Canberra Is Protecting Loan Sharks. Yes, You Read Right.
By Mike SeccombeAugust 2, 2012
When people elected to act in our interests start swimming with sharks, who can you turn to? It’s the hundred-dollar question with 1,000 per cent interest.
If a picture is worth a thousand words, then the website created by Cash Converters is a tale of 30 million woes. It's a compendium of more than 30,000 mug shots, each of an allegedly happy customer of the company's payday-lending operation.
They just don't look very happy. There are a few smiles for the camera, but most of these people stare blankly ahead, and a lot manage to obscure some or all of their face. The overwhelming impression is that these are shots of prisoners — you know the type, where the person holds an inmate number across his or her chest.
Instead of a number, the people on the Cash Converters site — Nocap.com.au — hold little signs carrying political messages such as: "Save My Credit", "My Credit, My Choice", or "Don't sell me short, Mr Shorten". And even those who have tried to hide their faces can't take any comfort in anonymity; Cash Converters kindly provides us with a name and approximate address for each.
In a sense, these people are prisoners — prisoners of dire economic circumstance. The fact of the matter is that the great majority of them have no option but to go to payday lenders such as Cash Converters to get small loans that tide them over during times of financial emergency, perhaps just to cover the power bill or pay for car repairs.
For these small loans — typically in the realm of a few hundred dollars, taken over a couple of weeks with repayments direct debited from the client's bank account — they pay astronomical interest rates, amounting in annualised terms to hundreds of per cent. Some of the loans documented by the payday industry's many opponents in the welfare and financial sector have imposed rates of more than 1,000 per cent.
The odd thing is, those 30,000 financially distressed people on the Cash Converters website are there as part of a lobbying effort against regulations which might lower their interest rates. It's a bit like the Commonwealth Bank marshalling tens of thousands of its customers to be photographed holding signs saying "Don't force my bank to lower my mortgage rate."
The company insists — and who are we to argue — that the customers did it voluntarily, motivated by their high regard for the service the company provides them.
It seems improbable, but there you go.
It may be an unorthodox means of lobbying; it may be a tacky means of lobbying, but it's been part of a very effective campaign run by Cash Converters and the other payday lenders. Among those advocating for Cash Converters and businesses like it were some of the best-connected lobbying firms in the country, including: Barton Deakin, whose director of federal government relations is Grahame Morris, John Howard's former chief of staff; GRA Everingham, whose chairman is former Labor Treasurer John Dawkins; one of the ALP's favourites, Hawker Britton, whose directors include former senior Labor staffer and über-insider Simon Banks; and ECG Advisory Solutions, one of whose directors is former staffer to John Howard, Peter Costello, Tony Abbott and Liberal Party candidate David Gazard.
There were others, too, and we'll be hearing more from one of them shortly, but you get the picture — just as one can measure the size of a fire by the number of firemen needed to put it out, one can measure the size of a rort by the number of lobbyists called upon to defend it.
Anyway, the lobbying worked. At the end of June, at the very end of the last session of federal Parliament, the House of Representatives passed very watered-down new legislation regulating payday lenders. Even by the usual standards of legislative sausage making, it was an ugly process. The original proposed legislation was fiercely opposed by the payday industry and federal Opposition and was shunted off to the Parliamentary Joint Committee on Corporations and Financial Services, where it was substantially de-fanged. (The committee chair was a little-known member of the Queensland ALP right faction, Bernie Ripoll; you can see what he looks like on his Flickr page, which includes several happy snaps of him opening a Cash Converters store at Goodna, in his electorate, last August.)
Horse-trading over amendments continued until the last minute as the government struggled to get the support of the opposition and independent MPs.
Sometime in the next couple of months, early in the spring session of the Parliament, the Senate is set to wave the bill through. Oh, the Greens are going to try to amend it, but it looks unlikely that they will have any impact. The government and the opposition will stick with a regime that meets the requirements of the payday lenders — or at least the big ones. It's a growth industry, you know.
It's hard to be sure just how big the industry is, given that previously it was regulated, and in some cases not regulated, by the various state governments. By the best estimate of the Consumer Action Law Centre (CALC), which led the charge against payday lenders with its 2010 report Payday loans: Helping hand or quicksand?, the industry then serviced half a million customers and provided maybe three-quarters of a million loans at that time.
Going by the statistics of lobbyist Phillip Smiles, a former Liberal assistant Treasurer in NSW, who has led the charge on behalf of smaller lenders against the government's proposed regulation, it's much bigger than that. He says the industry now services 750,000 people, with an average of 2.4 loans each per year. That's 1.8 million high-interest, short-term loans annually.
