Making payday loans safer: the Australian approach to regulating small and medium sized loans
In mid-2013, national price regulation for consumer credit came into effect in Australia, driven largely by concerns about payday loans and other small, short-term loans. As explained by the Australian Government at the time of law’s passing, the reforms had been introduced ‘to reduce the financial harm caused by lenders who ruthlessly impose excessive fees and charges simply because vulnerable consumers cannot obtain alternative access to credit’.1 These changes have brought some finality to a long and heated debate about the need or otherwise for ‘bright-line’ price regulation2 and/or other forms of regulation to respond to concerns about payday loans. Under the former state and territory-based regime in Australia, interest rate caps existed in some states and territories, but there was no nationally consistent approach. The staged transfer of consumer credit regulation to the Commonwealth Government from 2009 provided a platform for further discussion and debate on the need for price caps or other regulation. The discussion was often framed in the context of a need to address financial exclusion, which has shown a general increase over seven years of collecting data (although with a slight decrease in 2013).3 Financial exclusion is said to exist ‘where individuals lack access to appropriate and affordable financial services and products – the key services and products are a transaction account, general insurance and a moderate amount of credit’.4 In consumer credit, the focus is on access to mainstream credit, rather than the ‘informal financial sector or the fringe market, such as payday lenders’.5 If fringe credit and payday
exclusion can involve reducing the use of these products and/or making them safer and more affordable. Imposing a maximum price for small loans can then been seen as part of the broader project to reduce financial exclusion. In Australia, price regulation has been imposed through the National Consumer Credit Protection Act 2009 (Cth) and the National Credit Code. The approach taken in Australia does not replicate the previous interest rate cap regimes in some Australian jurisdictions, where the same price cap applied to all consumer credit products. Instead, the national price cap imposes a differentiated price cap, with different requirements for ‘short-term credit contracts’, ‘small-amount credit contracts’, ‘medium-amount credit contracts’ and other credit contracts. The changes are still relatively new and, at the time of writing (January 2015), there has been no comprehensive assessment of their impact released. However, some preliminary observations on the impact of the new laws are made in this chapter. This chapter provides a brief background to the recent changes in Australia, and then sets out the key price regulation and other provisions that have been introduced to respond to concerns about high-cost small loans. The chapter then examines the preliminary information on the impact of the changes, particularly on the industry and on consumers, and considers some remaining issues for this market, including avoidance activities and disclosure of comparative price information. The chapter then locates these new laws in the context of a changing approach to consumer credit regulation, from a traditional focus on truth in lending to a greater focus on fairness in lending through (among other things) regulation of product features, and suggests that a similar change in approach is also beginning to be seen in the broader consumer financial services market. The chapter concludes with a call for more effort on the broader financial inclusion product and for a commitment to empirical research on the impact of the changes in light of the independent review of some of the changes that is required ‘as soon as practicable’ after 1 July 2015.6
Payday lending first entered the Australian consumer credit market in the late 1990s. Since then, the sector has grown rapidly, although reliable figures of the size of the market are hard to come by.7 In 2011, an Australian Government Regulation Impact Statement reported that there were at least 567 branches of short-term loan providers, based on details published from eight major lenders. A review of branch and outlet numbers as published on the same lender websites in 20148 suggests that there are at least 456 branches and outlets. However, it is also clear that there has been an expansion into online lending, such that branch numbers are unlikely to
increasing business in recent years.