A consumer regulator has warned payday lenders that further legal actions against the industry were “inevitable” because credit providers were failing to comply with responsible lending laws.

Peter Kell, the deputy chair of the Australian Securities and Investments Commission, issued the warning to the country’s 1036 licensed payday lenders after releasing the findings of a 12-month review of lending practices in the sector.

“The industry needs to lift its standards and review its compliance,” Mr Kell said.

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“Further enforcement action is inevitable.”

Mr Kell also warned that the regulator would consider launching criminal cases against credit providers whose lending practices caused avoidable harm to borrowers.

While payday lenders lend small amounts of cash (up to $5000), they typically impose large fees and onerous repayment conditions on borrowers.

Most borrowers have poor credit records and are unable to source cheaper finance from banks.

In recent years the sector has won a notorious reputation for swindling high fees and interest charges from unemployed workers and pensioners.

The latest industry miscreant exposed by the regulator was The Credit Shop, which copped a fine of almost $19 million in the Federal Court last month for using irresponsible lending tactics.

Credit reforms introduced in 2013 widened the lending obligations of payday lenders but the ASIC review found that credit providers are still flouting the laws.

“Lenders are falling short of meeting obligations of the new laws introduced in 2013,” Mr Kell said.

“We’re wanting to see some improvement in a relatively short amount of time.

“And we’re not waiting to take enforcement action.”

What ASIC discovered

Under the 2013 reforms, lenders are required to assess whether people applying for loans have a capacity to clear the debt within the prescribed repayment period.

Lenders also need to ensure that the terms of loan agreements meet the financial needs and objectives of borrowers.

ASIC reviewed 288 consumer files for 13 payday lenders and found that only one provider could demonstrate they were undertaking such loan assessments before agreeing to lend out cash.

“ASIC has a strong focus on the payday lending sector as its customers include some of the most financially vulnerable members of the community,” Mr Kell said.

“ASIC will use its powers to reduce the risk of payday lenders providing unsuitable loans and to reduce the risk that financially vulnerable consumers get caught in a debt spiral, where new loans are effectively used to pay back old loans.”

The regulator also unearthed examples of lenders pushing customers to agree to repay loans beyond 12 months so that they could harvest more fees.

This tactic has helped some loan sharks to circumvent laws aimed at capping the upfront and monthly fees levied on borrowers.

Tougher laws required

Around two-thirds of the consumer files reviewed by ASIC indicate that lenders entered into contracts with customers who could have been unsuited to the credit product.

Gerard Brody, the chief executive of the Consumer Action Law Centre, said this indicated that recent reforms were not inhibiting credit providers from lending to repeat borrowers.

Many payday lenders use software programs to evaluate whether a loan is appropriate for a client, but Mr Brody is concerned that such assessment methods are open to manipulation by aggressive lenders.

“If there is an assessment, it is common that the clients’ capacity to pay is considered but results may be skewed by reducing living expenses to a minimal amount,” he said.

“This isn’t surprising when a lender is relying on third-party software and algorithms to complete suitability assessments.

“We think it is inappropriate to rely on software and average expenditure models without taking the person’s individual circumstances into account, and it seems that ASIC agrees.”

Mr Brody called on the Federal Government to strengthen the assessment testing obligations of payday lenders.

A review of all laws relating to payday lenders is due to commence in July.

Mr Kell refused to comment on the reform proposals that ASIC was likely to put to government later in the year.