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Tuesday, 26 June 2012
Page: 7937


Mr FLETCHER (Bradfield) (11:01): I am very pleased to rise to speak on the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011. This is a bill dealing with the regulation of the market for the provision of short-term, small amount loans. At first blush, the issues in this area of policy seem to be very straightforward: moneylenders are charging high rates for small loans for a short period of time. Battlers are being ripped off! The solution is very simple: ban that conduct and prevent the rip-off. As is so often the case, however, the picture is much more complex. What is at stake here is the very real risk of shutting down an industry which today serves many thousands of Australians, including those who find that its services are a better solution to their needs than other forms of short-term finance such as credit cards and those who find it simply impossible to obtain finance from any other source.

The Parliamentary Joint Committee on Corporations and Financial Services conducted an inquiry into this bill last year. The report of that inquiry raised significant concerns with a number of aspects of the bill as it then stood, a bill which embodied the kind of simplistic approach which I described at the start of my remarks. In the time I have available today I will highlight three points in relation to the bill before the House. The first is that this is a complex and difficult area of public policy, but it is not correct to assert, as the government appears to, that all users of the services of moneylenders in this area are victims who are being ripped off. The second point I will make is that the approach with this legislation is, sadly, all too characteristic of the responsible minister, the Minister for Financial Services and Superannuation, Mr Shorten. It is driven by a grab for headlines rather than a detailed and careful analysis of the underlying issues. The third point is to highlight the significant risk of this industry, or large components of it, being driven out of business and the implications that will have for the thousands of Australians who rely on its services today.

Let me turn first to the proposition that this is a complex and difficult area and that it is a simplistic caricature to assert that all who use the services of those providing short-term, small amount loans are victims, are vulnerable and are being ripped off. Let us start with the proposition that a large number of people use these services. One witness before the parliamentary joint committee in its inquiry last year told the committee that it estimates that the industry provides cash advances of some $800 million a year to some 500,000 customers. On any measure, a large number of Australians are requiring these loans. Accordingly, one of the compelling issues which must be addressed here is the detriment that consumers would suffer if the industry were materially reduced in its extent because of regulatory measures. Where is the sense in reducing the availability of a product for which there is a proven demand? Minister Shorten said in the media release announcing the measures contained in the bill that the measures are intended to 'protect … vulnerable consumers'. That is a good indication of the premise that underpins the government's introduction of this legislation. This bill is based on the assumption that all loans for a short term and for a small amount are inherently harmful and that all who take them out are inherently vulnerable. I do not believe that that is a correct assumption. There were certainly witnesses who appeared before the committee who put that particular proposition. Let me quote, for example, Ms Catriona Lowe of the Consumer Action Law Centre, who said:

What we are saying is that the product is harmful in the sorts of circumstances which are typical for the user of the product. Where a product is harmful, there are countless examples of where we as a society make a judgement that, if we are making that product available, we will regulate the basis on which it is available because of its potential for harm.

I quote the comments of Ms Lowe because I think they are an articulate summary of the premise on which this legislation is based. I hasten to add that the work done by consumer credit legal centres is of the first importance. It is difficult work, it is demanding work and the people who do it are very much to be admired and respected. They do extremely important work. Let me make it absolutely clear that I acknowledge, as any sensible person must, that there are plenty of people who are incapable of making sensible financial decisions, for a whole host of reasons—it may be due to addiction, substance abuse, intellectual impairment or limited decision-making capacity for other reasons. There are a range of reasons why a proportion of people will be incapable of making sensible financial decisions, but it is not correct to claim that all who use short-term, small amount loans are, by reason of that fact, people who have demonstrated themselves incapable of making a sensible financial decision. The premise that we ought to regulate on the basis that everybody who is a consumer of these products is being ripped off is a premise which has not been satisfactorily demonstrated to be valid by the government in the rationale it has put for the measures contained in the bill before us today.

There was evidence provided to the inquiry that, for a number of consumers, taking out a short-term small amount loan is a rational decision on the basis that it is the best source of finance compared to the alternatives. In particular, there are consumers for whom a credit card is a less attractive proposition than a loan of this kind. It is also noteworthy that a number of providers told us that they do not make a practice of lending to those whose only income is government benefits or, alternatively, they specifically require that their customers must be in paid employment.

The issues here are complex, and the appropriate and pressing objective for the government and for the parliament is to strike the right balance. There certainly are consumers who are vulnerable, and sensible measures to protect them are obviously worth considering. But it is very important to ensure that short-term lending remains available, accessible and as cost-effective and competitive as possible.

