ASIC has little capacity to enforce regulations restricting bad behaviour and predatory lending in Australia's large and growing fringe lending market, writes Carl Packman, who suggests a possible solution.
AUSTRALIA HAS BECOME the envy of the world as far as standing up to predatory lenders is concerned.
Recently in the UK, the Conservative chancellor of the exchequer, George Osborne, pointed out that he wanted to see a similar regulatory system as the one that went through parliament here. Once before, when Britain sneezed Australia caught its cold — now it leads the way on controlling outliers in the consumer credit market.
However, Australia certainly does have a payday loan (small, short-term unsecured loan) problem.
The 1980s, a time of deregulation for many countries including Australia, saw a huge rise in the consumer credit market. It has been estimated that total outstanding consumer credit debt rose 560 per cent between 1980 and 1996, from $33.3bn to $220.3bn.
Entering into a bulging market, the first payday lender popped up in Australia in 1998 and, by 2001, eighty-two payday lending businesses were offering around 12,800 loans a month.
Half the battle is trying to keep up with how much the industry is worth.
On the back of a report by Jane Searle in 2007 ['Cash in Demand', BRW, August 23-29, p 36-39] it is estimated to be in the region of $800m, but no breakdowns were given, leaving critics of the fringe lending industry to suspect it is actually more.
A look at the customer growth for lenders themselves tells a story in itself.
Cash Converters, the biggest payday lender in the country, reported a customer base of 92,927 rising to 231,262 from 2005 to 2009. In the 2010/11 financial year the company provided 626,555 short-term loans, amounting to almost $257 million in value. It boasted a strong loan book value in December 2012, worth some $84.2m.
Of course, as the lenders themselves would say, the size of the loan book doesn't tell any particular story about their practices.
This is true.
But in order to make sure lenders no longer retreat to predatory behaviour, the creation of the Australian Securities and Investments Commission (ASIC) was vital.
So, too, were the penalties that could be levelled against lenders.
Up to $55,000 for body corporates, two years imprisonment, or both; the failure to credit check saw penalties of up to $1,100,000 for body corporates? Surely, for bad behaviour, this was disincentive enough.
But there are still many challenges.
Consumer advocate groups still worry about the buckling to industry pressure on establishment fees of 20 per cent on loans. Also, the limited discussion in regulation impact reports on alternatives to high cost credit products — what use, for example, could post offices be in offering finance to those otherwise served by payday lenders?
The other big issue is enforcement.
While it is all well and good having tougher rules, such as the two loan maximum within a 90 day period rule, with steeper penalties this means nothing without a robust facility to check that people aren't being lent to improperly.
One way to overcome this problem would be with the introduction of a real time database.
Regular updates over the businesses that ASIC regulate would create a far more efficient means by which to ensure effective oversight. Companies like Veritec, who have already met with the Federal Government, provide those means to proven success.
As it works in other countries, the database would be owned by ASIC and all lenders selling credit below $5,000 would be mandated to update the information into the database in order to give the regulator an ample tool to check compliance to rules. The penalties for other poor conduct could be similarly levelled at lenders who fail to input data into the real time database.
The benefits of such a system are threefold.
For regulators it makes their supervisory job easier. For lenders it brings information on a lender's affordability up to date, right up to the second, and so ensures that borrowers aren't going from store to store taking out credit. For consumers it will mean that lending in Australia is more responsible and responsive to the changes in a person's credit history.
The consumer credit regulatory regime in Australia has come a long way from before 2011, some further steps in the right direction on enforcement can ensure that the envy felt across the world has significant longevity.
The Senate Economics Committee is currently hearing verbal submissions in an Inquiry into ASIC's performance; read ASIC's submission to this Inquiry on the subject of low doc loans here. Carl Packman is the London based the author of Loan Sharks: The Rise and Rise of Payday Lending.
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