Lisa Singh (Tasmania, Australian Labor Party) Share this | Hansard source

I rise to speak to the Consumer Credit Legislation Amendment (Enhancements) Bill 2012. This bill is the next step in the government's important agenda of reform of consumer law across this country to enhance protections from predatory trading practices. This is a journey that I was happy to see commence at the national level during my time when, back in 2008, I was a minister for consumer protection in the state parliament in my home state of Tasmania. It is good to see that it has now come to the Senate and that I am now here to be able to contribute to its fruition at this point in time.

When it comes to finance and lending, predatory trading practices do not just rip people off, they also can fundamentally change the economic security and the situation of an individual's life, especially those who are already in a challenging financial circumstance. The lending practices to which I refer are those which offer small to medium amounts of money for a short term at a very high rate of interest, or a set fee—a market which I understand is worth some $500 million annually in Australia. These loans are typically designed for people who need to cover off on, maybe, bills at home or immediate debts to pay day-to-day expenses, or those coming up in the days to weeks ahead. They are then taken out on a security of anticipated income, hence the name 'payday loans'.

These debts are most typically unexpected expenses—things like car repairs or replacement of white goods and household essentials. In some cases, they are utilities expenses or rent costs, but in almost all cases they are taken out by people who live very much hand-to-mouth with as little capacity to absorb unexpected financial shocks down the line as they are at the time they take out the loan.

While payday loans help customers to deal with immediate financial issues, according to the Caught short report from the RMIT and the University of Queensland, only 20 per cent of borrowers considered themselves better off after using such short-term credit. Half actually considered themselves worse off, with a number caught in a vicious cycle of the extra expenses incurred in repaying the loan then requiring new finance to be sought. Worse, these loans have historically been marketed as cheap and easy access to money; we have all seen the signs. They either minimise or fail to mention the high level of interest, fees or other costs associated with taking out such a short-term loan. Lending assessment usually does not involve the kind of rigorous credit and means checking that one might expect from a robust finance sector.

In too many examples payday lending operations leave consumers with the impression that such loans are the best and the easiest option for them at that point in time. Rarely is this the case, and we are all aware of that. Indeed, about 80 per cent of payday loan customers are receiving Centrelink payments or pensions and would have access to alternative low- or no-cost options in the form of things like no-interest loans, applying for an advance payment on a regular payment from Centrelink, or something of that nature. The prevalence of consumer credit suppliers and the relative simplicity of the process, though, has meant that payday lending has very much become a first option rather than a last resort.

There is no doubt that the demand for consumer credit is high and that there are a number of legitimate and genuine purposes behind consumer credit operations. So long as they are informed about the market and their options, consumers should be entitled to choose the credit option that best suits their situation. But the main point of that, of course, is that it is so long as they are informed. There is an undeniable need to protect the most vulnerable in our community—those in vulnerable circumstances—from extraordinary costs and to provide information on alternatives to those who would turn to those types of payday lenders in the first place.

The bill before the Senate goes a long way to providing those people who have run into cash-flow difficulties and have the need for some form of short-term credit with access to a safe and fair industry. It will also help to ensure that consumers are fully informed of their options and the ramifications of taking out a short-term loan from a payday lender. This bill includes a national interest rate cap, which will limit the cost of credit for consumers. For loans of less than $2,000 and 12 months duration, which constitute the majority of short-term loans—I know that in my home state of Tasmania that is certainly the case—the cap will be costs of 20 per cent of the credit amount plus four per cent of the credit for each month of the loan contract. For mid-tier loans of $2,000 to $5,000 and of two years duration or less, a cap of $400 on establishment fee and 48 per cent per annum interest will also apply.

These caps fall in the mix of comparable international models, which range from Canada's 17 per cent cap to some US states which cap rates at 35 per cent. Therefore, lenders will no longer be able to charge exorbitant fees of one-third or one-half of the total amount of credit that is provided. No longer will people who borrow $300 for a week be hit with $100 in charges for a seven-day loan. Indeed, loans with terms of 15 days or fewer will be prohibited under this bill, and responsible lending requirements will be extended to brokers in this industry. Those obligations include a presumption that a credit contract would be unsuitable where it would be the borrower's third loan in the last three months, pushing the burden of proof for suitability to the contract parties. Lenders and borrowers will both have to demonstrate that lending is responsible. There is a presumption that the loan has to be suitable and responsible. Not only will lenders no longer be able to charge these exorbitant fees; they will have to demonstrate responsible lending requirements. These obligations include the presumption, as I mentioned, that a credit contract would be unsuitable where it would be the borrower's third loan in the last three months.

