NEXT WEEK'S VOTE ON MONEY LENDING

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1 1-5 The Legislation: NEXT WEEK'S VOTE ON MONEY LENDING Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 The most comprehensive source of information available: Go to Submission No. 40 at - porations_ctte/consumer_credit_corporations_2011/submissions.htm for the most comprehensive analysis of Australian payday and microlending ever written. With reference to 32 different Australian studies undertaken for the lending industry since 2001, by consumer advocates, consultants and by universities, no other reference is anywhere near as comprehensive. How big is the issue? Referred to by Treasury as small amount, short term lending and referred to by the market as payday and microlending, this topic is an emotion charged issue with lots of wild claims and opinions circulating and with serious socio-economic consequences - if the legislation gets it wrong. What are the numbers? In his second reading speech, Minister Shorten mentioned that at least $500 million is lent annually. He was conservative. The real figure is $1.2 billion annually. Not mentioned by the Minister: Each year, 750,000 people borrow the kinds of loans to be regulated by the Enhancements Bill. At least 525,000 have nowhere else to go to borrow. On average, they borrow 2.46 loans per year. 90% of all small amount, short term loans are for under $1,000, for under 12 weeks. The average loan for this group is $325 for 4 weeks. Loans are generally repaid weekly or fortnightly. Very, very rarely are they paid monthly. Purpose for borrowing - 80% borrow for essential purchases/payments, according to contemporary Australian standards. Bad debts, as in permanently non-performing loans, general range 3% to 10%, costing 13% to 15% of gross revenue for lenders who manage defaulting loans conscientiously. There are now approximately 640 lenders involved. Approximately 50% of these lenders are independent of any major company or franchise. 57 internet sites offer online lending. They employ 2,500 full time equivalent staff. The adverse economic conditions relevant for the borrowers sectors of our society has had its impact, with applications for hardship up 100% this year on last year. For many lenders, bad debts are up 80% to 100% (2011 figures on 2010 figures) and compound industry sector growth is down from 18% in 2008, 2009 and 2010, to 4% in 2011 and, to

2 date, there have been considerably lower lending volumes. Profitability dependent on growth, appears to be over. What are the most significant wild claims circulating? 1. All borrowers are in a debt trap. The facts - 94% of all loans are paid off. Consumer advocates/financial counsellors do see borrowers who are in financial trouble that could be considered a debt trap, but - (a) on their own figures, the number of clients they see constitutes, at most, 0.66% of total small amount, short term consumers; AND (b) the information made available does NOT differentiate between those they see who are in trouble because of credit cards, gambling or alcoholism, etc. and those who are in trouble for borrowing small loans. 2. It is debt created by loans that creates the problem for the desperate and vulnerable. The facts - the fundamental reason for many in this category is that, in particular, the existing Government New Start allowance has borrowers' incomes well below the Henderson poverty line. You cannot solve a systemic problem by legislating the only commercial short term solution available to many who receive such benefits, out of existence. 3. Borrowers should go to commercial sources like the banks, building societies and credit unions for their loans. The facts - the mainstream financial institutions have not been interested in lending small amount, short term personal loans for nearly 10 years. With rare exception, they are not interested in lending personal loans under $4,000, and over 99% of the total loans to be regulated under the Enhancements Bill are under this amount, with over 94% under $1,000 - loans of which none of the mainstream are interested in providing. 4. Credit cards are cheaper. The facts - even the current leader of the consumer advocates, the Consumer Action Law Centre, in their 2010 report acknowledged credit cards are a far worse problem. This due to the unlimited term and relatively unlimited amounts of credit that can be accessed. The problem is not the rates, it is consumers maxing out their cards, paying the minimum amount each time at best, and being saddled with debt for years. Further, consumer research undertaken by Smiles Turner and quoted by Treasury on occasions, has indicated that up to 27% of small amount, short term borrowers have a credit card (with a further 16% having had a card), but prefer to borrow from a payday or microlender. 5. It is the cost of these small loans that is the problem. The facts - most of the indebtedness is NOT due to the interest rate, fees and charges imposed by lenders, but the amount that was actually borrowed and has to be repaid - 74% to 84% of the total amount to be repaid, for the most popular loans, constitutes repayment of the principal. 6. Lots of people borrow to gamble. The facts - one South Australian State MP, in 2006, was quoting a study claiming 10% or more of all small loans were for gambling. There is no other study that has offered any such figure. Consumer advocates have said that this is an issue, without any statistical evidence to support the allegation and Smiles Turner s relatively frequent consumer research, involving over 6,000 consumers, has discovered only 2 cases - in 11 years. Most borrowers rely on being able to come back to the lender another time. A pattern of borrowing and losing on gambling can be expected to show up quickly. No lender is going to accept such a risk as justifying lending. 2-5

