy-nilly destroy an industry which meets the needs of thousands of Australians every year would be a bad idea.

Laura Smyth (La Trobe, Australian Labor Party) Share this | Link to this | Hansard source

I am pleased to be able to speak in this debate today. It is an important issue for all of us in the House to respond to concerns about payday lending amongst other things that are addressed in the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011. There is comprehensive range of reforms which are addressed in this bill. I should begin, however, by responding to one of the propositions put earlier by the member for Bradfield. Not all who use payday loans are vulnerable and I think all of us can say that the legislation certainly has not been premised on the proposition that everyone using payday loans is in a vulnerable position. But I think the weight of evidence, including evidence before the Parliamentary Joint Committee on Corporations and Financial Services towards the end of last year, would bear out that a substantial proportion of those seeking payday loans, small loans, are indeed vulnerable people. It is important to note that at least half of those people are on incomes of less than $24,000 a year and around two-thirds are on annual incomes of $36,000. But, apart from that information, it is worth bearing in mind the comments of the shadow Treasurer on this point in relation to the special vulnerability of a great many of the people who are relying on short-term payday loans. He said in 2001:

Payday lending is an insidious practice that targets the less prosperous men and women of our society, the less financially savvy and the people who can least handle spiralling debt.

Unfortunately, as is the case with a great many things in this place in this term, it is left to a Labor government to respond to the issue of payday lending as to the special vulnerability of many but perhaps not all of the people who rely on payday lending and to respond to a range of other things that the bill before us contemplates, including the vulnerability of senior Australians to risky reverse mortgages that they may be exposed to in certain circumstances. But, returning to the issue of the particular vulnerability of a great many people who rely on short-term payday loans, I would like to specifically refer to some of the provisions and some of the findings of the Parliamentary Joint Committee on Corporations and Financial Services. It particularly refers, at 5.51, to a then interim report for a joint RMIT-University of Queensland study in relation to an analysis of some of the consumers accessing the short-term loan industry. At 5.54 the committee notes:

… The researchers concluded that 'poverty pervades the lives of most borrowers interviewed.' The study indicates that users of short-term loans are commonly unemployed, receive Government assistance, have low rates of home ownership and are likely to be in their 30s or 40s. Of the 112 borrowers interviewed, 78 per cent received Centrelink benefits, less than 25 per cent were in paid employment, and 75 per cent lived in rental accommodation. Only nine persons interviewed owned their own homes, and eight were homeless. … Of the 112 borrowers interviewed, only seven had credit cards and 68 had poor credit history.

I think it is important to note those points in particular. The committee went on to find, at 5.56, as a result of the evidence presented to it:

… The research indicates that the short-term loan industry has a disproportionately high client base of Disability Support Pensioners.

It further found, at 5.58:

… The study shows that the primary reason for seeking a short-term loan is to cover regular expenses such as food, bills and petrol. … Of the regular expenses cited as reasons to obtain a short-term loan, the third most common reason was 'to pay back another loan.'

These are fairly telling findings of a parliamentary committee about the characteristics of the bulk of those people who are entering into short-term loans as a means to simply pay for basic necessities and carry on with their lives. So I think it is appropriate that this government, through this bill, respond to those particular vulnerabilities and ensure that we provide appropriate protections for consumers before they are exposed to short-term loans which might result in significant costs to and significant interest payments by them.

The bill is indeed the next in a series of measures which have been taken by this government to provide appropriate consumer protections for Australians who borrow. It includes important measures which are designed to protect some of our most vulnerable consumers. It follows on from measures introduced by this government earlier in this term to better protect consumers who take up home loans or credit cards. It is a result of extensive consultations on the matters which are in the bill, and I have mentioned one parliamentary committee's inquiry, and it has also been the subject of a Senate Economics Legislation Committee inquiry. Between the committees some 86 submissions were received in relation to the draft bill. Those committee inquiries followed on from a green paper in July 2010 in relation to national credit reform. So, contrary to some of the assertions that have been made in the contributions from those opposite today, this bill has been the subject of extensive consultation with consumer advocates and with industry. It has been the subject of two parliamentary inquiries. It has been the subject of a green paper. It was something that this government took to the last election. Draft amendments to the bill were also released for public comment between April and May of this year. The government has also consulted directly with payday lenders and consumer groups and has amended certain provisions in the bill in response to issues raised by them.

It is estimated that at least $500 million is lent annually in payday loans. These are short-term loans for small amounts up to around $2,000. Those Australians who rely on payday loans are often unable to obtain other forms of credit which might be provided on substantially more reasonable terms. As I have said, they are often low-paid workers—half of them will be on incomes of less than $24,000 a year and around two-thirds will be on incomes of less than $36,000 a year. These are people our consumer credit laws should be looking out for.

Needless to say, these are people who can least afford to be exposed to high-interest loans, as they have the least capacity to repay them. I think all of us in this place would agree that paying almost $1,500 in interest and fees on an original loan of $1,000 over six months is unreasonable. For some of these people, what might begin with a small loan can often turn into a debt spiral, eating into the already limited wages of the borrower over a lengthy period of time and prompting the borrower to take out new loans, as the corporations committee inquiry heard.

The consumer credit reforms in the bill will maintain a sensible balance between a sustainable and responsible industry and reducing the damage caused to consumers who may, out of necessity or without proper advice about their options, come to rely on credit products which they are ill-equipped to repay. It will do this by a variety of means. The bill provides that for short-term small-amount contracts of less than $2,000 and 12 months duration, a cap on costs of 20 per cent of the credit provided plus four per cent of the credit provided for each month of the credit contract will apply. The bill will reduce the term for small-amount credit contracts from 24 months to 12 months to target the most vulnerable consumers. For mid-tier loans of between $2,000 and $5,000 and two years duration or less, a cap on costs of 48 per cent per annum interest plus a $400 establishment fee will apply. The bill addresses the possibility of avoidance of that cap by applying it over the life of the contract while doing so in a way that minimises the potential compliance burden on lenders.

The bill introduces a prohibition on loans with a term of 15 days or less and introduces a maximum 200 per cent total cap on charges for all lending. The cap will limit the cost of credit for consumers, so that they will no longer be charged such high costs for these types of credit. I think most of us would agree that we must do something to respond to cases where people who borrow $300 can be charged over $100 for a seven-day loan, and can then only meet the repayment by not paying for other necessities, such as utilities or rent. The committee heard that in many cases people are using these funds for basic necessities. The bill will also introduce a specific requirement for credit providers to obtain and consider a copy of the borrower's bank statements for the last three months before entering into the contract. This will supplement responsible lending obligations to ensure the lender obtains and considers the details of payments in the statements.

Many low-income consumers take out these kinds of loans as their first port of call rather than using them as a last resort. The reforms in the bill will encourage consumers to consider other options when they are faced with a temporary financial shortage. The government is also considering ways to let consumers know that they have other options to meet their everyday expenses. It is extremely troubling that a survey undertaken recently by the Consumer Action Law Centre found that around 21 per cent of consumers used a payday loan to pay utility bills. Given that most utility providers already have hardship arrangements in place to help people pay off their bills over time, it would be far preferable that consumers be made aware of and have the opportunity to use those arrangements. They would indeed cost substantially less than taking out a payday loan to cover utility bill costs.

