Predatory short-term lender The Cash Store has been slapped with a $19 million penalty for violating consumer credit laws, the largest ever awarded by the Australian Securities and Investments Commission (ASIC) and setting a new precedent for the controversial payday loan industry.
The now-defunct Canadian-owned lender earned the record fine after it breached a spate of laws and, in ASIC’s words, engaged in “unconscionable conduct”, preying on low-income earners and Centrelink recipients.
The penalty came with a warning to other payday lenders: comply with lending rules or face similar penalties.
“This is a landmark case for the consumer credit regime and is essential reading for all credit licensees,” said ASIC deputy chair Peter Kell.
“The significant size of the penalty imposed shows ASIC and the Court take these obligations very seriously, as must all lenders, no matter how small the loan is.”
This stern response is in stark contrast to the regulator’s feeble response to the crooked financial advice provided by Commonwealth Bank and others.
More penalties to come
The Cash Store case is not a one-off. Fellow payday lender Cash Converters is currently facing two class actions over charging “excessive fees and interest rates”.
Law firm Maurice Blackburn, which brought the class actions to the Federal Court, says its client claims Cash Converters did not disclose the typical interest rate on its cash advance, which amounted to an astonishing – and probably illegal – 633 per cent.
According to The Australia Institute’s Tom Swann, there could be a “slew of potential court cases” coming up as regulators and consumers catch up with the dodgy behaviour of these under-regulated lenders.
“There’s very poor data on it,” says Mr Swann, “but estimates are that around half of all borrowers are on welfare.
“These fringe lenders are lending to the most vulnerable people and taking up the largest segment of their income. They end up using the same service over and over – some people are taking out 12, 13, 14 loans a year.”
With upfront interest rates above 20 per cent, and a large and confusing number of extra fees, low-income earners find they can only repay debts by borrowing again, falling into a debt trap that is all but impossible to get out of, says Mr Swann.
Borrowing to buy food
According to the 2012 Caught Short Report, the most common reasons for accessing a payday loan were to purchase food, to ‘make ends meet’, or to pay bills and rent.
A paper by Melbourne University legal scholars Paul Ali, Cosima McRae and Ian Ramsay, meanwhile, argues that the loans have a “disproportionately ‘corrosive and harmful’ impact on the financial and general wellbeing of the poorest and most vulnerable borrowers”.
And contrary to what the industry itself may claim, the authors maintain it “relies on repeat borrowing for a substantial part of its business and that payday loans entrench a pattern of repeat borrowing for a significant number of borrowers”.
Is there a place for these loans?
The industry has a decidedly predatory past, but there are signs that it is reining in its most “unconscionable” excesses. A number of payday lenders, including Nimble, Cash Train, Lone Ranger and Sunshine Loans, require borrowers to be in employment of some description.
But for welfare recipients, Mr Swann says there is no reason to use a payday lender, because you are eligible for a government equivalent: the Centrelink advance payment.
Anyone on Newstart Allowance, the Age Pension, Youth Allowance, Disability Support Pension, and eight other benefit programs is eligible to receive a Centrelink advance payment.
These loans are similar in size to payday loans. However, unlike payday loans, which can legally charge interest of 200 per cent per annum, Centrelink advance payments attract no interest, and repayment is made via deductions to benefit payments.
The Australia Institute is currently working on a report on the regulation of payday lenders.