Nick Xenophon (SA, Independent) Share this | Hansard source

I will follow on from the considered comments of Senator Singh in relation to this matter. We need to look at the causes of why so many people are seeking payday lending. We need to look at why there has been an explosion in the payday lending market in recent years, particularly in my home state of South Australia. There is no doubt whatsoever that the introduction of poker machines in pubs and clubs has led to an increase in financial hardship and an increase in financial damage for individuals and families, and that is why I believe that poker machine reform, one-dollar bets in particular with a $120 an hour maximum loss, would make a real difference in the sort of business that these payday lenders generate. So I indicate my support for the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2012. I have been discussing this issue, pushing for tighter restrictions on small credit loans and in particular payday lending for many years. There are significant concerns that these types of loans when offered by unscrupulous lenders can take advantage of people who are already in financial hardship. I think we need to look at the causes of poverty and the reason why so many people are now seeking to avail themselves of payday lending.

The debt cycle of using credit to pay off debts and therefore accumulating even greater debts is a vicious one. I believe the amendments proposed in this bill will go some way towards controlling unscrupulous providers and limiting harm. However, I am concerned about the enforcement of these provisions. The current bill relies on complaint reports to ASIC, which will then investigate breaches of the law. I see that Senator John Williams is in the chamber. I think he is a person who has had considerable experience in dealing with ASIC over the whole issue of liquidators and unscrupulous lenders, as noted in his contribution to the recent Senate inquiry into this. Relying on ASIC is not the be-all and end-all, as I think Senator Williams has established.

Instead, I believe we should be focusing on a more proactive approach to enforcement. Last week I had discussions with Veritec Solutions, the company that developed an electronic database currently operating in Florida. I am very grateful for the time that I spent with the representatives from Veritec. The information that Veritec provided to the Senate committee that looked into this is worth reflecting on. In their submission, Veritec said that they were:

… specifically commenting how effective enforcement at little to no cost to Government can be achieved in order to produce the desired policy positions taken by the Amendment.

That is, these amendments to the consumer credit act. Veritec recommended:

… that the Committee consider a real-time verification system to efficiently and effectively ensure compliance before a covered transaction is entered into with an Australian consumer.

Veritec has gone into great detail on this. I believe that what Veritec has put forward has a lot of merit. That does not necessarily mean that we go down the path of getting Veritec to do this, but something of that nature—in other words, if not Veritec then another company that can provide the same sort of outcome or, if it can be provided, within government. But it seems that Veritec has a proven track record on this.

It is important to note that Florida has a tightly regulated and booming payday loans industry, with an average of 4.7 million transactions a year between 2004 and 2009. According to a paper by researchers Michael H. Anderson and Raymond Jackson at the University of Massachusetts, Dartmouth, headed 'Perspectives on payday loans: the evidence from Florida', this database real-time reporting solution was very effective. The paper focused on:

… the payday loan experience in Florida where the statute regulates the interest rate, fees, loan size and the protocol for resolving a loan that cannot be repaid at maturity.

According to this paper:

The Florida statute prohibits a consumer from having more than one payday loan at a time. Under state supervision, a real-time database is maintained of all outstanding transactions. When an application is submitted, the lender enters the database to verify that the borrower has no current open loan, is not in arrears on any past loan and is therefore eligible to be approved at this time. Once verification is successful, the borrower is still required to sign a statement confirming that no payday loan is outstanding and, in addition, give assurance that no loan was successfully terminated within the past 24 hours. The amount of the new loan, excluding all fees, is limited to $500.

That is what they do in Florida. That is something that Veritec has been involved in, and it seems that this independent analysis from Anderson and Jackson at the University of Massachusetts indicates that it has worked. It has been effective. My concern with this legislation from the government, though a well-intentioned, useful piece of legislation, regards its efficacy in the absence of ensuring some real-time reporting and having a database.

Only about two per cent of the value of these loans—some $2 billion—is considered lost or not repaid each year. That is pretty good. The aim of an online database is to allow small credit providers to access real-time credit information to ensure that applicants satisfy the requirements for a small credit loan. It can also be used to ensure that the credit contract in question is in line with the regulations. There are clearly benefits to both sides under such a system. First, it allows providers to be certain that they are lending responsibly. The database provides information not only on the applicant's credit history but also on whether the applicant currently has any outstanding loans, as Florida statute prohibits applicants holding more than one payday loan at a time, as set out in the paper.