3 7. Lenders just lend to anyone. The facts - The one rogue lender who adopted that approach lost an estimated $8 million last year (albeit claiming a lesser loss). The reason - it is economic insanity for a lender to adopt such a policy because, on average, every non-performing small loan means the lender has to lend between 8 and 17 very similar loans, in order just to recover their capital. The problem - not those extra required 8 to 17 loans, but the fact that, if just one of those new loans goes bad - the number of successful loans required to recover just the lender's capital (no profit) increases exponentially. 8. We need more regulation of lenders because what we have is not working. The facts - ASIC undertook a 12 month study from November 2010, collecting thousands of loan documents, from hundreds of lenders, to review whether or not the provisions of the National Consumer Credit Protection Act, commencing on 1 st July 2010 and introducing a revolution in lender regulation, were actually working. Their report last year concluded they largely were and that the exceptions were rarely serious and all were correctable. ASIC issued a general advice and letters - warning those who had demonstrated some defect to lift their game. None of the alleged "breaches" were considered serious enough to warrant prosecution. 9. We need more regulation to further protect all borrowers. The facts - That is what next week s Enhancements Bill is trying to do. This despite Minister Bill Shorten declaring that the Bill was designed to protect the desperate and vulnerable and the Consumer Action Law Centre s own research indicating that only 23% of all borrowers could be so categorised. Unless there are exemptions introduced - prohibitions on second loans, increased credit limits and rolling over (refinancing) loans, appropriate for consideration with the desperate and vulnerable, will be applied to all. Further, attempts to reduce the cost of borrowing for the desperate and vulnerable, by way of maximum fees on the small loans, and a 48% inclusive daily reducing unworkable cap on the larger and all unsecured loans, will be applied to all borrowers - making it uneconomical for lenders to stay in the industry sector. 10. Just apply a 48% cap and the lenders will simply have to adjust their business model. The facts - None of the advocates of this 48% cap concept - anywhere in the world - has undertaken comprehensive lender costs' analysis to objectively review whether or not relatively small amount, short term lenders can actually break even - let alone make a profit - charging only 48% per annum, all inclusive, daily reducing. They CANNOT - as the NAB-subsidised Money Fast pilot program report concluded - unless they lend a minimum of at least $1,700, for 18 months to 2 years. As indicated above, 94% of the loans the Enhancements Bill is designed to regulate are for under $1,000 and are for weeks, NOT many months or years. 11. More regulation is always the answer. The facts - Feel good legislation and favourable populist media attention, for one or two days, never recognises the costs imposed on lenders by any further regulation. Smiles Turner industry research indicates that, following Phase 1 of the Commonwealth s regulation, lenders are facing average compliance costs, per loan, of between $11 (for the small and volume lending) to $103 (for the larger, lower volume lending), plus it is almost mandatory to undertake a credit check costing between $7 and $17, plus a minimum of 40 minutes staff time is involved in undertaking the mandatory assessment and an average of 20 minutes for mandatory administration duties thereafter, with loan officer staff being paid award rates (at least) of $18.60 to $24.30 an hour (net of on-costs, such as insurance and superannuation). Lenders are currently paying between 12% and 14% flat for their wholesale money. 3-5

