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Legal and Constitutional Affairs Legislation Committee
05/03/2018

BEREGI, Mr Thomas, Chief Executive Officer, Credit Corp Group Limited

[15:18]

CHAIR: I think we've given you wouldn't part information on parliamentary privilege and the protection of witnesses. Would you like to make an opening statement and then will ask you questions.

Mr Beregi : Credit Corp Group is an ASX 200 financial services company employing more than 1,500 people, and the face value of our receivables is $6 billion across 850,000 customers. We have a successful track record of market disruption to the benefit of both consumers and creditors. We have disrupted the debt collection market to provide the most successful response to consumer hardship available with a current portfolio of more than $1.3 billion of defaulted consumer debts restructured into affordable repayment plans across 153,000 individual customer accounts. We have also disrupted the consumer lending market to provide the cheapest and most sustainable loans to consumers with limited borrowing alternatives, delivering 150,000 consumers an average saving in excess of 70 per cent. It is our aim to do the same thing in the debt agreement industry. Using our expertise in managing hardship, our experience as a creditor in one-third of all debt agreements and our existing infrastructure, we have proven that we can provide a significantly cheaper debt agreement with an average saving in total fees paid to administrators and introducers of more than 35 per cent, with no up-front fees whatsoever.

The proposed amendment to preclude voting by a creditor entity related to the debt administrator, we feel, is a misguided formulation which will threaten our ability to deliver these benefits to both creditors and consumers. As we look at it, we think that there's a paradox. The proposed amendment will deprive Credit Corp of the ability to vote in respect of its genuine pre-existing receivables while preserving the voting rights of third-party introducers connected with debt administrators. The proposed amendment will preclude competition by ethical operators with a transparent business structure, like ourselves, while encouraging unscrupulous operators to employ avoidance structures and distort voting with high up-front fees.

The proposal misses the real conflict of interest in the creation of a debt agreement. This is the conflict between the interests of administrators and introducers on the one hand, and the interests of the consumer and the creditors on the other. The administrator and introducer have no interest in exploring hardship options with creditors because there is no return—there is no fee on that activity. The administrator/introducer is interested in maximising repayments in order to maximise its own fees, taking a percentage of each repayment, and also improving the likelihood of creditor acceptance.

This conflict is what creates poor outcomes for consumers and creditors. A genuine pre-existing creditor, like ourselves, also acting as administrator will always exhaust the hardship options and won't unnecessarily burden itself and the other creditors with the costs and fees of a debt agreement, including the government's AFSA fee. Similarly, a genuine pre-existing creditor also acting as administrator will have no interest in proposing unsustainably high repayments that only increase the chances that its debt will not be repaid.

Credit Corp recommends that the proposed amendment be reformulated to exclude voting in respect of any debt arising from advisory, management or other services in any way connected with the formation of the debt agreement proposal, regardless of whether or not the creditor is a related party of the debt administrator. We believe this superior formulation addresses the real conflict of interest in the debt agreement industry, prevents an obvious avoidance structure involving third-party introducers, discourages high up-front fees set with the intention of distorting the voting process, promotes competition by ethical businesses aligned with positive consumer and creditor outcomes, and also preserves the voting ability of all genuine pre-existing creditors. That's all I had intended to speak about. I've heard lots of comments about debt buyers, and Credit Corp in particular. I haven't prepared myself to necessarily speak on that; that's not the purpose of me being here. But I'm happy to address any questions you have on that subject, or any others.

CHAIR: Thank you, Mr Beregi, for that opening statement and for your written submission. If there were things that you heard earlier that you think need commenting upon, please feel free to do that.

Mr Beregi : A debt purchaser like ourselves is the most patient of all creditors. That is because we have permanent tenure to the debt; we've purchased the charged-off debt. Contrary to what was mentioned earlier, the vast majority of debts that a debt buyer will buy have not recently entered a part IX debt agreement. In the last 12 months, Credit Corp has acquired over 156,000 debts owed by individual consumers. Less than 4,000 of those were the subject of a part IX debt agreement. That is certainly not the main aspect of our business. We are generally buying debts where people are in default, the debt has been accelerated, the whole amount is immediately due and payable, and, in the vast majority of instances, there has been no payment for six months. What we are doing is getting in touch with those people, working out what they can afford and setting in place a hardship repayment plan to clear that debt over a number of years.