In addition to the measures that I have mentioned, the legislation addresses the risk of fees accruing to a debtor's account in the event that repeated unsuccessful use of a direct debit arrangement is used to make payments under a small-amount credit contract. The bill will respond to this issue by introducing a regulation making power that will enable the use of direct debit arrangements to be suspended if this occurs. Importantly, the bill also introduces a regulation making power for a protected earnings amount. This is where borrowers are dependent on Centrelink benefits. This could enable the maximum payments this class of borrowers would have to pay to not exceed 20 per cent of their income. Members will no doubt appreciate the significance of this safety net for those who are reliant on Centrelink benefits. In addition to the arrangements relating to short-term loans, the bill also contemplates arrangements for better protection of consumers who are taking out reverse mortgages. We committed to these reforms at the last election and I am pleased to be able to speak in favour of the bill which gives effect to them.

The effect of the disclosure requirements in the bill will be that reverse mortgage lenders and brokers will be required to talk to consumers about different borrowing arrangements. They will be required to show those consumers how the equity in their homes might be reduced according to how much they choose to borrow through a reverse mortgage amendment and through potential movements in house prices. Senior Australians who are likely to access reverse mortgages can be extremely vulnerable if they take out the wrong loan and either exhaust the equity in their home through a reverse mortgage or end up with a debt which exceeds the value of their home.

These are only a few of the measures contemplated in the bill before us but I am pleased to stand in support of them for the protection of those who are vulnerable to difficulties presented by short-term loan arrangements and for the better protection, particularly, of senior Australians who maybe likely to take out reverse mortgages. These measures are long overdue and I commend the Minister for Financial Services and Superannuation for bringing them to the parliament through this legislation and for his efforts with industry and consumer advocates to take this bill through its lengthy period of consultation.

Bert Van Manen (Forde, Liberal Party) Share this | Link to this | Hansard source

Before I get into the substance of my contribution today, I would like to touch on a couple of points that the member for La Trobe has made. She quite rightly pointed out the stats from the Parliamentary Joint Committee on Corporations and Financial Services. The interesting thing to note is that those very costs mentioned in that committee report that people typically go to payday lenders to borrow funds for are the costs that are going to be most impacted by the introduction of the carbon tax. There is very limited ability for people in these situations who are already struggling financially to increase their income to offset these cost increases. The question then arises: how many more people are going to seek the services of these so-called payday lenders in order to help make ends meet? On one hand we have a piece of government legislation that seeks to assist people in financial difficulties, yet on the other hand we have government legislation that will do absolutely nothing for the environment and put people in much more difficult financial circumstances. But, as we have come to learn over the past 4½ years, that is not untypical of this government, and the Australian population recognises it.

As the shadow Treasurer pointed out in his speech earlier today, it would have been helpful to have had the 70 or so amendments circulated before commencing this second reading debate. Right now, as we speak, further amendments are still being drafted; it is just beyond belief. But it is an all too familiar occurrence from this government to be skittish and scattered. Only this morning I spoke on changes to the MIT, which were going back and forth like the DeLorean from Back to the Future. Yesterday the minister suggested that the coalition was a bit like Burke and Wills, but I would like to suggest that the government is more like Lost in Space, caught up in some green tardis.

The government has had nine months to consider these bills, and that is nine months of uncertainty for small, payday-lending businesses. Once again, it is another example of the government's inability to provide certainty and direction for small businesses around this nation. Since this legislation was first introduced to the House I have received a number of inquiries in relation to this bill from many people in the industry. As recently as today, I received some documentation that brought the whole focus of this legislation back to its roots. The document stated that the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 is first and foremost about borrowers, and I think we in this House all agree that we need to protect people who are in poor or vulnerable situations from loan sharks and people who are looking to do the wrong thing by them.

Borrowers are at risk of losing what in some cases can be their only source of credit, as it has the potential to be legislated out of existence. The credit sources we are talking about here today are payday lenders or microlenders, otherwise known as short-term loan providers. There are many providers in this space. Individuals have mixed feelings towards these operations. However, according to research undertaken by Smiles Turner, there are in excess of 1.5 million payday and microloans a year and there are some 750,000 consumers borrowing on average 2.4 times per year.

Demand has increased at a rate of some 18 per cent per annum over the past three years to 2010-11 and is currently tracking at 4.2 per cent for this financial year. Of these borrowers, 630,000 have nowhere else to go, and there is a concern that amongst these are some of the most vulnerable and underprivileged in our society. There are concerns in relation to their association with these types of lenders. However, at some point it comes down to personal responsibility and the responsibility of the government to ensure that any changes made to these lenders' ability to lend results in the best case scenario for all parties involved.

It is no surprise that the No. 1 reason for borrowing from short-term providers is for the purpose of paying bills. A national survey by Smiles Turner of nearly 2,000 borrowers in May and June this year revealed the following statistics: funds that were borrowed for bills were a bit over 22 per cent; for finance, repaying other loans or cash, nine per cent; for food, four per cent; for household shopping and goods, six per cent; and for vehicle costs, 16 per cent. There is a current theme that indicates that the reason people are borrowing from these short-term lenders in the first place is to pay for general living costs. As I touched on in my opening comments, the policies put forward by this government, particularly in relation to things like the carbon tax, are only going to exacerbate this problem.

This has also been borne out in a Newspoll survey quoted in the Australian today by Dennis Shanahan, which shows that over 36 per cent of voters believe that their standard of living is going to get worse in the next six months and are more pessimistic now than they have been about their standard of living since the global financial crisis in 2008. The government should be doing everything they can to get this legislation right, because they are responsible for these cost-of-living increases increasing so rapidly since 2007. Whether people favour short-term lending operations or not, they do provide an avenue for people who are desperate for financial support. Where would these people turn to if these lenders disappeared? We have already seen a spike in crime, an increase due to a number of economic factors including higher unemployment, underemployment and rising living costs. Recently I held a crime forum in my electorate, and one of the major issues raised was number plate theft. Number plates, the police explained, are stolen and placed on cars which people then take to petrol stations, fill up and then drive off and do not pay for the petrol. In addition, a number of ram raids and robberies have occurred through the Logan and Gold Coast district over the past several months, and residents are concerned that this activity has been more frequent than usual. If you look at the Albert and Logan News online today, five of the top 10 current news stories are about robberies and break-ins.

During the crime forum, I was informed by one of the attendees about a family man who had conducted his first ever crime to help pay the bills. He said he was so desperate he could see no option but to commit a crime to get out of the financial troubles he was in. This is a very sad situation, given that there are a number of community organisations in my electorate who could have assisted this man and his family at that very difficult time, but that is another story for another day. I have used this as an example to highlight my previous point—that we need to ensure that small-amount, short-term lending continues to provide an avenue for people within the community who have nowhere else to turn.