4 From 26 to 43 sheets of paper are now required for the contract documentation that is mandatory under the National Consumer Credit Protection Act. No lender dare continue in business without continuing professional compliance advice, because the regulation is now so extensive and complex to put into practice. Apart from the risk of losing the mandatory Australian Credit Licence and being immediately out of business, the penalties for breaches go to $220,000 for an individual, to $1,100,000 for a company and there are gaol terms to 5 years. 12. Lenders are making huge profits so they can afford to face more regulation. The facts - When they make this assessment, the consumer advocates look to Cash Converters, one of the two public companies involved as lenders, with their 140+ stores, major TV advertising campaigns and expensive High Street locations. Their annual report indicates big dollar amounts as gross profits - but none of the commentators divide these by the number of stores, or assesses what the real return on capital is. In addition, most lenders - those serving 44% of the market - are small business operations, the majority being husband and wife owner-operators, who have none of the economies of scale available to a big public company. Under the proposed, but still to be confirmed, 20%, 4% fee cap, the gross income on an average loan of $320, for the average 2 to 4 weeks, after the mandatory adjustments included elsewhere in the Enhancements Bill currently before Parliament - will be $51.20 (not the consumer advocates' $76.80, or Cash Converters' $89.60 for 32 days). On the minimum of the cost figures listed above - just for wages, credit checks, compliance and interest on money borrowed to lend ($39.80) - that means the lender will have $11.40 to cover staff on-costs, rent of premises, telephone, electricity, advertising, management salaries, public risk and staff insurances, bookkeeping and accountancy fees, computers and computer software, contribution to establishment of business costs, etc. In fact, the $11.40 will NOT even cover average marketing costs, when you remember every one successful loan has got to cover the marketing and other cost associated with attracting, assessing and then rejecting the average of 2 out of 3 applican ts. That means - definitely under the current Enhancements Bill's 10%, 2% fee cap, also definitely under the proposed amendment to 20%, 4% and, in the later case, absolutely, while the current later provisions in the Bill actually reduce the 20%, 4% to approximately 13%, 3% - to lend the average small amount loan of $320 will mean a LOSS every time. That means the current Bill, or an amended Bill that just includes the 20%, 4% figures, will force every small lender out of business. 13. There has been substantial consultation and Treasury has been comprehensively advising the Minister. The facts - (a) At the last moment, the Minister was unavailable for his promised discussion with industry representatives and no alternative date was proposed. (b) The RIS prepared by Treasury did not include any industry facts provided during the Green Paper process and, despite at least 15 months since, during which time Treasury issued Discussion Papers almost every second month, no attempt was made to update the RIS, or the Bill's Explanatory Note. (c) The Bill's Explanatory Note includes a statement alleging that the legislation would not impose any cost on the Government and would not economically impact on lenders - this despite substantial spreadsheets and econometric modelling, presented by the Delegation in May last year, which destroys the legitimacy of this statement. (d) Despite extensively researched information on the potential negative impact on consumers, the industry sector and the Not-For-Profit alternatives, provided 4-5

5 before the Exposure Draft, before the introduction of the current Bill into the Parliament, then on a number of occasions over the following 6 months, by the Delegation - only the proposed 20%, 4% fee cap represents any (and still inadequate) change to the original Exposure Draft offered to date. (e) The two Parliamentary Committees' fundamental recommendation has largely been ignored. (f) Despite the Minister's Chief of Staff, on the 20 th February, promising the distribution of another Exposure Draft, accompanied by the intended Regulations, we are just 3 business days from the scheduled commencement of debate on the Enhancements Bill - and it has still not arrived. What Minister Shorten said in the Parliament in September was right, but not for the reasons he presumed - (Commenting on the current cap) This cap delivers real outcomes for consumers. It ensures that borrowers who are in need of a small amount loan will not face relatively high costs, and will reduce the risk of an ongoing cycle of dependency through the continued use of this form of credit. The facts - this is a correct statement, because there will not be any small amount, short term loans available for consumers to borrow. The current Enhancements Bill and the Government s objectives (Concluding his comments on regulating small amount lending) Let me be clear, the Gillard government strongly believes that short-term loans do have a role in the Australian economy and should be part of everyday life, but we are also focused on protecting vulnerable consumers, not terminating the payday lending indu stry. The facts - the volume and amount of short term lending does make this lending part of everyday life. However - it may not have been the intentional focus of the Government - but the combined impact of the provisions in the Enhancements Bill - whether or not it ends up with a 10%, 2% or a 20%, 4% fee cap, and if continuing with the 48% per annum, all-inclusive cap for all secured loans and for amounts of over $2,000, lent for over 2 years, is the termination of all lenders lending primarily under $1000 and most lending up to $3,000, for terms up to 18 months or 2 years. That means 94% of current loans WILL BE terminated. 5-5 Presented on behalf of the Financiers' Association of Australia/Industry/Smiles Turner Delegation Enquiries: Phillip Smiles LL.B., B.Ec., M.B.A., Dip.Ed. Lyn Turner M.A., Dip.Drama. Smiles Turner T: F: M: E: phillip@smilesturner.com.au