It was also mentioned that we are somehow not regulated. Debt purchasers have an Australian credit licence, which is not a particularly easy thing to obtain. It is regulated by ASIC. We are all required to be members of an ombudsman scheme, and that will be the Australian Financial Complaints Authority, when it starts, but debt buyers are members of the existing two legacy schemes that we heard about earlier: the Credit and Investments Ombudsman and the Financial Ombudsman Service.

CHAIR: You are members?

Mr Beregi : We are members, absolutely. And as part of holding our license, as part of the National Consumer Credit Protection Act, there is a positive obligation on us to consider consumer hardship in all instances and respond to it appropriately. If we do not, the consumer is able to complain to the ombudsman, and the ombudsman will set what a fair and reasonable repayment plan is that is affordable to the consumer. The ombudsman decision is binding on us, and we have no choice but to be a member of the ombudsman scheme. There are really no rights of appeal from an ombudsman decision either. We are intensely regulated around consumer hardship and consumer outcomes. That is a key feature of our business model, and one that we respond to very seriously.

CHAIR: I can appreciate if you are a creditor then you will be wanting to do everything possible to make sure that all creditors, which includes yourself, get the maximum return. But in doing that, does that sort of suggest that you may be erring on the side of protecting the creditors rather than looking after the interests of the debtors?

Mr Beregi : We don't want to invest time and effort—this is in terms of our activities as a debt administrator. We are not receiving—our fee model, as I mentioned earlier, includes no upfront fees. We are getting no initial compensation for our activities. We are only getting paid pro rata as payments are made by the consumer and are distributed to creditors. It's entirely ongoing. If we set up an arrangement that's unsustainable and breaks, we don't go, 'That was an unhappy experience, but at least we've got our $2,000', or whatever it was we charged up front and then walk away from the deal and say, 'Better luck next time'. That's not the model that we're proposing.

CHAIR: But could some say that you might impose conditions that would require termination prior to the conclusion of the agreement, at which time bankruptcy would follow and you would get something on the way through and then get the rest of your debt on bankruptcy?

Mr Beregi : If I could just clarify something: bankruptcy is a very poor outcome for a debt purchaser and not one that Credit Corp pursues. It would be many years since Credit Corp petitioned anybody—

CHAIR: But you could get the house, if there were a house, although the evidence is that not a lot of these do have houses.

Mr Beregi : The issue with a bankruptcy, from a creditor's perspective, particularly an ethical, responsible creditor—you've got to remember that a company like Credit Corp is buying debts from the major banks and telecommunications companies in Australia. Those entities do not want to be dealing with any entity that they're going to find in the media with pictures of people, of families being displaced from their homes. The problem with a full bankruptcy is that it is a completely uncontrollable process, where the bankruptcy trustee takes over. As a creditor, you have no ability to manage what happens, manage how your debt is dealt with and so Credit Corp's view is to avoid bankruptcy as far as possible.

CHAIR: When you buy a debt, is the debt then shown as being owing to X bank or to Credit Corp?

Mr Beregi : It's owed to Credit Corp, so it's a proper legal assignment perfected under the Conveyancing Act.

CHAIR: But if there was a photo in the paper, it wouldn't be X bank that's being nasty, it would be Credit Corp that's being nasty.

Mr Beregi : Historically, that hasn't been the case when there have been issues. Historically, the individuals concerned have indicated the origins of the debt, and which bank was originally involved, and because debt-buyers are not in the media every day, not as prominent as major financial institutions, the headline is often focused in those instances where there have been issues. The headline will be focused on the original creditor.

CHAIR: Finally for me, if the debt that you've bought is, say forty per cent of the total debt of a debtor, and there's another credit manager in charge of the debt management, could it be said that as a creditor and a voter you could have the ability to disrupt the whole proceeding because you're not the debt manager?