Also according to Mr Smiles's numbers, 83 per cent of those borrowers, that is 630,000 of them, have "nowhere else to go". The customers of these lending outfits typically have low-paid or no jobs, often have poor credit histories, and often are dependent on welfare payments.
Unclear though it may be how big the industry is in absolute terms, it is clear that it has grown like topsy. Until little more than a decade ago, the financially distressed somehow managed to get by without payday lenders. According to a CALC investigation and report in 2002, the first payday lender in the nation opened in Queensland as recently as 1998.
Two years later, a Queensland Office of Fair Trading report reckoned there were then 82 payday lenders in the nation.
As of now, Cash Converters alone has almost twice that number of stores. The company, which began as a single secondhand store/pawnshop in Perth in 1984, is the largest player in the industry. The 2010 CALC report notes it only entered the high-cost short-term lending market in August 1999, and proceeded to grow rapidly — over six years between 2002-03 and 2008-09, the principle it lent in short-term loans increased by 973.5 per cent.
And it continues to rapidly expand. The company's 2011 annual report proudly announced a record profit, up 27.5 per cent over the previous year. The total lent in payday loans was also up, 31 per cent to more than $200 million; and customer numbers were up more than 19 per cent to almost 350,000.
The Global Mail contacted Cash Converters to ask about its lobbying effort and other matters relevant to the story, but no spokesman would speak on the record.
Cash Converters is the biggest lender of its kind, but there are innumerable others operating in the field. Like we said, it's a growth industry.
As for the customers, they are an exploited subsection of society, as the submissions by various welfare groups to the parliamentary inquiry made clear. Anglicare's report, for example, cited research showing: most borrowers were on low incomes, with 78 per cent of participants receiving Centrelink payments; 44 per cent cycled through loans, immediately taking out a new one when the previous loan had been paid out; 23 per cent got into a "spiralling process" of refinancing the balance of a partially paid-out loan to start a new loan; and 25 per cent "stated they took out two or more parallel loans from the same or different lenders simultaneously.
"Borrowers are then caught in a vicious cycle of debt from which it is almost impossible to extricate themselves," Anglicare said.
A Victorian disability-support pensioner, Ron Hayes makes a fairly typical case study. He took out a $170, one-month loan from Cash Converters in 2007 to help cover car repairs and registration costs. Things snowballed, and over the next three years he rolled through a total of 64 loans, borrowing a total of more than $15,000 and paying more than $5,400 in fees. With the support of CALC, he took the matter to court, alleging Cash Converters had breached the National Consumer Credit Protection Act and the National Credit Code in advancing the loans. The matter was settled confidentially, so Mr. Hayes would not discuss the details with The Global Mail.
But for three years he was reliant on friends and charities for help with food and medical expenses. The good news is, Hayes now says he is done with payday lenders and is a "less stressed, more organised individual".
The bad news, as CALC's Catriona Lowe noted at the time, is that consumer organisations see similar, if less extreme, cases "on a regular basis".
"People take out a loan to help pay their bills, but when the repayments are direct debited out of their account they find they don't have enough money left to live off and they go back for another loan," she said.
How would you characterise an industry which does this to the most vulnerable in Australian society?
Well, back in April 2001, when there were only about 80 payday-lending outlets in Australia, Joe Hockey — then Minister for Financial Services in the Howard Government, described it as "insidious".
At that time, the regulation of payday lending was a matter for the states, and Hockey was leaning on them to get tough.
"I want all States to take immediate action to protect consumers," he said in a press release.
"A payday lender's fee might be $20 per $100 dollars advanced. If the loan is for one week, the effective interest rate on that loan is 1,043 per cent a year.
"Payday lending is an insidious practice that targets the less prosperous men and women of our society, the less financially savvy and the people who can least handle spiraling debt.
"Payday lending is part of the twilight zone of Australian finance. As such, it needs to be reformed so that Australian men and women get the full picture and don't sign up for a loan that leaves them in financial strife."
After Hockey's urging, several states — New South Wales in particular — did in fact get serious about regulating the industry. New South Wales introduced a capped rate of 48 per cent, inclusive of all fees. Other states, Victoria for example, just capped rates, which simply led providers to jack up other fees. Even in NSW, lenders found various devious ways around the restrictions. Still, payday lenders, temporarily, took a hit.