The coalition will not oppose the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011. The government, with its amendments, has acknowledged the flaws in the bill as originally presented to parliament. That the government was forced to go back to the drawing board by the unanimous recommendations of the Parliamentary Joint Committee on Corporations and Financial Services is telling. The committee, including government members, recommended that the government revisit the payday lending changes and undertake further consultation with industry. Under this pressure, the government has agreed to a number of amendments or changes. It has increased the caps for small-amount credit contracts; shortened the term for small-amount credit contracts from 24 months to 12 months; increased establishment fees, from 10 per cent to 20 per cent, and the interest rate per month, from two per cent to four per cent; allowed an additional $400 fee to be charged for mid-tier loans between $2,000 and $5,000; and removed multiple-contract prohibitions on lenders under certain circumstances. In addition, there is a commitment to prohibit loans with a term of 15 days or less, by regulation.

These changes represent a significant concession to both industry and opposition concerns with the original bill. The original government proposals did not strike the right balance between appropriate consumer protection and making sure that short-term lending remains available, accessible, affordable and as competitive and transparent as possible. The proposed government amendments address many of the concerns raised by stakeholders during the parliamentary committee process.

These included concerns that the proposed caps on fees and interest charged on payday and small-amount loans would be uneconomic and would lead to many current participants withdrawing from the market. Many of the businesses that could close down are small, family owned and operated businesses. The reduction in availability of payday and small-amount loans could result in many people not having access to the existing finance they rely on to meet unexpected expenses. The banks have not participated in payday and small-amount lending for some time, because it is uneconomic for them to do so. I well remember when I started in the bank and you could get personal loans for down to $1,000. Most banks now will not do a personal loan for less than $5,000. It is highly unlikely in the current environment that they will seek to re-enter the market to fill the gap if existing providers go out of business. Stakeholders also mentioned concerns that a reduction in legitimate, licensed payday and small-amount lenders may encourage unlicensed and illegal operators to enter this market, which would in effect reduce consumer protection.

The amendments address these issues, in that the new caps on fees and interest charges will ensure that the vast majority of short-term lenders will remain commercially viable. Small, family owned and operated businesses will not be adversely impacted. People who rely on these type of loans, which are not provided by the banks, will continue to have access to the finance they rely on to meet unexpected expenses. Importantly, the ongoing viability of legitimate, regulated providers will discourage the growth of unlicensed and illegal operators whose entry into the market would reduce consumer protection and transparency.

While some of these provisions might not have been implemented by the coalition in government, the significant concessions obtained by the coalition have achieved a much better balance between the twin aims of providing appropriate consumer protection and ensuring that short-term lending remains available, accessible, affordable, transparent and as competitive as possible. With these amendments, the coalition will not oppose the bill.

Jill Hall (Shortland, Australian Labor Party) Share this | Link to this | Hansard source

The Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 is extremely important. It will benefit a number of people within my electorate. It addresses an issue that has been of considerable concern to me and to other members of parliament. It addresses the fact that people in very adverse financial circumstances will pay anything and do anything, within certain parameters, to obtain money. People may be desperate for small loans to replace broken household appliances, for example, and I think there is strong research that shows that people are using payday loans to pay utility bills. These loans cover a person until their next pay packet. Under this legislation, people will have more protection from inappropriate lending practices.

The Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011, particularly with the amendments the government has made to it, is very good legislation. The bill introduces protection for the consumers of short-term, small amount loans by imposing a cap on such loans and on the duration of such loans. The bill bans the process of multiple borrowing of short-term loans to address the risk of debtors falling into a debt spiral. It also requires lenders and brokers who arrange these loans to disclose the availability of alternatives.

As a member of parliament I regularly—I repeat, regularly—have constituents come to my office who are under severe financial strain. One of the first things I do is ask them if they have any loans and what the loans are. Invariably, these constituents have a series of small-amount loans that would be covered by the legislation we are dealing with here today. They are loans that have exorbitant interest rates—loans that, to be frank, these constituents will never be able to pay off if they continue down the track they are going. I usually refer these constituents to financial counsellors, who have the expertise to deal with my constituents' financial stress. But, invariably, when people on low incomes reach a crisis state, when they are not able to pay a bill or replace an appliance, they will redraw those loans. At the moment, there just is not that protection that is needed.

These reforms also provide protection to borrowers who use payday lenders, and stop payday lenders from overcharging consumers who are desperate for money, as I have shown, by including limits on the costs they can charge. The fine balance in this legislation is to ensure that people who need money desperately, the people who most need the protections under the legislation, would not be forced to use even less scrupulous lenders. So I think this is good legislation.

I was a bit disappointed to hear the previous speaker, the member for Forde, castigating the government for making further amendments to improve this bill. I think the opposition should be congratulating the government on making improvements to the bill to ensure that it is very good quality legislation that provides protection. I see the member opposite shaking his head. That indicates to me that he is not supportive of protecting the people covered by this legislation. However, the previous speaker indicated that the opposition would be supporting the government in relation to this legislation, so I do hope that the next opposition speaker's contribution to the debate will be along the same lines.

When I was doing research for this speech, I came across a submission from St Luke's Anglicare to the joint committee inquiry into the consumer credit amendment bill. They highlight very graphically the importance of this legislation—why it is needed. They talk about people experiencing social and economic disadvantage in rural Victoria; their awareness of the impact of payday lending on individuals and households; and the financial inclusion work that they do in terms of counselling, for example. They are supportive of the government's moves to address this issue and believe it should be embraced by all sides of parliament.

I would like to concentrate a little bit more on the bill. I think I have highlighted the issues and the need for legislation to protect people who are experiencing financial strain and do not really have any options. I believe this legislation will strike the right balance between having a sustainable and responsible industry and reducing consumer debt by increasing the cap on short-term contracts to a 20 per cent establishment fee. That is a change from the original legislation and relates to the government's amendment; previously, it was a 10 per cent establishment fee and two per cent monthly fee. The bill shortens the term for small account credit contracts, from 24 months down to 12 months, to target the most vulnerable consumers. It removes the prohibition on the refinancing of small-amount credit contracts. That was not permitted in the original legislation. From my previous comments you can gather that I may have a little question mark over that, because there are some people who get themselves into a lot of trouble by the refinancing of credit contracts. The bill introduces a mid tier of 48 per cent plus $400 for loans between $2,000 and $5,000. It introduces a review of the cap and other issues relating to the amount of credit contracts. It establishes a prohibition on loans with terms of 15 days or less, which I think is quite important, and there is a maximum 200 per cent total cap on charges for all lending.

This legislation goes across a number of areas. It looks at reverse mortgages. I am sure that a number of members in this House have spoken to seniors who have taken out a reverse mortgage on their home only to be faced with exorbitant interest charges. They find that the way in which the loans work really cuts into their capital in a big way and that they are in danger of no longer owning their home. This legislation will provide Australia's first statutory protection against negative equity, which will eliminate the risk of borrowers paying the lender more than the value of the house. There have definitely been reported cases of this happening.

