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Tuesday, 26 June 2012
Page: 7921


Mr HOCKEY (North Sydney) (09:49): I rise to speak on the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011. This bill has sat before the House of Representatives for nine months, since 21 September last year. The government has finally seen the light and decided to amend the bill at the last minute, with—as I understand it—70 amendments to be tabled this morning, but which have still not been circulated. These amendments will be considered by the House when it comes to consideration in detail. It would be helpful if the 70 amendments were circulated to the House for the purposes of the second reading speech and debate, because even though the coalition does have the amendments, other members should have the opportunity to change their second reading speeches in accordance with the massive number of amendments to be circulated.

For many in the sector, particularly small businesses, the past nine months has been a period of uncertainty. Businesses in the payday lending sector have been unsure whether to prepare to implement the measures or to weigh a compromise solution which is now proposed by the government. The government can hardly claim to have been caught unawares by the reaction. The coalition have long outlined serious issues with particular aspects of this bill, in particular the changes contained in schedules 3 and 4 of the bill relating to small amount credit contracts. The coalition issues constituted such concern that the bill was referred to both the Senate Economics Legislation Committee and the Parliamentary Joint Committee on Corporations and Financial Services on 22 September last year. The report of the Senate Economics Legislation Committee was released on 7 December 2011 and the report of the Parliamentary Joint Committee on Corporations and Financial Services was released on 7 February 2012. Both the report of the Senate Economics Legislation Committee and the report of the Parliamentary Joint Committee on Corporations and Financial Services address substantial issues within this bill and include a recommendation that the government revisit schedules 3 and 4 and associated provisions. The coalition is pleased to see that this has occurred, although it has been with an undue and unwarranted delay of nine months since the bill was introduced and around four months since the last committee reported. But now there is all of a sudden a rush to get this legislation through. Not surprisingly, yet again the government just cannot get the contents of their own bill right in the first place.

The coalition fully endorses the unanimous recommendation 2.1 of the Senate Economics Legislation Committee:

… that the government review the measures proposed in Schedules 3 and 4 of the bill. This review must re-engage with stakeholders to:

carefully assess claims that the current provisions may have adverse consequences for consumers;

carefully assess the merit of alternative approaches to focus the provisions on borrowers with low incomes; and

review and publish modelling on the effect of the proposed 10 per cent, 2 per cent and 48 per cent caps on the commercial viability of the payday loan industry.

The coalition also endorses the unanimous recommendation 12 made by the PJC:

… that the Government revisit the measures proposed in Schedules 3 and 4 of the Enhancements Bill. Further consultation with stakeholders should be undertaken to address the concerns identified throughout the inquiry and to develop measures that will ensure cohesive and consistent national consumer credit legislation and an appropriate balance between consumer protection and industry viability.

We are pleased that the Labor government has finally woken up to these recommendations.

Of course, the bill does not just address payday lending. Some of the other measures in this bill are very worth while. The changes to voting at annual general meetings of public companies, contained in schedule 7 of the bill, were recently passed as a separate bill—the Corporations Amendment (Proxy Voting) Bill 2012—and we welcomed that initiative by the government. The changes to the National Consumer Credit Protection Act 2009 provide for new requirements for reverse mortgages, including a statutory protection against negative equity and improved disclosure requirements. There are also changes to the terms for payday loans and other small-amount credit providers. These include caps on the maximum amount credit providers can charge and restrictions in some circumstances on multiple borrowings and small-amount contracts. There are also some new disclosure requirements. The bill also provides for changes to give greater regulatory consistency between consumer leases and credit contracts by extending the existing protections available for credit contracts to consumer leases and it makes changes to make it easier for debtors to seek a variation of the repayments under their contract due to financial hardship.