Mr Beregi : That wouldn't be our intention. The way we vote is based on what we think will give us the best outcome and what we think is sustainable for the consumer. If we see a debt agreement—in fact up until very recently we had a situation where in something like five per cent of the debt agreement proposals that we were receiving we were the only creditor. So a debt administrator sending us proposals where we were the sole creditor—which is an absurdity when you're dealing with an entity that you can get on the phone with without having to send seven per cent off to AFSA, without having to pay a twenty-five per cent on-going fee, without having to spend $2,500 up front, you can get on the phone and negotiate a hardship arrangement with us, a forbearance of some description, reasonably promptly. Our voting is based on what's rational for us as a creditor: is this going to deliver a better outcome for us as a creditor? Is it going to be sustainable and reasonable for the consumer, so that they can adhere to it over the period, over what we could achieve if the debt agreement does not succeed? If we think that we'll get a better outcome if the debt agreement doesn't succeed, then we will vote no.

CHAIR: A criticism, if there is one, would be that if you're the only creditor and you're supposably acting form the—who do the debt managers act for? Do they act for the debtor or the creditor, or both?

Mr Beregi : It's an interesting question. In terms of the service they're providing in the initial instance, it is for the debtor.

CHAIR: That's the advertising on TV, the debtor. That being the case, could a criticism be that you're the only creditor, and it's in your interests to get the maximum drop of blood out of the debtor, and there's a fine margin between the last drop of blood and the fourth last drop of blood, and you would err on the last drop of blood, and a well-meaning debtor, one who didn't want to suffer the suggestion that they weren't doing everything possible to clear their debts up, would go along with it even though there's some real hardship. The suggestion might be that your interests are then more in the creditor rather than in the debtor who originally came to you.

Mr Beregi : As a creditor, certainly we're in the interests of the creditor. It would be absurd for Credit Corp to attempt to set up a debt agreement where it was the only creditor, because all that would do would be increase our costs.

CHAIR: But I thought you said a lot of the debt management agreements were where you were the only creditor.

Mr Beregi : These are a small proportion—less than five per cent—I indicated up until a few months ago. Credit Corp is not proposing any of those debt agreements. They are from third-party debt administrators. It wouldn't make sense, because we would have the fee leakage, the AFSA fee that we would be paying away, and in fact our own fees—

CHAIR: So is what you're saying you'd come to an arrangement—

Mr Beregi : We would come to an arrangement, and we have—

CHAIR: as a principal between the creditor and the debtor, without going through a formal debt-management agreement?

Mr Beregi : That's right. That's the vast majority of our business. Right at the moment, we have 153,000 consumers paying us every fortnight or every week pursuant to an informally agreed arrangement where they will repay their debts over a period of time. We are a participant in approximately 28,000 debt agreements at the moment. So can see overwhelmingly our business is all about voluntary hardship repayment plans.

CHAIR: You make some very good points. There is an inherent inconsistency with the manager having a vote and something they have an interest in.

Mr Beregi : The reality is that even going forward under this legislation, through the obvious avoidance measure of a third-party introducer who takes that initial phone call, recommends the person across for a debt agreement and charges a fee for that and, to the extent that fee is not paid, is rolled in as a creditor. That happens today. Debt administrators are almost universally voting in debt agreements today.

CHAIR: Because they get a fee out of it?

Mr Beregi : There are two ways they get a fee. If I have a look at our own figures recently, with our average debt agreement that is proposed to us and then is formed as a debt agreement from a third-party administrator they will charge an ongoing fee of, on average, 23 per cent of the amount collected from the consumer, and that will be charged throughout the life of the debt agreement. Up front, they will charge a fee of 2½ thousand dollars to $3,000 on average. Some of that is often paid in cash up front, so the person who can't afford to pay their creditors is actually shelling out, as Ms Southon indicated earlier, $800 to Fox Symes. Then there is a component, in our experience with Fox Symes, of another $1,800 which is deferred as a creditor. That $1,800 is a manufactured creditor in the debt agreement, and that $1,800 debt will vote in the debt agreement. That's a debt which didn't exist before the person contacted the debt administrator.

