Reverend the Hon. Dr GORDON MOYES: The Consumer Credit (New South Wales) Amendment (Maximum Annual Percentage Rate) Bill amends the Consumer Credit (New South Wales) Act 1995 to extend the maximum annual percentage rate, inclusive of fees and charges, to all consumer credit products with the exception of certain specified products offered by authorised deposit-taking institutions [ADIs]. In general, the Christian Democratic Party supports the bill, which intends to bring further regulation to what I term fringe credit providers. However, at the next stage we will deal with some aspects of the bill in more detail. Under the Australian Uniform Credit Laws Agreement 1993 the States agreed to introduce and implement consumer credit legislation in line with uniform national legislation known as the consumer credit code, which was a major peak in the industry. The consumer credit code is a national legislative instrument, not simply a standard or guideline, that governs the provision of credit for personal, domestic or household use. As part of its obligation under the 1993 agreement, New South Wales introduced legislation to implement this agreement, namely the Consumer Credit (New South Wales) Act 1995. The recitals of the 1993 agreement bind the State parties to ensure that State legislation implementing or reflecting the national consumer code remains uniform or consistent with uniform laws.

The States must administer the legislation as far as possible on a uniform basis. However, this bill seemingly is introduced under the umbrella of Part VI of the 1993 agreement, which relates to non-uniform matters. That explains why the previous speaker in this debate, the Hon. John Ryan, indicated that no other State or Territory has provisions that are exactly similar to those of this bill. Among other things, clause 12 of Part VI states that a State or Territory may secure the passage of legislation to provide for the fixing of maximum interest rates payable under consumer credit contracts and the establishment of a scheme for the licensing for registration of credit providers. Presumably the substance and intention of this bill falls under the non-uniform matters; otherwise this bill would be ultra vires.

The bill is intended to provide further protection for payday lending customers. Payday loans are loans that are provided for periods of less than 62 days and are often marketed as cash to tide people over until the next payday. Therese Wilson, a lecturer from the Griffith University law school, claimed in her 2004 paper “The inadequacy of the current regulatory response to payday lending” in the Australian Business Law Review, volume 32, that there is evidence of a large number of payday borrowers in the United States of America being members of the working poor class. I concur with her opinion. Those who have worked with me over the years as credit counsellors would confirm that most of the people who come to us with credit problems are on low and fixed incomes. They are not necessarily people who are dependent on welfare or government benefits.

Research undertaken in the United States of America has shown that payday borrowers typically do not earn enough money to be able to repay the loan amount in the period stipulated and still have sufficient funds to meet general living expenses, such as food, rent, clothing and transport. It is also said that there is significant anecdotal evidence in Australia that payday lenders are actively targeting consumers on low and fixed incomes. In that regard I cite an article by C. Field, “Pay Day Lending—An Exploitative Market Practice” in the 2002 Alternative Law Journal, 27 (1) 36, at page 37. The anecdotal evidence includes the opening of payday lending outlets in predominantly low-income suburbs and the experience that has been reported by financial counsellors.

One only has to drive through suburbs in which most residents are on low incomes to find shopfront payday lenders in great numbers. It is widely known that the cost associated with payday lending credit is very high. Payday lenders are not permitted to charge any more than 48 per cent in interest, and no fees can be charged on top of that. Prior to 1 December 2001 lenders did not charge interest but set fees according to the amount of the loan. In effect that was de facto interest, but because it was not expressed as an annual interest rate, consumers may have been unaware of the true cost of the loan compared with other possible sources of credit. If annualised, the cost of credit for payday loans would average out to 1,000 per cent. I checked that with payday lenders and they acknowledge that that is true.