Potential borrowers will be provided with targeted disclosure of the financial consequences of entering into these types of contracts, which will enable them to better assess the impact it will have on them. The bill will reduce the risk of borrowers losing their homes because of default, by prohibiting certain default triggers. There is nothing more worrying to an older person than the fact that they may lose their home. The bill also introduces new arrangements dealing with the rights of seniors who may not be borrowers. As a result of these changes, senior consumers will have a better understanding of how reverse mortgages work and can make better choices. That is what this is all about: people making choices and understanding the implications of their decision when they enter into a contract or borrow money.

There has been widespread consultation on this legislation. The government conducted extensive consultations under the phase 2 consultations, which began in July 2010. There was the release of the green paper National credit reformenhancing confidence and fairness in Australia's credit laws. The primary vehicle for consultation with stakeholders has been consultation groups chaired by Treasury and a broad range of representatives. Treasury has also chaired two special groups in respect of reverse mortgages and consumer leases. There has been widespread consultation. The government has listened to the feedback from organisations such as St Luke's Anglicare in Victoria and it has listened to organisations that provide loans.

As with all legislation, it is all about getting the right balance. The opposition has had its chance to comment on the legislation. It is very important that this legislation pass the House, because it will provide greater financial security for Australians. Many Australians are experiencing economic difficulty and problems with finances, and it really is beholden on a responsible government to put in place legislation that affords them protection. The credit and consumer corporations legislation delivers benefits and protections for consumers who take out credit. The four main elements are the regulation of short-term and small-amount loans, otherwise known as 'payday loans'; delivery of the government's election promise in respect of reverse mortgages, which is very important and which I have highlighted; further improvement of aspects of the national credit laws; and addressing regulatory gaps in relation to consumer leases.

These reforms are important and continue the national credit reforms which are part of the COAG reform agenda. I urge all members of this parliament to support the legislation. It is good legislation and it is delivering to those Australians who need our support.

George Christensen (Dawson, National Party) Share this | Link to this | Hansard source

I rise to speak on the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011. I note, firstly, that this bill was introduced on 21 September last year and that it has been before the House for quite some time now. When the bill was first introduced, I had some very serious concerns about what it would mean in the real world and how it would affect people who seek short-term loans. So it is with some relief that I see the government has seen fit to make amendments to its bill, which will go some way towards erasing those concerns.

There is no question that reviews of lending practices are warranted in this country. In the wake of the global financial crisis, we are only too aware of what can happen when lending standards are poor. Thankfully, our banking system was less vulnerable than those in other countries, but there are lessons to be learned. The bill did have admirable intentions. It set out to ensure that customers were better protected in their dealings with credit products and credit providers. The bill sought to achieve that by enhancing access to the hardship provisions in the code, introducing protection against negative equity for holders of reverse mortgages, introducing a cap on costs for small-amount credit contracts and introducing a cap on all loans. The bill is the second phase of legislative changes that result from a Council of Australian Governments meeting in July 2008 and a subsequent meeting in the following October. In the midst of the global financial crisis, Australia was moving toward providing greater protection for credit consumers. In my home city of Mackay there were tough times indeed when the global financial crisis hit. The region had been booming with the resources industry, but families who were not part of the boom were being placed under enormous pressure. Labour was scarce and everything was more expensive—and still is. Rent was astronomical, if you were lucky enough to find a place to live in. Back then, when the retrenchments started in the resources sector, some of the pressure actually eased in terms of housing. But we are again on the same path. The cost of living, as I said, for everyday families in Mackay is quite high. Everything is more expensive in many regional centres around Australia, and in regional centres where there is a mining boom the situation is much worse. The mining boom is there but not everyone is part of that boom.

When this government talks about spreading the wealth of the boom, it is talking about taking the profits that are generated in regional centres through mining and taking them down to capital cities. The government either is completely blind to the cost-of-living difference between an average family in a resource region and an average family in the city or simply does not care. Because of this double-edged sword, there are many families in North Queensland who are doing it very tough. When these families were smacked with a big bill, be it an extraordinarily high electricity bill—and, I have to say, in future it will be via a carbon tax that is going to start in a few days time—a car repair bill or a medical bill, they struggled to find money to pay those bills. When a huge chunk of their income is spent on rent, as it is with the higher prices, there is not much left just for weekly living, let alone to have large bills suddenly appear without warning.

For these people one option has been to seek short-term loans. Concerns about these short-term loans have been raised with me by locals. The George Street Neighbourhood Centre Association's financial counsellor, Natasha Syed Ali, pointed out to me that these so-called payday loans can come with a huge interest rate. She said something that I would like to quote here:

These loans can come with interest rates of over 400 per cent and send people into a spiral of debt. Payday loans are typically very expensive, given to people living off welfare payments and send borrowers further into financial hardship. Lenders often recoup their debts using direct debits—this means the money is taken out of borrowers' accounts before they have a chance to allocate money for necessities like groceries, rent or medicines. They then go back for another loan to help pay for day-to-day expenses and a pattern of repeat borrowing is created.

What she said there reflects quite legitimate concerns about the payday lending industry. Obviously these are the concerns of someone who is dealing with the most vulnerable in our community. But we should not forget that these short-term loans can also be of assistance to some of the most vulnerable people in our community.

When this bill first came before us, there was strong opposition from the industry—from the providers of those products and from their customers. In just a couple of weeks, when this bill was first mooted, I received 93 letters from people opposing this bill who were using short-term loan facilities in Mackay. There are any number of reasons why people use these loans, and I can give you quite a personal example.

As a young university graduate, I went into one of my first full-time jobs as a cadet journalist. It did not pay very much and I wondered why I had spent so long at university to end up with a job with such a small income. I was not born with a silver spoon in my mouth; I paid my own way through university through taking out bank loans. I got a credit card with a very minor credit limit and maxed it out. I knew that all of those bills would have to be paid on getting my first job. Moving into my own place, paying rent and paying all the bills I had to pay—for food, electricity and all the rest of it—money was tight. Then something happened. I cannot remember what it was—the washing machine might have broken, the fridge might have broken or something like that—but I was strapped. I needed money and the only place I could go to on my limited income, on my expenses, was one of the payday loan centres. I took advantage of that. Yes, I knew I was repaying a grossly inordinate amount of interest but I made that decision, looking at the finances, and it helped me through. If it had not, I do not know what I would have done. I probably would have done without the fridge or the washing machine, which would have caused other problems. There are many people who go into situations like that.

I know that short-term loans are also used, in some instances, by young entrepreneurs with no background in business to get them through cash flow difficulties in their start-up phase. So, when we talk about the most vulnerable in our community, we need to consider two distinct groups here. On one hand, we have people who really struggle to make ends meet on a weekly basis. For them, taking on a loan can easily add to their problems and the debt spiral is a very real possibility. The bill is obviously designed to protect those people. On the other hand, we have people who struggle to make ends meet but have an occasional—or even rare—speed bump in their finances, such as expensive car repairs, medical bills or, as I said, a broken fridge or washing machine or whatever. All they need is a helping hand to get over that speed bump. For them, the debt spiral is not such a danger. What is a danger for them is if they cannot afford to pay that urgent bill that needs paying. What happens if they cannot get their car fixed? What happens if they cannot get their fridge or washing machine fixed? What happens if they cannot get medical treatment or medicine? What happens if they cannot pay their electricity bill, their phone bill or their rent? The bill, as it originally was, ran the risk of making these people more vulnerable.