This brings me to the second proposition I want to argue to the House this morning, which is that the bill before the House today is not based on a careful analysis of the policy issues which present themselves in this area but is a cobbled together exercise driven by a desperate desire to grab headlines. The first piece of evidence for that proposition is to look at the minister who is bringing forward the bill, but the second piece of evidence is based upon an analysis of the existing regulatory framework and asking ourselves whether the additional measures contained in this bill are required or justified. For example, a number of parties appearing before the committee's inquiry pointed out that the recently introduced responsible-lending framework closely constrains their capacity to lend to precisely the class of consumers who, it is argued, are to benefit from the protections contained in this bill. This raises the question of the justification for the additional set of complex prescriptive measures contained in the bill we are presently considering if the responsible-lending framework only recently introduced already imposes restrictions on, for example, loans made specifically for the purpose of daily consumption needs or paying bills.

Another piece of evidence that this bill is primarily motivated by a short-term grab for headlines emerges from an analysis of some of the provisions contained in the bill. In particular, the bill, in the form in which it was first presented, adopted the simplistic 48 per cent cap, the cap that was first passed into law by the hopelessly incompetent New South Wales Labor government in its dying days. The Australian Bankers Association in its submission to the inquiry had this to say:

The proposed model for calculation of the "cost rate"—

that is, the 48 per cent—

is based on a model legislated under the Credit (Commonwealth Powers) Act 2010 (NSW) upon which there was no prior consultation with the credit industry. Subsequent representations to the New South Wales government were to no avail.

Simple mathematics means that any short-term loan for a few days or even a month is likely to breach a cap calculated on an annualised basis. For example, consider a loan of $100 for two weeks. Any fee greater than $1.85 produces an annualised interest rate of more than 48 per cent. More fundamentally, the premise which is effectively given effect to by this measure is that short-term loans are inherently problematic and objectionable. A formula which automatically deems short-term loans to be problematic and objectionable is one which I do not believe should be supported.

The bill in the form in which it was originally put imposed this 48 per cent cap for all loans under small amount credit contracts, and for small amount credit contracts there was a separate cap mechanism involving an upfront fee of 10 per cent of the principal amount and a monthly fee of two per cent. Small amount credit contracts were defined as being for less than two years and less than $2,000.

I hasten to add that the government has advised that it has a range of amendments which it says will address a number of the clear drafting and implementation problems contained in the bill as it was originally proposed. The difficulty is that this is a very complex area. It is not easy to quickly understand and analyse provisions. It is easy to make mistakes, as the New South Wales provisions demonstrate. And yet at this stage the actual drafting of the amendments has not yet been provided, simply a conceptual description of some of the amendments. So, while we on this side of the House are pleased that at least there appears to have been some movement and some recognition of the inherent flaws in the approach contained in the measures in the original bill, it is too early to be able to say that the amendments as drafted achieve the effect the government promises when it claims they will address many of the concerns raised.

Let me turn, thirdly, to the risk of driving the industry out of business. This is a risk to which the government appears to have given little consideration. The original media release by Minister Shorten did identify some alternative sources of short-term finance, but there was no evidence which emerged during the committee process of these being available in sufficient volume, remembering the estimate of some $800 million of advances being provided each year by the current industry. It is clear that the banks do not participate in payday and small amount lending and have not done so for some time, and there is no basis for thinking that they are going to return to that area of activity. The Treasury told the committee that the government's objective is to maintain a viable short-term small amount lending industry. Ms Vroombout from the Treasury said that maintaining a viable industry was the government's objective in setting the cap. But it is very unclear how this is to be achieved on the basis of the provisions of the bill before the House and it is very unclear how the detailed and prescriptive interventions in the business practices of the short-term lending providers are consistent with the government's stated objective of maintaining the existence of this sector.

This is a complex area. It is an area which, sadly, is all too susceptible to caricature and extremely simplistic approaches. That is the basis on which the government brought forward its initial legislation. That legislation, on any analysis, is deeply flawed. We are promised that there are amendments which are going to solve the problem. You will forgive us, Mr Deputy Speaker, if, based on experience, we are highly sceptical. We await the amendments but I conclude with the point, in weighing up the costs and benefits here, that to willy-nilly destroy an industry which meets the needs of thousands of Australians every year would be a bad idea.