Then last year the Minister for Financial Services, Bill Shorten, having taken over regulation of the industry, announced he was planning restrictions similar to those in NSW. The opposition — with Joe Hockey now shadow treasurer — clearly no longer thought payday lenders were insidious operators inhabiting the twilight zone of financial services. They were, rather, an industry that needed protection from overzealous regulation.
And, to be fair, it is hard to lend at rates under 48 per cent when you're dealing in small amounts, according to one financial services insider, who thoroughly investigated the economics of the industry.
It is not the risk of customers doing a bunk that makes a small loan expensive — there are few defaults because the lenders usually direct-debit repayments from the borrower's account — but the cost of processing.
"On $50 for a fortnight, you're making less than a dollar," says the insider. The profit comes from the fact that the majority of borrowers are repeat customers. Multiple renewals multiply the fees, she says.
So to the proposed legislation: under the original draft, upfront fees charged by payday lenders would have been capped at 10 per cent of the loan for amounts of less than $2,000, with monthly interest payments capped at 2 per cent.
Well, the payday lenders hated that. Cash Converters accused the government of trying to wipe out the industry. They also suggested a couple of thousand jobs would be lost, mostly in Labor electorates.
And the government blinked. In the face of opposition intransigence and industry threats, it agreed to a doubling of the caps, from 10 and 2 per cent, to 20 and 4 per cent. And Shorten, who initially went in so hard, executed a splendid backflip.
"The reforms I introduced last year in the Credit Enhancements Bill have benefited from significant review through Parliamentary committee inquiries and consultations with industry stakeholders," he said. "The draft amendments I am releasing today refine the operation of the Bill, and improve its effectiveness."
Again, to be fair, some other changes were made that are considered by the welfare lobby to be of some value. For example, the number of loans presumed responsible which can be made to one person over a 90-day period were constrained to two; the requirement was added that credit providers cannot recover more than twice the value of the loan; and the Australian Securities and Investment Commission are to be involved in overseeing the industry.
The changes must have done some good, because Phillip Smiles, representative of the wilder fringes of the payday industry, still insists the bill will drive many out of business. But Cash Converters said it could live with the new regime. Its future and that of the other larger players, appears assured.
But who, in this horse-trading between politicians and the lenders process, has asked the threshold question: Why do we need this industry at all?
No-one, it seems. Yet Gerard Brody, director of policy campaigns at CALC, says it is an entirely legitimate question to ask.
"Ten or 15 years ago there was no payday-loan industry," he notes. And while that was a problem for people excluded from mainstream sources of finance, there is no evidence that payday lending has done anything at all to help those people.
"Our view is that payday loans have not addressed those difficulties, but have served to make them worse," says Brody.
"This industry has created its own demand. The loans themselves incentivise more borrowing — a borrower, when they pay back one short-term loan in the fortnight or month, often are left without enough income to get through the next period and then are encouraged to come back.
"High-cost credit on a repeat basis is not conducive to improving financial circumstances."
It seems everyone who is not beholden to the industry agrees with that. But some question whether the debate over rates is the important thing.
"It's not about interest rates so much as enforcement," says our financial services expert.
"If we had proper enforcement on the principles about lending to people in hardship, most of this lending would not be allowed to occur," she says.
"Under all the responsible-lending provisions that all credit providers are now meant to adhere to, most of the practices of these people are already illegal. They've just not been prosecuted."
She explains that lenders are supposed to ensure borrowers will be able to repay the loan without enduring "substantial hardship".
Given that almost all the payday loans are made to cover essential expenses like rent and power bills, she thinks most borrowers are already facing substantial hardship, which the usurous interest payments only exacerbate.
Brody agrees that many loans are made in breach of current laws, but argues those laws are structured in a way which makes it very difficult for the regulator, the Australian Securities and Investments Commission, to prosecute.
"They would need a complainant, a consumer willing to go to court," he says.
"And consumers that often use these loans are often very vulnerable. There are numerous things going on in their lives — addictions, health problems, relationship problems, family breakdowns, which mean they are not good witnesses against a big lender."
Much better, then, would be a firm cap or limit on loans, coupled with a database or register of loans.
"With that regime, they wouldn't have to rely on evidence from a customer, but just look at the contracts held by the lenders themselves," he says.
Ah, but that is not what they got. What they got is a regime that will do little to constrain the legally dodgy practices of payday lenders.
Brody may reiterate the opinion, "We don't think this industry benefits anyone at all." But that's not a fair assessment. Payday lending benefits lots of people — accountants, shareholders, shop owners, Phillip Smiles, John Dawkins, Grahame Morris … The list of beneficiaries is long. It just doesn't include any poor people.