Secondly, the system provides security for the applicant. They know that the terms they are receiving are in line with regulations, and they have the comfort of knowing that the sector is appropriately managed and controlled to cut down on illegal or immoral lenders. It is likely that a combination of good regulations and good enforcement has led to the strength of payday loans in Florida. These factors make them a much safer and more robust product overall, consistent with the intention of the legislation before us today.

A House of Commons report from February this year specifically recommended that the British government introduce legislation to establish an online database to monitor payday lending. That report was the House of Commons Business, Innovation and Skills Committee's Debt management: fourteenth report of session 2010-12, and it was ordered by the House of Commons to be printed on 21 February 2012. That report is very useful, and it says:

It is clear that credit checking is a key factor in ensuring appropriate lending to consumers. We are therefore deeply concerned with the evidence that payday providers are not recording all of their transactions. Examples of credit databases that do capture payday lending are available in other countries and we recommend that the Government require industry to introduce similar models in the UK as a matter of urgency.

That is what the House of Commons said. They looked at what Florida is doing.

I understand that this legislation has been a long time coming and that it has been the subject of much discussion and consultation. However, I believe the aspect of enforcement cannot be ignored, and I believe it has been ignored with this legislation. It was my intention to move a second reading amendment calling on the government to request ASIC undertake a study into the appropriateness of introducing such a database in Australia. After receiving an undertaking from the government to approach ASIC and request this report I will no longer be moving the second reading amendment that I have circulated. However, I seek to table a letter that I have received from the Minister for Employment and Workplace Relations, the Minister for Financial Services and Superannuation, the Hon. Bill Shorten. It is undated, but I received it last week, and it is in relation to this piece of legislation. I seek leave to table this document.

Leave granted.

The document from Minister Shorten refers to the proposed second reading amendment, which says that while the government does not support a second reading amendment to the bill the minister is prepared to write to ASIC requesting a report on similar terms. That is very pleasing, and I am very grateful for the engagement with the minister's office in relation to this.

The minister proposes that paragraph A of what I have requested be limited to the enforcement provisions in relation to small-amount credit contracts in the bill, and that is fair enough. He will also direct ASIC to consider in its response whether or not there are any limitations in the amendments that would prevent ASIC from taking court action or severely restrict its capacity to do so, including the inability to obtain evidence in order to establish the requirements necessary to prove an offence. This would focus attention on particular concerns raised by stakeholders, says the minister. He also undertakes to make this request within three months of the commencement of the provisions to the bill.

I will be asking the government to set out what time line it would like for the reporting of this bill, because I think it is important. This bill, although it is well-intentioned, will not do the work it is meant to do unless there is enforcement. That is why the House of Commons debt management report was very clear on this matter. If I go back to the House of Commons report, on page 17 it says the consumer credit counselling service informed the committee that data coming into its social policy team raised questions 'about the level of credit checking that goes on' and why individuals who are struggling to repay their debts were still able to get payday loans. That is a very key issue. The House of Commons committee actually recommended that payday lenders be required by law to record all loan transactions on such a database, so that consumer credit histories can be accurately monitored. The House of Commons has got it right, the state of Florida has got it right, and academics at the University of Massachusetts have got it right; but this legislation has not quite got it right in terms of insisting on this. I am concerned that this will be a piece of feelgood legislation that sounds good, is well-intentioned, but will not do what it is meant to do without having that technological solution.

There is no doubt that, for many, payday loans or small-credit loans are not a good option. But the factors in this bill, if strongly enforced through an online database or similar system, will make them a viable financial option for many people. I look forward to seeing the report from ASIC. I hope it will make a valuable contribution to this debate and will give us another opportunity not only to discuss these issues but to seek to amend the legislation to ensure that the online database, that sort of reporting, becomes a key aspect of the enforcement of this legislation. One of the questions I will ask the government is whether, if there is a recommendation, this aspect of enforcement can be dealt with now without any further amendments to the legislation. That is a real issue that I want to explore in the committee stage.