The amendments to the National Consumer Credit Protection Act relating to reverse mortgages are sensible initiatives. Consumers deserve more information about reverse mortgages and the potential risk they carry. The introduction of protection against negative equity is intended to prevent a situation where the value of the accumulated debt and interest rates exceeds the market value of the dwelling. This would result in a situation where the owner's equity in the dwelling was completely wiped out. This could occur where a reverse mortgage plus compounding interest was allowed to accumulate over a long period of time or where the market value of a dwelling declined. This would not be in the interests of the owner and would not be in the interests of the lender. The mechanism by which this is achieved is that, if the exit from a reverse mortgage results in the payment of a sum that is greater than the market value of the dwelling, then the credit provider must pay the excess to the debtor.

The more detailed disclosure requirements for reverse mortgages are, in our view, also sensible. These include providing intending mortgagees with projections that relate to the value of the dwelling or land that may become the reverse mortgage property and the consumer's indebtedness. They also include the provision of a reverse mortgage information statement. The regulations may regulate or prohibit the entry by a credit provider into a credit contract for a reverse mortgage if the debtor has not obtained legal advice.

The provisions of the National Consumer Credit Protection Act relating to small-amount credit contracts, or payday lending, are more problematic, because they may restrict access to a legitimate form of finance for many Australians. These provisions cover loans such as those provided by companies like Cash Converters. Both parliamentary committees' inquiries into the bill unanimously recommended that the government revisit the measures proposed in schedules 3 and 4 of the bill. I am pleased that the government will be moving amendments to schedules 3 and 4 and the related measures, although the proposed amendments are yet to appear.

I have been actively involved with my colleague Senator Cormann in the issue of payday lending. In my case, it goes back to my time as Minister for Financial Services and Regulation. The member for Chisholm would remember my days as Minister for Financial Services and Regulation. Back then—more than a decade ago, when I was the minister—microlending was a state responsibility. That was before we had a national consumer credit code. At the time I said:

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.

I am always wary of quoting myself—that is ultimately the grandest act of hubris, as my colleague the member for Dunkley would appreciate.

Mr Billson: Or giving me a note to quote you!

Mr HOCKEY: Well, I could do that! I could pass him a note to quote me, which might be a rather more elegant approach. Perhaps I could quote my actions rather than my words. When I was the minister I urged three steps for reform: firstly, for payday lending to be brought under the uniform consumer credit code by the states; secondly, for disclosure of all payday lending loan details, including terms and the effective interest rate on the payday loan; and thirdly, for uniformity amongst states on any cap on interest rates.

To be fair to the first minister for financial services, the member for North Sydney—and now I am talking about myself in the third person, like the member for Griffith!—at that time we were overwhelmingly focused on getting a referral power from the states to the Commonwealth in relation to the Corporations Act. It was the biggest referral of power from the states to the Commonwealth, arguably, since income tax, during the course of World War II—1942. It certainly was not much heralded, because it was obvious that it should happen, but the High Court was on the verge of striking down the agreement between the Commonwealth and the states that had been forged some years earlier.

In those rather harrowing negotiations back in 2000, which I and then Prime Minister John Howard were engaged in, ultimately it was Premier Bob Carr and Premier Steve Bracks who came to the party after we had to threaten to set up a Delaware-style system out of the ACT for the registration of companies. That period has not been properly documented, but I endeavour to get it on the record here today, because some will say, 'Why didn't you take over consumer credit from the states at the point?' The reason was that we were flat out trying to get referral of power in relation to corporations from the states. Rob Hulls, the Attorney-General of Victoria, described me—very generously, I thought—as 'a white George Speight' during the negotiations, because I was bullying him. I think it was George Speight who sought to strike a coup in Fiji at that time.

But this was very significant stuff. Of course, as I said, in those days we would have liked to have had uniformity among the states in relation to consumer credit, but there were other priorities. Often when we reflect on the failures of previous governments in various areas—be they the coalition, Labor or whatever—I think people fail to properly recognise the other challenges that are on at that moment and that a government may face that would prohibit it from any further reform in a particular area. The initial bill from this government tried to be consistent with the aims that I laid down in 2001 but failed in implementation because the proposals had the potential to drive the practice of payday lending underground, making payday lending all the more unregulated and dangerous.