Removing short-term loans from the market can leave these people desperately ill, without a car to go to work or without electricity, a phone or even a roof over their heads. The original bill that the government introduced would have done exactly that. With all good intentions to protect vulnerable people, it would have thrown the baby out with the bathwater, creating a whole new group of vulnerable families and not actually doing anything to help in return. The original bill was sloppy. It was rushed and it was not properly thought through. So much of the policy from Labor and the Greens is like that—a kneejerk reaction that is brought before the parliament without proper consultation with those most affected and without thinking about what impact the bill will actually have in the real world. Once again, the government was forced back to the drawing board when the failures of the original bill were pointed out by all and sundry, including the government's own members.

It took strong, responsible opposition from this side of the House, from the Liberal-National coalition, as well as from industry, and unanimous recommendations of the Parliamentary Joint Committee on Corporations and Financial Services—and, I might also say, those many people who are clients of payday lending services who wrote to their local members saying, 'Do not pass the bill in this form'. The joint committee, which included government members, recommended the government reconsider the bill and go back and consult with the industry.

As a result of actually talking with the industry and considering what the original bill would do, the government proposed amendments that will increase the caps for small amount credit contracts; shorten the term for SACCs from 24 months to 12 months; increase establishment fees from 10 per cent to 20 per cent and interest rates per month from two per cent to four per cent for small amount credit contracts; allow an additional $400 fee to be charged for mid-tier loans between $2,000 and $5,000; remove the 'multiple contract prohibitions on lenders under certain circumstances; and commit to prohibit loans with a term of 15 days or less.

These are considerable amendments and substantially change the original bill. It would have been good to see them included in the original bill but at least the government has been dragged before us now—with the minimal bit of kicking and screaming—and, importantly, these amendments will make the product more viable and will make it easier for the short-term lenders to stay in business, which is important because they do fulfil an important role. It is also important to note that the banking industry does not offer these loans. The banks have long since withdrawn from this section of the market and the banks would be extremely unlikely to fill the gap if short-term lenders were to exit the market.

While the coalition would have opposed the original bill, we are inclined to support the bill with these amendments. As it stood, the original bill would have, as I have explained, made the products unviable. Businesses would have been squeezed out of the industry and there would have been insufficient alternatives, and families in need would no longer have access to the finance that they need to get them through unexpected expenses. From an industry point of view, many of the current providers are small family owned and operated businesses. I know there are quite a few of them in the Mackay region—City Finance, for example, is one that springs to mind.

There are, however, provisions in the original bill that the coalition and industry support, including statutory protections in the provision of reverse mortgages. These would provide a statutory protection against negative equity and more detailed and prescriptive disclosure requirements. Other important measures the government has agreed to introduce via legislation include a 200 per cent total cap on charges for all lending and a range of responsible lending obligations, including a presumption that a refinance is unsuitable where the borrower is already in default, a presumption that a SACC is unsuitable where it is the lender's third or fourth loan in the last three months, a requirement for credit providers to consider a copy of the borrower's bank statements for the last three months before entering into the contract and a prohibition on loans with a term of 15 days or less.

These measures provide a filter, in particular the measures for responsible lending. Regulating the industry so that credit providers are required to lend only to those people who will be helped by the product will prevent the most vulnerable people entering into a debt spiral. This is a process that seeks to isolate that problem without the blanket red tape and regulation that would have destroyed a product—being these short-term loans—that are so useful for many people in the community who find it tough to make its meet.

Overall, this bill, as it is amended, is a useful and necessary bill. It addresses a problem area that we do have with payday loans and, with the amendments, strikes a better balance in fixing the problem without, as I said before, throwing the baby out with the bathwater. Credit should go to the industry and end users who lobbied their MPs and voiced their opposition to the original bill. A better outcome is being achieved here and now today due to their actions, and I commend the bill, as it is amended, to the House.

Mike Symon (Deakin, Australian Labor Party) Share this | Link to this | Hansard source

I speak in support of the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011. Payday lending is an issue that I have spoken on several times in this place because of the great impact it has had on a fairly large number of constituents within my electorate of Deakin. It is certainly not—as we have heard from other speeches in relation to this bill—related to just one part of Melbourne or indeed one part of Australia. Payday lending extends right across the country and has become very popular with some groups of people. This bill will amend the National Consumer Credit Protection Act 2009 to implement a range of national reforms of consumer credit. The initiatives included in the bill making it easier to seek relief from credit under the grounds of hardship and provide greater protections for consumers using reverse mortgages, including a statutory protection against negative equity, and new regulation of payday lenders.

As I said just a little while ago, I would like to focus on the impact of payday lenders, because the current practices of this industry are of great concern to me. Payday lending typically involves small loans of less than $2,000 and for terms of less than two years. The payday lending industry is best known for short-term cash advances to manage people's financial shortfalls. This legislation will introduce caps on fees and interest charged on such short-term finance. The majority of consumers accessing short-term credit are on low incomes. Some very good research has been done on this over recent years—for instance, the Caught short report, which was released in August 2011. This research was conducted by the National Australia Bank, RMIT and the University of Queensland. The report noted that 78 per cent of those using payday lenders were receiving Centrelink payments and over half had taken out at least 10 loans since first borrowing from a payday lender. The report found that borrowers largely have no access to other forms of credit, with some surveys finding that this is the situation for over 70 per cent of payday lenders. People who borrow from the payday lenders are often excluded from mainstream borrowing from the market due to a number of factors, and other speakers have spoken about this. These factors may include previous defaults, a difficulty in proving ongoing income or the fact that borrowers may be intimidated by banks and their processes. The most common uses for the funds advanced under the short-term loans are to meet day-to-day living expenses such as electricity bills, food, rent, car repairs and registration. The research found that there was minimal or negligible use of short-term loans for discretionary spending purposes.

Payday lending is a strong and growing market that has attracted many customers, but many of them are vulnerable. It is unfortunate that payday lenders are taking advantage of these vulnerable consumers and customers by charging rates that are well in excess of other mainstream lenders. As an example, Cash Converters, which is the largest payday lender in Australia, in the 2010-11 financial year provided 626,555 short-term loans amounting to almost $257 million in value. That year Cash Converters reported a record profit result of $26.7 million, a profit that had surged 27 per cent on the previous year. Its revenue for the period was up 47 per cent, with the main drivers for growth including an increase in personal loan interest of $4.2 million and establishment fees of $5 million. Cash Converters reported that the number of loan customer numbers grew 19 per cent in that year to 345,295 people. Cash Converters' own data shows that 46 per cent of borrowers of a cash advance loan received government benefits and 75 per cent of those customers had an income of under $36,000.

