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Category: Consumer Finance / Consumer Protection / Regulation / Small Business

Government tightens rules on pay day loans and consumer leases

Monday, 28 Nov 2016 15:09:40 | Michael Janda

Cash Converters and other short-term small-scale lenders are facing tougher regulation. (Giulio Saggin, file photo: ABC News)

The Federal Government is planning to tighten laws around small consumer loans and leases in an attempt to prevent exploitative practices.

Minister for Financial Services Kelly O'Dwyer released the Government's response to a range of recommendations designed to prevent extremely high lease charges and excessive lending, especially to low-income customers.

"Implementation of these recommendations will ensure that vulnerable consumers are afforded appropriate levels of consumer protection while continuing to access SACCs [small amount credit contracts] and leases," she said.

The key change for small loans — such as pay day lending — is that such debts in total cannot be more than 10 per cent of a customer's net income.

Currently, customers who receive most of their income from Centrelink are limited to borrowing up to 20 per cent of their income.

The most widespread changes relate to consumer leases, previously a largely unregulated industry where there was previously no cap on charges.

The Australian Securities and Investments Commission had reported instances where some consumers had been charged lease fees equivalent to an interest rate of 884 per cent per annum.

This will now be limited to 4 per cent per month of the baseline price (generally the recommended retail price), which the Consumer Action Law Centre said will allow an effective interest rate of up to 84 per cent per annum.

Consumer leasing firms will also be allowed to charge a fee for delivery that is outside the cap and, in some cases, a fee to recover installation costs.

The total value of leases any one customer can take out will also be limited to 10 per cent of their net income.

Consumer leasing sector warns of business failures, job losses

Andrew Gresswell, who runs the lobby group for the majority of consumer leasing firms, the Consumer Household Equipment Rental Providers Association (CHERPA), said Kelly O'Dwyer had not personally met with his organisation, leaving it up to her staff.

He added that the two key consumer leasing recommendations would likely see almost 400 small to medium-sized leasing firms close, and cost around 1,500 jobs.

"Either of those two recommendations, as they've been supported by Government and they're going to go ahead with them, either of those two will see them completely gone, and so the question then will become who is going to provide these essential household items to consumers," he warned.

However, Gerard Brody from the Consumer Action Law Centre said the limits proposed by the Government remain very generous.

"If you can't make money charging those rates then you probably shouldn't be in business," he told the ABC.

Mr Gresswell said the high charges reflect the risk of loss or damage of their goods that his members face, and also the costs of servicing customers.

"Yes it's expensive, but those expenses are the support of the item over that time," he said.

"Nobody wants to charge high interest, but the problem is we're dealing with a difficult segment of society in that they are higher risk and there's lots of repairs needed over that period of time, and phone calls, support."

Mr Gresswell said his members average a profit margin of around 7 per cent of their revenue, which he described as low.

Mr Brody said the reforms should go further and impose a blanket 48 per cent per annum interest rate limit on all consumer lending and leases, but the Government's initial moves are a good start.

"We'd like to see these reforms be implemented as soon as possible," he said.

However, it is understood that legislation to implement the changes will not be introduced until some time next year, with the new laws not coming into effect until 12 months after that bill is passed.

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