Payday Loan Regulations: Advocates Push For Immediate Action

A delegation of multiple consumer advocacy groups recently met with MPs in a push for tougher regulation of the payday loan industry.

The coalition of organisations is calling for the government to immediately introduce new laws to better protect consumers from predatory short-term loan schemes, as well as to increase financial education services and expand no-interest loan schemes.

The groups present include Financial Counselling Australia, the Consumers Federation of Australia, and the Financial Rights Legal Centre, among others.

Consumer advocates are calling for quicker action following the government’s commitment (on 28 November 2016) to improve the legislation governing small amount credit contracts (SACCs), commonly known as payday loans.

What are payday loans?

Payday loans are low value loans, typically up to several thousand dollars, with short repayment timeframes and high interest rates. Customers typically take them out in order to pay for a few days’ worth of necessities until payday arrives – hence the name. The high fees payable make it easy for customers to become caught in a cycle of debt – continually taking out new loans in order to pay off current loans.

What are consumer leases?

Consumer leases are where customers rent an item from a supplier, typically household appliances such as TVs or fridges. These also tend to have high interest rates, and customers do not own the appliance at the end of the contract. This usually results in customers paying much more than the retail price of the item over a long period.

“It’s been 120 days since the Federal Government responded to the independent review of SACCs, stating the importance of implementing the recommendations to protect vulnerable borrowers,” said Consumers Federation of Australia Chair Gerard Brody.

“These industries prey on people on low incomes or in tough spots, trapping them in high-cost products even though they may be struggling to pay for the basics like rent or food. People are often left struggling to pay off multiple loans or leases.”

Significant changes on the table

The government’s proposed measures are based on the recommendations of an independent review into SACCs, and include:

  • Capping repayments for both payday loans and consumer leases at 10% of a customer’s net income.
  • Introducing a cap on consumer lease fees equal to 4% of the base price of the goods per month.
  • Banning payday loan providers from making unsolicited offers to customers.

The government accepted the vast majority of the recommendations supplied by the SACCs investigation’s final report. These included retaining several current laws in addition to new ones, such as banning credit contracts with terms of less than 15 days, and retaining the existing price caps on payday loans.

Consumer advocacy groups view the government as dragging its feet over the legislation, arguing that it represents an urgent priority in order to protect low-income households without significant financial knowledge.

“Payday loans and consumer leases are often used by people who feel they have no alternative when times get tough, but there are other options,” says Good Shepherd Microfinance’s Adam Mooney.

“We’d like to see the Federal Government increase its investment in safe, smart options such as financial counselling, the No Interest Loan Scheme (NILS), and legal assistance.”

Alexandra Kelly of the Financial Rights Legal Centre was more forthright.

“Every day the Federal Government delays this legislation is another day someone walks through our doors in financial distress because of the devastatingly poor practices within this industry,” she said.

Government next steps

In a keynote address at the Consumer Action Law Centre Breakfast, Minister for Small Business Michael McCormack said he expects to progress the proposed changes “later this year”.

McCormack also expects them to take effect “12 months after the legislation passes parliament”.

“Because the reforms are so wide-ranging, we’ll have another review of SACCs and consumer leases after the legislation’s been in place for three years,” he said.

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