An examination of the costs charged by Cash Converters in Victoria for short-term loans shows why Cash Converters' profit has risen so rapidly. For example, charges for a short-term cash advance at Cash Converters include 35 per cent of the principal of the loan for an establishment fee. That is an incredible $35 fee for every $100 borrowed. But that is not all. Borrowers may also be charged a $16.50 default fee and other charges, such as fees for direct debit failures. The bulk of loans from Cash Converters are short-term loans, which are repayable in two or four weeks. Converting the 35 per cent charge into an annualised interest rate, the interest works out at around 400 per cent for a four-week loan. For unsecured loans of between $1,000 and $2,000, Cash Converters charge a $385 establishment fee, a $7.50-per-week account-keeping fee and a $33 default fee. For example, for borrowing $600 and paying that amount back in six months the total paid back would be $1,036. That is an incredible $436 in interest and other charges on the borrowed amount of $600 in the relatively short period of six months.

The Consumer Action Law Centre in Victoria explains that these short-term loans exploit the most vulnerable by sidestepping current regulation. They say: 'Lenders such as Cash Converters are circumventing credit laws by charging a fee rather than interest. This avoids legislation that caps interest at 48 per cent in Victoria'—and I know that applies in some other states as well. They continue: 'By charging fees the total interest rate paid on these short-term loans can be as high as 500 per cent, once all costs are included.' The industry has a number of other fees that are levied on payday borrowers. They can be things like late payment fees, which can be charged per day, per week or per month if the payment is late and can be up to $75 per day, and default interest charges, where interest may continue to be charged at the same rate, or at a higher rate, once a borrower has missed a payment. In some cases these default interest rates can be as high as 47 per cent. Payday lenders can also charge a direct debit dishonour fee, which can be up to $150 per dishonour. Payday lenders can also levy loan-rescheduling fees, which may be charged when a customer is unable to meet payments as they fall due under the repayment schedule. The loan reschedule fee may occur independently of, or in addition to, default fees.

The other key concern I have about payday lending is the practice of using new loans to pay off previous loans. An individual may borrow an amount and within a short period be unable to make the next payment, due to other bills. The payday lender can then reschedule and extend a new loan, with further charges and fees. This practice can lead to the individual being tied up in debt and unable to pay off their short-term loans. An article in the Herald Sun on 19 October 2011 revealed that Cash Converters was facing proceedings in the Magistrates Court of Victoria over the case of a disability support pensioner who had received 64 short-term loans over a three-year period. Another example of consumers being caught in a debt trap through such short-term finance includes a case reported in the Australian Financial Review last year about a lender who started with a loan of $170 at Cash Converters. Three years later, and after 64 loans, the debt had ballooned out to a grand total of $15,450, including $5,407 in fees. Allowing for the fact that the money was always due in a month, the annualised interest rate on each loan was about 425 per cent.

This legislation is about bringing to a halt some of these practices and bringing fairness to payday lending. It is obvious there is a growing demand for short-term borrowing, but this industry most certainly needs better regulation. The current situation is untenable, as the customers relying on the industry are quite often vulnerable and in no position to fight these fees or do not know where to or how to shop around for a better deal. This legislation will bring urgently needed regulation to fees and charges in this industry. There will be caps on fees, including a cap on establishment fees of 20 per cent of the loan amount and a four per cent cap on monthly fees for unsecured loans of less than $2,000 and less than one year; a midtier cap of 48 per cent plus $400 for loans between $2,000 and $5,000 and a term of two years or less; and a cap on the total amount recoverable, so that even with default fees or other penalties the most a person will ever repay is double the loan amount, 200 per cent. The legislation will restrict the refinancing of payday loans or providing a new payday loan. The risk of a debt spiral is to be addressed by introducing further responsible-lending obligations. A presumption would be introduced that a refinance is unsuitable where the borrower is already in default or where it is the lender's third loan in the last three months. The restrictions on refinancing will address the risk of debtors entering into that debt spiral, and that is something that I have explained several times in this place in previous speeches. So many people do not understand the contracts that they are signing when they walk in the door, and, although some of us may have more financial knowledge than others, in many cases it is quite simply a case of needing the money now and signing whatever piece of paper has been put in front of the person who needs the money. Certainly cases like that have come to my electorate office.

Under this legislation, payday lenders will also have to provide information about alternatives to their potential borrowers or consumers. This is a very important point. Improving disclosure about the availability of alternatives will help consumers to make better and more informed financial decisions, and with that information to have the ability to seek out lower cost alternatives to relatively higher cost short-term credit contracts. There are currently a range of alternatives to high-cost short-term loans, and this legislation will ensure that borrowers are informed of these choices. Already, alternatives to payday lenders include Centrelink loans and advances on payments, utility hardship programs and some microfinance products. A recent survey by the Consumer Action Law Centre found that 21 per cent of consumers had used a payday loan to pay utility bills, but in fact most utility providers will have hardship arrangements to help people pay off their bills over time. Surely that would be a preferable option for most people, rather than getting into debt at high rates of interest?

The federal government provides alternatives to payday lenders such as the No Interest Loans Scheme—NILS—which is designed for people on welfare benefits. The scheme offers loans of up to $1,200 to people on low incomes with healthcare or pension cards. There are no interest charges or fees on these loans. This scheme is run by Good Shepherd Microfinance in partnership with the National Australia Bank and the federal government. People who receive social security payments such as the age or disability support pension, Newstart, parenting payment or youth allowance can request Centrelink advances, where recipients can draw forward payments at no cost. Also, families that receive family tax benefit part A can request an advance on their payments from Centrelink of up to 7.5 per cent of their annual payments, capped at $1,000.

Many non-profit community groups have expressed support for greater regulation of payday lending—groups who see the impact of payday lending every day, groups such as the Uniting Church, whose spokesman, Mark Zirnsak, called on the government to close the loophole and protect consumers from high-interest schemes. He said:

These pay-day loans are the wild west of lending.

Catriona Lowe, co-Chief Executive Officer of the Consumer Action Law Centre, said:

These type of loans do not help a person who can't meet the day-to-day cost of living.

Eleven organisations have signed a joint letter supporting this legislation, including the Consumer Action Law Centre, the St Vincent de Paul Society, Anglicare Victoria, CHOICE, the Financial and Consumer Rights Council Inc., the Good Shepherd Youth & Family Service, the Brotherhood of St Laurence, Financial Counselling Australia and EACH's—Eastern Access Community Health—social and community section, an organisation based in my own electorate of Deakin. To quote Anglicare Victoria:

Payday lending practices are in urgent need of reform to protect low income earners and vulnerable families from becoming trapped in debt. Anglicare Victoria provides financial counselling to more than 10,000 Victorians every year and we have seen firsthand the impact excessive fees and other charges can have on people who see no other option but to use short term loans.

There is a clear case to reform the industry of payday lending. Community organisations know the impact that these excessive fees and charges are having on our community. This bill will place reasonable regulation on an industry that is making incredible profits on the back of low-income earners, low-income earners who in many cases feel that they have no other options when they need to borrow.