That is a very sensitive issue. I reflect on the days when I was president of the SRC at Sydney university. One of the great challenges I had was to lend money, often to young women on campus who had fallen pregnant, did not have a partner and did not have income. I would much rather they came to me and borrow at a very modest interest rate, compared with the interest rates of those days, which were 15, 16 or 17 per cent. They could borrow money from me, from the student body, at four or five per cent to help them get through what would often be an awful time as a student, when they were unable to borrow. Because we were at Sydney uni, they could have walked down to some of the payday lender equivalents—Cash Converters or the 'money shops' in King Street, Newtown. At that time those borrowers were gouged.

So I have always been very mindful of the poorest of the poor being exposed to the hostile activities of a modern-day money lender. But rather than seek to claim a pound of flesh I have always thought that it is better to keep it above ground, with a sensible form of regulation, than to drive it underground to the point where standover men go around to those most vulnerable people in order to try to get their money back. On one hand, as I said, is the need to protect the interests of those who use payday lenders. Generally the people who use these products have lower incomes and little financial acumen. They often do not have access to cheaper and more regular sources of finance such as banks and other APRA-supervised lenders. I might add that there once was a time when we had to go to the bank to get a personal loan for $10,000. Now it is not hard to get a credit card to cover $40,000 or maybe more, which in some cases is cheaper than personal loans were in previous times. Even today, in a more credit constrained world, the fact is that credit is more available at lower levels and for people on lower incomes than it ever has been. And those are the people who have always been seen as poor credit risks or who were seeking to borrow amounts that were too small or for too short a period to be worthwhile for a lending institution. In a sense, that is why credit cards have been the saving grace in relation to this.

The interest rates charged in payday lending may seem high compared with the rates of interest available from banks, and certainly those who can least afford to pay are being charged the most. On the other hand, small and short-term loans have high costs associated with them. The administrative cost of establishing a loan does not vary with the loan size. Small short-term loans are roughly as expensive to establish and administer as large long-term ones. When I was a banking and finance lawyer at Corrs Chambers Westgarth back in the early 1990s, when we were involved in this area—in the line of credit and banking—it became patently obvious that it was much easier for banks to lend $100 million to one person, or one entity, than to lend $1 million to 100 entities, often with the same return. But the complexity and the failure rate were usually far greater with 100 at $1 million than with one at $100 million—unless you had met Alan Bond, Christopher Skase or Laurie Connell, or a few of the others!

So the result is that where administration costs are a high percentage of the loan then the interest rate is obviously higher, and that is typically the issue with payday or small loans. It is also the case that the loans are often unsecured, and so a high credit risk premium must be built into the interest rate. The industry claims that the interest rate maximums in the initial bill would make many of these small loans unprofitable and drive them underground.

The compromise situation put forward by the government this morning will make this less of an issue and impose less of a threat to small businesses in the sector. After all the delay and procrastination I do want to thank the Minister for Financial Services and Superannuation for engaging with us in this discussion. We accept that the payday and small loans sector is a legitimate industry which responds to market demand. We are not in the business of driving out legitimate market activities, especially when the business of a legitimate market crops up again in an illegitimate black market that has far more punitive measures. We also appreciate that some people who use this sector are vulnerable and require some government controls to protect their interests, but at the end of the day I am strongly of the view that people have to accept some personal responsibility for their actions. This is not an area where we should be tempted to go down the path of overregulation to the point where it no longer continues.