Quite a bit of misinformation was peddled by what is described as the micro-lending industry in relation to some of the ramifications of the bill. For example, the 48 per cent cap on the effective maximum interest rate that may be charged by payday lenders is already part of the law. A bill was introduced in 2001 that entrenched that provision. Fringe lenders have been able to exploit a loophole in the law by extending the period of a loan beyond 62 days and charging much more than 48 per cent in interest. As payday lenders generally offer loans for fewer than 62 days—loans that are described as short-term loans under the relevant legislation—most of their transactions with consumers would be covered by the code. Therefore, the effective interest rate, including all fees, charges and interest rates, would be subject to strict regulation. However, as the Minister’s second reading speech indicates:

There is recent evidence that the fringe lending market—a term used to describe credit providers who offer relatively small high-cost loans—has reinvented itself from “payday lending” by increasing the term of loan products to a period greater than 62 days.

The current practice shows that payday lenders have been circumventing the statutory measures relating to short-term loans by offering loans for longer than 62 days. The obvious result is that fringe lenders continue to impose fees and charges that are far in excess of reasonable costs. The Consumer Credit Legal Centre has stated:

... based on … casework and advice experience, it would appear that payday lenders in New South Wales have transferred most of their loans to terms greater than 62 days to avoid the interest-rate.

That was not admitted; nor would members of the payday lenders’ fraternity who met with members of this House yesterday admit that it is a widespread practice. Moreover, the Consumer Credit Legal Centre states that this situation has resulted in a loophole in consumer protection and has effectively defeated the consumer protection purposes of payday lending reforms. This is also reflected in the alarming increase in problems with fringe lenders over the past three years, as shown in our casework and advice service.

I remind honourable members that I established Credit Line Financial Counselling Services, which is now the largest credit financial counselling service. Between 2002 and 2003 the number of clients who came to the Consumer Credit Legal Centre with a fringe lending problem increased by 350 per cent. The centre provides legal advice and assistance, as do my staff at the Wesley Mission, which includes lawyers who work with people who have financial problems. The centre provides services to approximately 1,000 clients per year and I think my staff counsel approximately 14,000 or 15,000 clients per year. The Wesley Mission represents people in courts, tribunals and alternative dispute resolutions.

Reference to the experience of financial counsellors in this context is invaluable in understanding the plight of consumers when dealing with fringe credit lenders. A financial counsellor with the Wesley Financial Counselling Service has told me that the majority of clients who come to her for financial counselling have one or more payday loans. She said that clients need only to show identification, produce a pay slip, and sign a direct debit on the bank account that their pay goes into, and they are given a loan.

When I questioned industry representatives about this they all denied that anybody had ever been given a second loan. Some payday lenders are clearly providing additional loans. People borrow from many different lenders in respect of the same pay period. In the experience of my counsellor, people who have a gambling problem are particularly susceptible to this type of easy lending and they usually go to many different payday lenders to borrow $80 here or $100 there to feed their gambling addiction.

Quite often the person who has a gambling problem has access to their pay as soon as it has been deposited into the bank account, so there is no money to meet the direct debit charges of the payday lending entity. The client will need to extend the loans and will no doubt incur further fees on top of what they already are being charged. In the experience of my counsellor, many clients who have a gambling problem have families who are relying upon their income to pay the rent or the mortgage and pay for food. Easy lending does not assist their situation by withholding access to money that will be used for gambling. When I confronted members of the industry about that, they all denied that they ever lend to anybody who has a gambling problem. I found that too far beyond comprehension to believe.

An example of the nature of payday lending fees and charges and how they add up is worth noting. I know a person who approached a fringe lender for a loan of $2,000. The annual interest rate for the loan was 28 per cent per annum, with fees and charges of $750 consisting of a $600 establishment fee, $45 in legal fees, $60 in direct debit fees made up of $5 for each direct debit and $45 for account keeping at a rate of $15 per month, and so on. I asked members of the representative group who met with members of this House whether those charges were usual or reasonable. They confirmed that the fees and charges were both usual and reasonable.