As I have said, I certainly hope that this gets some of the message out to people who are in that situation that there are alternatives. I think that is one of the good measures in this bill, that it provides information to be put out to people who may need that sort of finance in a hurry. I commend the bill to the House. (Time expired)

Steven Ciobo (Moncrieff, Liberal Party) Share this | Link to this | Hansard source

If there is one fundamental relationship that everyone involved in finance or the markets understands it is the relationship between risk and reward. The fundamental proposition that you can never escape is that the higher the risk the greater the reward, and vice versa: the more reward there is for taking more risk. So it is with those who operate in the segment of the market that the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 deals with, that segment of the loans market that is inherently risky because of the customer base that accesses these types of loans.

My concern with this bill—and I note at the outset that the coalition is not opposing this bill that the government has put forward—is that this is yet another step on the journey in this country that sees us continuing to impose regulation on the basis of it being a social benefit in the community. I have put on the record now on a number of occasions my serious concern that as a nation we have become obsessed with regulating every single aspect of people's lives on the basis of saying from a paternalistic point of view, 'This is in your best interests.' This is simply another step down that pathway.

It seems to me as a member of the coalition, and as someone who genuinely believes in smaller government not big government, that a better way to address this problem would be to adopt the approach that the best way we can deliver maximum benefit for consumers is through the promotion of healthy competition. If there is a reason why consumers, when accessing payday loans and other types of small amount credit contracts, feel like they are being overcharged, and if there is a concern that exists among those who operate in this space and those who provide financial counselling that consumers are being taken advantage of, my response to that is that it is obviously because the market is not competitive enough. In a more competitive marketplace those that would seek to basically extract maximum profit from consumers would be unable to do so because consumers would substitute their product offering with someone else who is a provider in the marketplace and is more reasonable. That is the solution to concerns that people have about consumers being gouged by providers who seek to obtain maximum profit.

On the face of it legislation like this always seems superficially attractive. On the face of it legislation that is built upon the basis of saying, 'There is a social harm that is being done to the vulnerable in our community so therefore we the government will step in and address that social harm,' always seems superficially attractive. But at what point do we as legislators go to the character of our nation and say, 'How much regulation is too much regulation?' I guarantee you one thing: I do not think in the 11 years I have been in this chamber I have ever heard a single minister or participant stand in this chamber and say, 'We are introducing all this new regulation because we think it is a bad idea.' There is a newsflash: no-one has ever come in and said, 'We're going to introduce this regulation because we think it's a bad idea.'

Every piece of legislation that moves through this House and the chamber upstairs is built on the premise that it is for the good of the people. I think, as I have said on a number of occasions, that enough is enough. We need to take a stand that says, 'We do not need to regulate every aspect of people's lives.' The way to achieve a solution where there is excess interest being charged and where there are access fees being charged is to drive the best consumer outcome by having a more competitive marketplace, not by having increased compliance and regulation. Ultimately, the consequence of more regulation and increased compliance costs is that the consumer pays more. It is innovation that withers and fundamentally the consumer ends up being in a worse position than they were to begin with.

What we see is the reallocation of harm from perhaps being concentrated on one per cent of the marketplace to now being spread across the consumer segment. Yes, you do not see the imposition of harm on one or two per cent of the marketplace but, rather, you spread the imposition of harm across the entire marketplace. The net impact of that in the marketplace is for the worst. But the government stands up and says, 'This is a better outcome because now we have stopped one or two per cent being adversely affected in a more significant way.' This is without realising that by spreading the harm across the entire marketplace we as a country are, in net terms, in a worse position.

I acknowledge, as I said, that the coalition are not opposing this bill, but I do not think this is a good bill. I do not think it is a good bill because it is typical of the response of both sides of the political aisle—I am not going to turn this into a partisan comment—whose first reaction is always to say, 'More regulation,' in response to consumer concerns that are raised by certain advocacy groups who are bone fide in outlining and being advocates about their concerns but in my view do more fundamental injustice to the Australian people by effectively clearing the pathway for more and more regulation.

I would love to hear from the minister responsible arguments about why an increasingly competitive marketplace—one in which we allow lower barriers to entry so that more people can operate in the space and there can be more loans available and greater access to these types of small-amount credit contracts—will not provide the kinds of protections we are talking about for those consumers that need to take advantage of these kinds of options. This is especially so when the speaker in this debate immediately prior to me outlined the alternatives available. The previous speaker outlined that there are, for example, advances available through Centrelink and payment terms usually with utility providers and the like. I would love to hear why consumers are not empowered with that knowledge and feel that they must resort to payday lenders. If there are payday lenders out there in the marketplace, I say: let's have more providers filling the space so that no-one is able to inflict price gouging on consumers, because consumers say, 'Why would I go to that person who charges obscene start-up costs or establishment fees or an obscene interest rate when I can choose to go to another provider?' That is the solution. Regulating the amount of interest, regulating the number of days and regulating establishment fees and the like always seem superficially attractive, but it is my contention that in the long term they do more damage than good.

I acknowledge that the government—and it is unfortunate that it came to this—had to make around 79 amendments to their original piece of legislation. I think it is good that the government have done that, but to me it underscores how misguided the government were initially with respect to their original piece of legislation.

I was contacted by large numbers of providers in the space who outlined their concerns to me that, had this bill gone through as it was initially drafted, the consequence would have been that they would have withdrawn from the market. It runs contrary to some of the popular views out there, but these are not people who are despicable, these are not people who are seeking to price-gouge and these are not people who are sending around merchants of fear and intimidation to extract the maximum amount of interest out of their customers. In most instances these are genuine business people who are providing a product in a segment of the consumer market that is particularly risky. They employ people to operate in this space. Their business—in many instances they are family businesses—plus the employees that they have, were directly threatened in terms of their commercial viability by the original iteration of this legislation. So I welcome the amendments, although I do that in the context of not being particularly supportive of more and more regulation. My concern with respect to these people operating in this space—and this was put forward to me by a number of those providers in my electorate of Moncrieff, on the Gold Coast—is that, had they left the marketplace because by way of regulation and legislation they would no longer have been commercially viable, that market segment that would have been left vacant and unprovided for would have been met by, for example, bikies moving into this space. So, based on the original piece of legislation, we would have had a government that said, 'We're here for you, consumer, to make sure that you're not taken advantage of and that price gouging doesn't take place,' and the direct consequence—mentioned to me not by one provider but by five or six—would have been that they would have left the marketplace. So the so-called protection the government would have delivered to those customers who need to take advantage of payday loans would have been to throw them to the wolves. It would have meant that they were actually obtaining money from so-called payday lenders that in fact would have been fronts for bikie organisations and other criminal gangs, who I absolutely guarantee you would not be taking time to know their client or to check whether or not their clients could repay the loan but rather would absolutely deal with threats of intimidation and violence if loans were not repaid. So thank goodness, frankly, that the government has moved a swag of amendments to its own legislation so that common sense, hopefully, prevails. Increasing the establishment fee from 10 to 20 per cent and interest rates per month from two to four per cent for small-amount credit contracts is the kind of amendment that we are talking about where I think it has taken decisions that will be of benefit to consumers.