CHAIR: The $1,800 as a percentage of what spoke to the creditor, if anything's paid to the creditor.

Mr Beregi : It will be repaid—

CHAIR: Not in priority.

Mr Beregi : No. it will be paid, I guess, pro rata with all the other creditors, but it will vote, yet it's a debt that was created through the process of forming the debt agreement.

CHAIR: Why would you have a debt agreement if you're the only creditor?

Mr Beregi : It's absurd, absolutely. It's ridiculous.

CHAIR: But you're saying that five per cent of them are.

Mr Beregi : Less than five per cent, up until recently. Recently AFSA provided clarification and now routinely rejects such debt agreements. So up until recently what I was providing you was an indication of some of the practices that have historically gone on in debt agreements to show that there are debt agreements being formed that are not in the interests of the consumer.

CHAIR: If you're the only creditor, it would seem ridiculous, but you're saying that five per cent of the time that's what happens.

Mr Beregi : That's right. In our most recent statistics, something around 10 per cent there will be fewer than three creditors, excluding the debt administrator, who will be a fourth.

Senator PRATT: I don't understand, based on the submission, what an introducer is.

Mr Beregi : A broker—a third party who will advertise on television under a particular brand. In fact, with many administrators you will see a brand on television, but then you will see the debt administrator is in fact another entity.

Senator PRATT: I'm familiar with that kind of advertising. Thank you for clarifying that for me. Do you have any evidence that enables us to compare what's paid to creditors under a debt agreement versus under a debt purchase, and how much the debtor is paying under both those proportionately? You've said very clearly that there are things added in a debt agreement—in terms of the contract to negotiate that and do that—versus negotiating some kind of reduction of that debt, saying, 'Look, this is all you're going to get.' Under a debt purchase, clearly you've bought that debt, probably at a discount from the actual value of the original debt. You've got to have a good business case that you'll get back more than what you bought it for. How do we compare those two relativities?

Mr Beregi : I think there may be some confusion. It's not really an either/or. All the debts we buy will be purchased debts. Some—very few—will end up in debt agreements. Most will end up in a situation where we will agree some sort of informal repayment schedule with the consumer and they will make payments over time. Some people will complete all their payments and some will not. So it's not really an either/or. I guess the simple fact is that people who enter a debt agreement—because the model effectively requires it—are on average paying about 104 per cent of their debts through the debt agreement. Creditors are ending up with only a proportion of that, probably around 65 per cent.

Senator PRATT: By 104 per cent of debt, you're not saying that that's just the original amount borrowed. That 104 per cent of the interest and then an extra four per cent on top.

Mr Beregi : No. At the time they enter into the debt agreement, or at the time they negotiate the debt agreement, they might owe $28,000 under that debt agreement, as is the case with debt agreements that have been formed where Credit Corp is a creditor. Out of those total payments that will be made, on top of that there will be the up-front fee, which I mentioned earlier is around $2½ thousand—that's where you get the additional over the 100 per cent. So they'll pay that and, effectively, 30 per cent of every repayment—let's say 23 per cent goes to the debt administrator as their ongoing fee and seven per cent goes to AFSA, the government body that oversees the act and the debt administration industry.

Senator PRATT: But in those cases the consumer is likely to be better off having such an agreement than continuing to just pay the interest on that $28,000 and never being in a position to pay off that substantive $28,000.

Mr Beregi : Every informal arrangement that Credit Corp enters into ensures that people are reducing principal with every repayment. People are not finding themselves in a worse situation. In many instances where people are in circumstances where they can only make limited repayments Credit Corp will agree to freeze interest while people adhere to their repayment plan. So in many instances there is no interest being charged.

Senator PRATT: So you are, in the main, freezing interest—

Mr Beregi : In many instances.

Senator PRATT: and I'm assuming that debt agreements do as well. You are in the main continuing interest on it. I guess there's no real way of comparing, but that's not at the core of our issues today. I have no further questions.

CHAIR: Thanks, Mr Beregi. We very much appreciate your assistance and help.

Mr Beregi : Thank you.

Proceedings suspended from 15:45 to 15:56