As expected, there has been significant concern from payday and small amount lenders regarding increased regulation. They have had five major concerns. Firstly, the proposed caps on fees and interest charged on payday and small loans are uneconomic, and will lead to many current participants withdrawing from the market. Secondly, many of the businesses that could close down are small family owned and operated businesses. Thirdly, the reduction of the availability of payday and small amount loans would result in many people not having access to the existing finance they rely on to meet unexpected expenses. Fourthly, the banks have not participated in payday and small amount lending for some time because it is uneconomic for them to do so, and they would re-enter the market to fill the gap if existing providers went out of business. Arguably, they do that anyway with credit cards. Finally, the reduction in legitimate licensed payday and small amount lenders may encourage unlicensed and illegal operators to enter this market, which would reduce consumer protection. I would just note that, after all, a number of bikie gangs and so-called 'workplace business mediators'—standover men, basically—are engaged in that sort of activity. Obviously we want to reduce it—get rid of it; we want to try and make their lives untenable.

As a starting point the amendments increase the small amount credit contracts from a 10 per cent establishment fee and two per cent interest per month to a 20 per cent establishment fee and four per cent interest per month. As an offset for the increase in interest rates of four per cent, the length of term for loans has been shortened from 24 months to 12 months. We will talk a bit more about the amendments as we get closer, but they also introduce a mid-tier model for loans between $2,000 and $5,000, for which an additional fee of up to $400 can be charged. Multiple contract prohibitions on lenders under the following circumstances have also been removed, such as when refinancing an existing small loan, when increasing the credit limit of an existing small loan or when entering into a second existing small loan where the credit provider is already a party to the existing loan. Finally, in these amendments a protected lending amount for Centrelink-dependant consumers is introduced. The amount of the repayments is to be capped at 20 per cent of their income. For example, if their weekly income is $400 the maximum amount of a repayment would be $80. This is a rather sensible move.

The government has also agreed to introduce two key changes via regulation, including a 200 per cent total cap on charges for all lending and a range of responsible lending obligations, including a presumption that a refinance is unsuitable where the borrower is already in default, a presumption that a credit contract is unsuitable where it is the lender's third or fourth loan in the last three months—and usually, sadly, that is linked to gambling or drug use—and a requirement for credit providers to consider a copy of the borrower's bank statements for the last three months before entering into the contract. Regulation will also be implemented to impose a prohibition on loans with a term of 15 days or less. These amendments are welcomed by the coalition. It should not have taken so long for them to be introduced, but let's get over that and deal with the fact that these are now before the House. Peter Cummins, the Managing Director of Cash Converters, stated on ABC Lateline Business in August last year, referring to Bill Shorten:

He's made it very clear in this draft legislation that he intends to wipe out the micro lending industry. And it's very disappointing when during two years of negotiation with Treasury and the Government we were led to believe he had no intention to do that.

I am glad that the minister is not seeking to wipe out the industry. Without revealing anything from my discussion with the minister today, it indicates that there is goodwill there, and I appreciate that. So I would say to members of the House we could have short-circuited it: instead of introducing 70 amendments in what could be the last week of parliamentary sittings for this government—but maybe we will not speculate on that—it would have been good to consult before the bill was introduced into the House, which would have provided significantly more confidence to all those involved in short-term financing.

I know there is an amendment outstanding from the Independents which we have not agreed to yet. But, with the amendments that we have seen, the coalition is not going to oppose the legislation. We continue to come to this with goodwill, noting the fact that it is often the people who need to borrow the least amount of money who are the most desperate for it. I am very mindful of so many scenarios, including where people put up wedding rings or family heirlooms as security for a short time to borrow a small amount of money to pay an electricity bill or to pay the rent. We do not want to prevent that because where people cannot get credit in those sorts of circumstances and they cannot pay the bills and could end up being kicked out of rented accommodation or have the electricity turned off, they often have to resort to petty crime. None of us would wish that circumstance on the sorts of people who have never engaged in that activity before. I have seen it in the past, and that is why I am very mindful that we need to have short-term financing available for people through a semi-regulated process to avoid a circumstance where, out of desperation, they have nowhere else to go other than to make enormous personal sacrifices, which this place would not condone.