ASIC today released a report that found that payday lenders need to improve compliance with some of the key consumer protection laws operating in the industry.
While ASIC’s review found compliance with some rules was working, it also found that payday lenders are falling short in meeting important new obligations introduced as part of the small amount lending reforms in 2013.
ASIC Deputy Chairman Peter Kell said: ‘The payday lending sector is on notice to improve its practices or further enforcement action is inevitable.’
ASIC’s review of 288 consumer files for 13 payday lenders - who are responsible for more than 75 per cent of payday loans made to consumers in Australia - found some lenders engaging in conduct that risks breaching responsible lending obligations.
ASIC’s review found particular compliance risks around the tests for loan suitability, which must be considered when the consumer has multiple other payday loans or is in default under a payday loan.
The review also identified concerns where payday lenders set their loan terms at 12 months or more, thereby charging the consumer more fees, in circumstances where a consumer had requested a shorter term and paid the loan back in that shorter time.
The report also found systemic weaknesses in documentation and record keeping, including around the issue of the consumer’s objectives and needs.
ASIC’s review found better levels of compliance with some regulations, including the requirement to provide a warning about alternative credit options and the income protection rules for Centrelink recipients.
The findings are detailed in Report 426: Payday lenders and the new small amount lending provisions (REP 426).
ASIC’s review follows a series of enforcement actions against payday lenders, including the recent Cash Store decision which saw penalties of almost $19 million handed down by the Federal Court for irresponsible lending and unconscionable conduct.
Following the work and the conduct that has been uncovered ASIC has commenced investigations and further follow-up work in certain cases, and will consider enforcement action or other regulatory action.
Mr Kell said: ‘ASIC has a strong focus on the payday lending sector as its customers include some of the most financially vulnerable members of the community.
‘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.’
ASIC became the national credit regulator in 2010. Tighter consumer credit rules for small amount lending were introduced in 2013.
ASIC notes the 2013 small amount credit reforms will be independently reviewed after 1 July 2015. ASIC will continue its focus on enforcing the current provisions and raising industry standards.
ASIC has focused on three areas of misconduct in the payday lending sector:
- irresponsible lending
- avoidance through business models that attempt to circumvent the law, and
- unfair fees and misleading advertising.
Since 2010, ASIC enforcement action has resulted in close to $2 million in refunds to more than 10,000 consumers who have been overcharged when taking out a payday loan. Payday lenders have also been issued with 13 infringement notices totalling approximately $120,000 in response to ASIC concerns about their compliance with the credit laws.
In February 2015, following ASIC action, The Federal Court awarded record penalties totalling nearly $19 million against The Cash Store and loan funder Assistive Finance Australia for failing to comply with consumer lending laws and unconscionably selling credit insurance products to Centrelink recipients. The penalty is the largest civil penalty obtained by ASIC (refer: 15-032MR).
In recent years, ASIC has taken enforcement action and achieved outcomes against payday lenders, including online lender Nimble. These are listed below and cover irresponsible lending, avoidance models/unlicensed conduct, general misconduct, and misleading advertising.
ASIC also has a range of actions on foot, including:
- seven matters before the court, and
- 16 matters being investigated or reviewed (this is in addition to the work being conducted following the findings in REP 426).
Mr Kell said: ‘ASIC’s particular focus on payday lending is part of our wider scrutiny of the broader consumer credit regime, which takes in banks and other non-bank lenders.
‘Our actions demonstrate ASIC’s commitment to address particular consumer credit risks in our market.’
ASIC’s payday lending outcomes include:
Breaches of responsible lending requirements
Avoidance models/unlicensed conduct
- Fast Easy Loans (refer: 14-328MR)
- Cash Loan Money Centres and Sunshine Loans (refer: 14-278MR)
- PAID International (formerly First Stop Money) (refer: 14-272MR)
- Teleloans and Finance & Loans Direct (refer: 14-150MR)
- Cash Stop Financial Services (refer: 14-035MR)
- Fast Access Finance (refer: 13-205MR)
- Cashpal (refer: 12-127MR)
- PAID International (refer 14-065MR)
- Cash in a hurry (13-284MR)
- Fair Loans (refer: 13-190MR)
- Nimble (refer: 13-112MR)
- Fair Finance (refer: 13-088MR)
- Cash Today (refer: 12-197MR)
- Money3 (refer: 12-136MR)
Consumer guidance is available on ASIC’s MoneySmart website for consumers thinking about getting a small amount loan like a payday loan.