Why payday lenders need to clearly defined in legislation
The Financial Services Federation (FSF) has made its submission to MBIE on the Credit Contracts Legislation Amendment Bill (CCLAB), and says that the proposed 100% interest rate and fee cap on high-cost loans won’t protect vulnerable consumers.
According to the FSF, this cap will do nothing to stop lenders from rolling loans over, or to prevent consumers from taking their loan to a new lender and continuing their cycle of debt. Executive Director Lyn McMorran says the Bill should instead consider clearly defining payday lenders in its legislation, and on focusing their enforcement efforts on ensuring that they can only lend within strict small amount, short-term parameters.
“When it comes to the cap, we don’t have a problem with the proposal in and of itself – it’s aimed only at lenders who are lending at high interest rates, and so that doesn’t make a difference to any of our members,” McMorran explained.
“But the issue is that we simply don’t think it’s going to work. If we still have people who are able to access credit but can’t afford to repay, that suggests that even the current law is not being enforced.”
“The sad fact of life is that there is sometimes a need for people to access payday loans, and if you had a blanket interest rate cap on small, high-risk and short term loans, you’ll drive the reputable lenders out of business,” she continued.
“We think a better method would be to clearly define what a payday loan and payday lender is in the legislation, and ensure that those providers are registered on the Financial Services Providers Register (FSPR) as a separate class of lender.”
McMorran says this solution would allow enforcement efforts to concentrate on where the real damage is coming from, and to ensure that these lenders are unauthorised to provide any credit contracts outside of the official ‘payday lender’ definition. As an example, one customer had recently been lent $5,000 by a payday lender at a 245% p.a. rate – something which should classify as a personal loan, not a payday loan, and would likely not be permitted even under today’s legislation.
“The real harm is coming from these high-interest loans which are supposed to be small amount, high-cost and very short term,” McMorran said.
“That makes them very distinct, and allows you to restrict them to only offering those products on a short-term basis. The regulator can then specifically target that group in their oversight to ensure that they’re not lending to people who can’t afford to repay within a specific term.”
The Select Committee is currently considering submissions on the CCLAB, and is expected to report back to the House around the end of October.
