Pay Day Lending and Consumer Lease Reforms: The Story so Far

Thursday 12 January 2017 @ 9.56 a.m. | Corporate & Regulatory | Legal Research

Last year (28 November 2016), the Federal Minister for Financial Services, Ms Kelly O'Dwyer (the Minister) released the Government's response to the review of the "small amount credit contract" laws (the SACCs) - a review which commenced in 2015. These recommendations, as the ABC reported, were " . . . designed to prevent extremely high lease charges and excessive lending, especially to low-income customers". Legislation is expected to follow from these recommendations in 2017 and it seems useful to provide some overview and recap of the process and issues arising from the review and likely to come up in the resulting legislation.

Initiation of the Review and Chronology

The recommendations result from an extensive period of review, a statutory requirement under the National Consumer Credit Protection Act 2009 (Cth) (the Credit Act) section 335A which required that, a review be undertaken ". . . as soon as practicable after 1 July 2015", to examine and report on the effectiveness of the law relating to SACCs. Given the similarity of issues, the review was also considered an appropriate time to consider the law applying to consumer leases, regulated under National Credit Code (Part 11) especially as they effected the same market as SACCs.

The terms of reference for the review were released on 7 August 2015, by the then Assistant Treasurer and the review was chaired by Ms Danielle Press. The review panel members were Ms Catherine Walter AM and Mr Stephen Cavanagh.

The final report to the Government was provided on 3 March 2016 and in accordance with the requirements of the Credit Act section 335A(4), the Minister tabled copies of the report in each House of the Federal Parliament, this followed by a public release of the final report on 19 April 2016.

The Terms of Reference

By its terms of reference the review was to make recommendations about the:

requirement to obtain and consider a consumer's bank account statements (see the Credit Act ss 117(1A) and 130(1A));
rebuttable presumption that a loan is unsuitable where the consumer is in default under another SACC or has held two other SACCs in the past 90 days (see the Credit Act ss 118(3A), 123(3A), 131(3A) and 133(3A));
prohibitions on entering into, or increasing the credit limit of, a loan contract that has a term of 15 days or less with a consumer, and on suggesting or assisting a consumer to do so (see the Credit Act ss 124A, 133C and 133CA);
requirement to display a warning statement about the alternatives available to SACCs (see the Credit Act ss 124B, 133C and 133CB);
cap on fees and charges (including the maximum of a 20 percent establishment fee and of a monthly four percent fee) (see the National Credit Code ss 23A, 31A, 31B and 39A);
requirement that consumers who default under a SACC must not be charged an amount that exceeds twice the amount of the relevant loan in (see the National Credit Code s 39B); and
power to introduce specific protections for particular groups of consumers (see the Credit Act ss 133C and 133CC) and the protections for consumers who receive 50 percent or more of their income under the Social Security Act 1991(Cth) in National Consumer Credit Protection Regulations 2010 (Cth) regulation 28S.

More general terms required the review to make recommendations on:

whether a national database of SACCs should be established, and who should do it and fund it; and
whether any additional provisions relating to SACCs should be included in the Credit Act and related legislation.

Importantly, the review was required to make recommendations on whether any of the provisions applying to SACCs should be extended to regulated consumer leases.

Limitations on the review were that it would not recommend the establishment of an additional body or the establishment of a further review(s) and that it would not recommend changes to any area of the law that the Federal Government did not have ". . . the direct power to regulate".

The Government's Response to the Review

The Government's response as delivered by the Minister, indicated that the Government supported:

retaining the existing price caps on SACCs;
extending the SACC protected earnings amount requirement to all consumers and lowering it to 10 percent of the consumer’s net income (currently, for those consumers who receive 50 percent or more income through payments from Centrelink, total SACC repayments are capped at 20 percent of a consumer’s gross income);
introducing a cap on total payments on a consumer lease equal to the base price of the good plus four percent of that price per month; and
introducing a protected earnings amount requirement for consumer lease providers of 10 percent of net income for all consumers, equivalent but separate to the requirement for SACCs.

In announcing the response, the Minister indicated that the Government intended that changes following from the review would apply 12 months following the passage of any legislation through Parliament and that legislation would be developed, subject to Government’s priorities, during 2017. The Minister also acknowledged the effect of proposed changes saying:

"The Government acknowledges the significant impact these changes will have on existing industry participants, and will put in place appropriate grandfathering arrangements for existing contracts."

Click here for a detailed list of the recommendations and the Government's response.

Reactions and Comments

The ABC has reported reaction from the consumer leasing sector, quoting Mr Andrew Gresswell, of lobby group Consumer Household Equipment Rental Providers Association, as indicating that the two key consumer leasing recommendations could see almost 400 small to medium-sized leasing firms close with the loss of 1,500 jobs. Further, Mr Gresswell is reported as saying ". . . the high charges reflect the risk of loss or damage of their goods that his members face, and also the costs of servicing customers."

Mr Gerard Brody from the Consumer Action Law Centre is reported as indicating the limits proposed by the Government remain "very generous" for the industry, and quoted as saying:

"If you can't make money charging those rates then you probably shouldn't be in business, . . ."

In Mr Brody's view, the reforms should go further and impose a blanket 48 percent p.a. interest rate limit on all consumer lending and leases, but he sees the Government's initial moves are a good start. The concern for Mr Brody was the anticipated length of time for the proposed laws to be fully implemented, which is not likely to be until sometime in 2018 at the earliest.

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