The term of the loan was three months. The actual cost of credit for borrowing $2,000, including all fees and charges, is 288 per cent as an annualised percentage rate. The Consumer Credit Legal Centre has provided a number of typical interactions between consumers and fringe lenders. For example, Ms K took out a person loan from Quickcash of $1,050 at 39.95 per cent interest, with an establishment fee of $350 and a maximum term of six months. She also had a $1,150 loan with Everyday Finance for 224 days at 42 per cent interest and a $350 establishment fee. However, in both loan documents the amount of total interest payable did not correspond with the stated percentage rates and were, in fact, much higher. Applying the formula in clause 8 of the regulation, the effective annual percentage interest rate works out at 104.09 per cent.

Payday loans are covered by the Consumer Credit Code, meaning that all the protection of the code and the documentation required by the code applies to that type of loan in the same way that it applies to personal loans, credit cards and other types of credit. But, there is not one overarching regulatory body, such as the Australian Prudential Regulation Authority, that governs payday lenders. I would commend the Government to considering establishing a regulatory body for payday lenders. This bill will address the loophole that has been exploited by payday lenders by extending the terms of the code to all consumer credit contracts regardless of the duration of the loan.

In the view of the Consumer Credit Legal Centre, the bill is urgently required to ensure that people in desperate circumstances are not driven further into poverty by the cost of credit and to ensure that the existing law in New South Wales achieves its original objective in limiting exploitation in credit provision. I will leave my comments on schedule 1 to the bill until another time, because there are a lot of matters that I would like to raise.

One concern I have with the bill is the retrospective nature of the measure in item [9] of schedule 2 to the bill. This matter was highlighted by the most recent report of the Legislation Review Committee. This provision will apply amendments to be made to the Consumer Credit (NSW) Special Provisions Regulation 2002 to existing contracts. In particular, it applies the inclusion of all credit fees and charges under a credit contract in the calculation of the maximum annual percentage rate. As a result the bill will reduce the money payable under any existing contracts that exceed the maximum annual percentage rate according to the formula set out in the bill to the maximum so provided. If I may, I would like to draw the attention of honourable members to the specific comments made by the committee on this issue. The committee’s report states:

The Committee notes that the Bill has the effect of altering the terms of existing contracts where the inclusion of all credit fees and interest charges in the calculation of the maximum annual percentage results in a maximum rate above that prescribed.

The Committee notes that the purpose of including fees and charges within the maximum annual percentage rate is to prevent fringe lenders from imposing fees and charge far in excess of reasonable costs.

The Legislation Review Committee referred to Parliament the question of whether the retrospective effect of the bill unduly trespasses on personal rights and liberties. Can the Government provide an answer to that? Notwithstanding those concerns, the bill will, by and large, prove to be a commendable improvement on the current state of affairs in which payday lenders prey on unsuspecting and vulnerable consumers. These amendments will catch credit providers who have been avoiding the intention of the consumer credit laws. From listening to representatives of the industry I note the failure of the Minister for Fair Trading, Diane Beamer, to meet with them. I am quite sure that my colleague Reverend the Hon. Fred Nile will take up that matter.

In conclusion, I refer again to Ms Wilson’s paper, published in the Australian Business Law Review, which noted that there is scope to classify—and honourable members should listen to this terminology—payday lending as “unconscionable”. The article stated:

[an] alternative approach in government policy is required, away from seeking to regulate fringe credit providers such as payday lenders as if they were providing legitimate financial services and recognising that payday lending needs to be effectively banned.

The author further indicated:

A reluctance to outlaw this largely unconscionable form of credit provision seems partly to be based upon a concern that without the presence of fringe credit providers in the market, low-income consumers will have nowhere to turn to access credit, due to the lack of services available to those consumers from mainstream financial institutions.

Representatives of the micro-lending industry have pointed out that none of the larger financial institutions are interested in lending to consumers who usually rely on payday and fringe lenders. That is an important point. Ms Wilson flouts the concept of allowing for mainstream credit to low-income consumers as an alternative for consumers of payday lending facilities. That is clear food for thought, and I hope that Minister and her advisers take up that issue. Low-income borrowers deserve better than loan sharks, pawnbrokers, and credit card companies that would move into the vacuum if the payday lenders were not there.

Wednesday, 9th November, 2005, 5:47 pm | Articles