The reform package also introduces a regulation-making power to allow use of direct debit to be suspended, avoiding the risk of fees accruing to a debtor's account should repeated direct debits for loan recovery be unsuccessful. Direct debit fees have very much contributed to consumer credit charges compounding and eventually spiralling out of control. We know how direct debit works. If the funds are not there in the bank account, on top of the continuing direct debit set-up that has been formed to pay out these exorbitant loans and fees, the consumer is then also whacked by their bank, who also then puts a fee on the fact that they did not have enough funds in the bank to cover those outgoing direct debit expenses.

Direct debit fees have very much contributed to consumer credit charges compound and eventually, as I said, spiralling. One example that was published in Anglicare Tasmania's Pay day lending in Tasmania report says:

A 54 year old man recently separated and on a carer’s pension had taken out two unsecured loans for $100 each in separate instances to help with food and fuel, as his rent of $320 did not leave enough to live on. With the first loan he was charged an extra $11 for a card with his photo. His repayments were $74 a fortnight for two fortnights. The repayments for the second loan were $64 a fortnight over two fortnights. Unfortunately he did not leave enough money in his account for the second payment on his second loan and was charged a $16 fee by the company and a $30 default fee by the bank. He has now found himself overdrawn by $125 and is having difficulty in repaying the loan. He needed to access an emergency relief agency for food and fuel.

That is a very real example of how the direct debit system under these payday loan arrangements can spiral out of control at both the payday loan end but also at the financial institution end. That is why this bill addresses that issue, as I referred to.

Some lenders will be more affected than others by this bill, depending on the extent to which their current practices and costs comply with this national law. Those who approach their task responsibly and do so with due diligence will continue to be able to offer the services at a reasonable cost to consumers and with a reasonable return for their business. But those lenders who tend in my view towards predatory practice will need to change their approach. Those are the types of lenders whose business model depends on repeat custom with borrowers taking out multiple or consecutive loans in order to pay off interest and fees from previous loans.

These reforms need to be coupled with ways to inform consumers that they have other low-cost options to assist them to meet their day-to-day expenses, and it is incumbent not only on government but also on the industry to make people aware of the fantastic work of schemes like the no-interest loan scheme in my state of Tasmania, which I might add have an extremely low default or non-payment rate. We must do better in promoting the electricity and telecommunications hardship programs, which are already a mandated part of the utilities markets. That is why under this legislation small amount lenders will be obliged to disclose alternative options to their customers, not just hide the fact that they are not the only option out there. We must do better to promote the notion of financial literacy, especially in response to the precarious and uncertain employment conditions of a casualised labour market. Strong and consistent budgeting must be a feature of people's lives. Managing money and anticipating costs is part of that challenge, very much so. Again, I know that there are a number of community organisations providing that assistance to assist people with budgeting their finances in their lives. But requiring small amount lenders to make customers aware of the ASIC financial literacy website is one way that they can support these customers. That is moneysmart.com.au. Again, that is an important step towards these goals, among other alternatives that they can provide.

I am proud to be part of a Labor government that is tackling this issue and protecting people from lending practices that are reckless or exploit people's financial hardships. I am proud to be part of a Labor government that took up the challenge to balance access to finance and protection for customers. When the opposition in government identified this issue as early as 2001, it still did nothing for the next seven years of government to assist those in this low-income predatory environment. It is only a Labor government which has been willing to do more than pay lip-service to this issue and actually address those difficult policy areas which lead to issues of inequity and unfairness. I think this is one of those policy areas that very much demonstrate inequity and unfairness involving some of the most vulnerable people in our community, those on low incomes trying to get by day to day and pay their bills and budget their finances, their finances being of a very low income, but at the same time facing the glitz of the payday lenders trying to entice them with a very easy, quick fix option which then ends up being a spiralling downwards once they enter the situation of having to pay the high fees and the high costs in repaying the loan. On top of that there is the setting up of a direct debit system which, as I demonstrated in the example from Anglicare Tasmania, can end up leaving them in a much worse position than when they started in the first place.

I commend this bill to the Senate and, as I said, I am very proud to be part of a Gillard Labor government that is tackling the payday lenders and addressing the needs of low-income consumers in Australia.