But I go back to the fundamental proposition with respect to the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill, which is that I fundamentally believe that the concerns that have been raised could be addressed by lowering barriers to entry and by making it easier for there to be multiple providers in this space. That is how you bring about maximum consumer benefit: give consumers options. Make suppliers compete to be in the space. Deny those suppliers in the space the opportunity to price-gouge by giving consumers ability to choose who they want to go to. The more providers in the space, the lower the margins. Instead, this government has adopted the approach of saying, 'What's required is more regulation,' so in fact the barriers to entry are actually increasing.

So time will tell whether this was a decision that is in the best interests of consumers. There may be in the future fewer examples of one, two or more victims of unscrupulous payday lenders who seek to price-gouge. But I leave this question: how will we truly measure the general net detriment that all consumers face as a consequence of increased compliance and increased regulation? It is my contention that we will not be able to measure that, but I have no doubt that the net impact of this legislation will be to visit a greater degree of cost on all consumers in the space, rather than the current situation, which sees fewer people paying less.

Sid Sidebottom (Braddon, Australian Labor Party, Parliamentary Secretary for Agriculture, Fisheries and Forestry) Share this | Link to 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.

Greg Hunt (Flinders, Liberal Party, Shadow Minister for Climate Action, Environment and Heritage) Share this | Link to this | Hansard source

I refer to the contribution from the member for Braddon who eloquently outlined the cycle of debt as each year an entity borrows more, has higher levels of interest rates and then borrows to pay the interest rates. This has of course been the story of the Australian government over the last four years: annual deficits building to national debt, building to interest and all of that interest for the current year being met through further borrowing, which future generations will be saddled with and for which they will have to pay in their time.

But let me turn to the specifics of the Consumer Credit Corporations Legislation Amendment (Enhancements) Bill. The purpose and the intention of the bill is to ensure that the cycle of indebtedness is not exacerbated. It is a notable and important perspective. The goal is to weed out the shonks and the charlatans who prey upon those who are vulnerable, again a noble purpose. The fear is that as it was originally drafted this bill would have had an impact not necessarily on the shonks and the charlatans, the predators on the fringes of the industry, but on those who are legitimate microfinance providers. On that basis, we have put forward a suite of amendments designed to, intended to and aimed at protecting the genuine legitimate microfinance providers who play a critical role in helping those who may not have access to mainstream banks and who may not be able to provide the collateral. The message is get rid of the shonks, but do not destroy the legitimate microfinance providers.

We have been engaged in a long and arduous discussion with the government, with those who would not have dealt on their side with the genuine by-product of their legislation as to legitimate microfinance providers. To that extent I want to base the vast bulk of what I have to say on the words of Helen and Jeremy Spink, who are constituents of mine who operate a small microfinance business in the neighbouring electorate of Dunkley. Helen Spink wrote to me recently, and I beg the indulgence of the House to quote at length from her letter:

We own and run Cash Loan Money Centres, a micro finance business, in Young Street Frankston. We took out a large mortgage in 2006 to purchase our franchise business to enable us to see out the latter years of our working life serving people in our local community. We provide small amount loans of between $200 and $2000 over terms of 3, 6, 9, or 12 months. Our customers are more than satisfied with our affordable repayments and the flexible terms we offer.

In short, at this point they are serving the community. Helen goes on:

We have built wonderful friendships with many of our customers. Everyone that walks through our door is treated with kindness and respect, and consideration is given to all of their circumstances, not just their need for short term finance. We have been able to support many through major crises in their lives. Consumers from all walks of life have unexpected needs that have to be met. Our customers value freedom of choice and the ability to make their own decisions—this gives them dignity and self-respect.

Here I divert from Helen's letter and say to the government: do not for one moment detract from the ability of people who struggle and who are vulnerable to seek out their own 'dignity and respect', to use Helen's words. I continue with Helen's warnings:

Under this new legislation, most lenders like ourselves, will not be able to continue. The legislation is unworkable, confusing, and renders our business totally unviable. With borrowing costs, Credit licensing costs, Private Indemnity Insurance costs, and membership of an external dispute resolution scheme, not to mention wages, rent, and running costs, we cannot make a living under the cap rules in the new legislation. We don't understand why the government bothers to regulate the industry, only to sabotage its existence. This will mean job losses in departments of the regulators, rental premises empty everywhere, small businesses closing, staff losing their jobs, and so on.

Helen then continues:

We go out of our way to ensure a loan is suitable and affordable for a customer. We value them too much not to and its our money we are lending! We need it repaid and we try to encourage our customers with the value of honouring a commitment.

This is the value to which Helen and Jeremy are referring, not just of their own endeavours but of that heightened sense of independence and self-respect which they are attempting to give those who work with them. It is a noble purpose and it is designed in a way to give those who are most vulnerable an opportunity. As a country, we encourage microfinance programs through our aid budget. As a country, it would be folly not to believe that those on the fringes, those who are most vulnerable, should have the same rights as those which we are providing and encouraging for people who are most vulnerable in developing societies. The letter continues:

We stand to lose so much if this legislation is passed. We lose our business, our customers, our staff, and the prospect of finding new jobs as we approach 60 is frightening to say the least. But what upsets us most is the anguish on our customers faces when we tell them we may not be around much longer. We cannot tell them where they will go. Most don't fit the criteria for the Not For Profit loans or the lead time is too long for their immediate need.

We applaud the new regulated industry to weed out any unscrupulous loan sharks. Consumers have the right to be able to obtain finance in a safe, honest, transparent and responsible environment. Unfortunately we fear the consequences if this legislation is passed. Consumers will always need money for the unexpected and the emergence of unlawful operators is almost a certainty. The very law that was meant to protect our customers will in fact do the opposite.

Helen continues:

We feel cheated by Mr Bill Shorten. He has proven not to be a person of integrity. It appears by this whole process that all he is interested in is his own political goals. … he obviously has his own agenda and is extremely arrogant in his pursuit of it. The power that one person wields can potentially be catastrophic for many. It would be nice to think that we all have a savings stash for those unexpected expenses. The reality is that our customers don't and family support is often not an option either.

…   …   …

This government seems hell bent on destroying small business and hurting ordinary Australians. Why wipe us all out when you can simply prosecute or de-licence the few rogue lenders that operate in contravention of the Act.

Having set out Helen and Jeremy's letter, let me say that those comments were made before the government accepted the amendments we have proposed. I hope that those amendments and the government's acceptance of them deal with Helen's concerns. I have, however, deep concerns having witnessed the Home Insulation Program, the Green Loans Program, the Green Start program and the repeated random changes in solar hot water policy and solar PV policy. This is a government which has not understood the human consequences of its decisions time and again.

We are showing good faith to the government, having moved a range of amendments which the government appears set to adopt. But my concern is for Helen and Jeremy and their clients and customers. It is up to the government to ensure that everything of which they have warned does not come to pass, and we will hold this government responsible if these things do come to pass.

Debate adjourned.