Monday, 20 August 2012
Consumer Credit Legislation Amendment (Enhancements) Bill 2012; Second Reading
The coalition will not oppose the Consumer Credit Legislation Amendment (Enhancements) Bill 2012, but this bill is yet another example and a clear demonstration of the government's incompetence and complete dysfunction in dealing with the most basic parliamentary processes. When Senator Feeney only a few days ago introduced this legislation in the Senate, he tabled a second reading speech that was outdated by just a year. He tabled a speech that was completely unrelated to the legislation that is before the Senate. He tabled a second reading speech which assumed that all of the corrections that were imposed on the government by the Parliamentary Joint Committee on Corporations and Financial Services had not happened.
This piece of legislation, like so many pieces of legislation in the portfolio of the Minister for Financial Services and Superannuation, Bill Shorten, was not properly thought through. It did not strike the right balance between consumer protection by making sure that relevant services for which there is strong public demand remain available, accessible and affordable. So the Parliamentary Joint Committee on Corporations and Financial Services made a unanimous report making strong recommendations on how Labor's original piece of legislation should and must be improved. When I say it was a unanimous recommendation, it was a recommendation that was made by government members of the committee alongside coalition members of the committee. The Parliamentary Joint Committee on Corporations and Financial Services came to the view that Minister Shorten did not get this right and introduced a piece of legislation that was going to have detrimental consequences for consumers of these sorts of services right across Australia. But Senator Feeney, either because he was unaware of what had happened over the last 12 months or because somebody in Minister Shorten's office had not quite caught up with what was happening, was tabling a second reading speech here in the Senate which was to make us believe that in fact the government had not taken any of the recommendations on board, even though the bill itself reflected all of those changes. It is just another example of the complete chaos and the complete dysfunction and incompetence of this bad Labor government that we are subjected to at this point in time.
Senator Feeney's speech as incorporated talked about an up-front fee of 10 per cent of the loan and a cap of two per cent interest each month. In fact, the government's bill allows for an up-front fee of 20 per cent of the loan, and four per cent interest each month. It is absolutely extraordinary that the government cannot even get these sorts of basic processes right. As I have said before, the government with its amendments to the legislation has already acknowledged the flaws in the bill as originally presented to parliament. The government was forced back to the drawing board by the unanimous recommendations of the PJC inquiry. Under pressure from that inquiry, the government has agreed to very specifically increase the caps for small amount credit contracts, shorten the term for small amount credit contracts from 24 months to 12 months, and increase the establishment fees from 10 per cent to 20 per cent and interest rates per month from 2 per cent to 4 per cent as well as allowing an additional $400 fee to be charged for mid-tier loans between $2,000 and $5,000, remove the multiple contract prohibition on lenders under certain circumstances and introduce a commitment to prohibit loans with a term of 15 days or less by regulation.
These changes represent a significant concession to the arguments put forward by the industry in the context of the inquiry by the Parliamentary Joint Committee on Corporations and Financial Services and expressed in relation to the original bill. The government's original proposals clearly did not strike the right balance between appropriate consumer protection and making sure that short-term lending remains available and accessible and is as affordable and competitive as possible. Yet again Minister Shorten, in his enthusiasm to increase the levels of red tape and increase levels of regulation, had not really thought things through. He had not gone through proper process. He had not listened carefully enough to the legitimate representations by people across the industry who actually know what they are talking about.
The proposed government amendments address many of the concerns raised by stakeholders during the parliamentary committee process—specifically the concerns that the proposed caps on fees and interest charged on payday and small amount of loans would be uneconomic and would lead to many current participants withdrawing from the market, that many of the businesses that could close down are small family owned and operated businesses, that the reduction in the availability of payday and small amount loans would result in many people not having access to existing finance they rely on to meet unexpected expenses, and that the banks, having not participated in payday and small amount lending for some time because it is uneconomic for them to do so, would not re-enter the market to fill the gap if existing providers went out of business. Also, the reduction in legitimate licensed payday and small amount lenders may encourage unlicensed and illegal operators to enter this market, which would have reduced consumer protection instead of increasing it.
The amendments address these issues in that they ensure that the new caps on fees and interest charges will ensure that the vast majority of short-term lenders will remain commercially viable, that small family owned and operated businesses will not be adversely impacted, and that people who rely on these types of loans, which are not provided by banks, will continue to be able to access the finance they rely on to meet unexpected expenses.
The ongoing viability of legitimate, regulated providers will discourage the growth of unlicensed and illegal operators, whose entry into the market would have reduced consumer protection.
While some of the provisions may not have been implemented by the coalition in government in the form that they have been proffered by this government, the significant concessions obtained by the coalition have achieved a much better balance between the twin aims of providing appropriate consumer protection and ensuring that short-term lending remains available than was the case in the original version of the bill. That is why, with these amendments, the coalition will not oppose this bill. The bill also introduces statutory protections in the provision of reverse mortgages, including a statutory protection against negative equity, and more detailed and prescriptive disclosure requirements. These measures were in the original bill and are not opposed by the coalition, and they are supported by the industry.
I draw the attention of the Senate, in this context, to the additional comments that were made by coalition members and senators as part of the parliamentary joint committee inquiry into the Consumer Credit and Corporations Legislation Amendment (Enhancement) Bill 2011. This is a pretty sizeable industry. Senators may be surprised to learn that this short-term lending industry provides cash advances of $800 million a year to about 500,000 customers. Half a million Australians access this service to the tune of $800 million a year. That was part of a submission that was made to our inquiry. This suggests that this industry, providing short term, small-amount loans, responds to and is meeting a substantial consumer need for those types of loans. Whenever we make regulatory changes, whenever we seek to impose additional regulatory restrictions, we must take account of the consumer impact and the potential consumer detriment which comes from reducing the availability of a product or the competitiveness in the industry that provides those sorts of services.
When Minister Shorten first announced the measures in the original version of this bill he asserted that this was all about protecting vulnerable consumers. In other words, this bill was based on an assumption that all short-term, small-amount loans are inherently harmful, and all those who take them out are inherently vulnerable. That is not correct, if you consider the evidence which ultimately was accepted by all Labor and coalition members of the committee. There was an acknowledgement there that the service goes much further.
I draw the attention of the Senate to some hard evidence. Rather than being used only by those who are vulnerable and desperate, many short-term, small-amount loans are provided to people in employment who have made a rational decision that the product meets their needs better than the alternatives. We heard evidence that many providers specifically require customers to be employed, or have a rule that they do not lend to those whose only income is government benefits. These providers included businesses like Money Plus, Money Centre, DollarsDirect, Cash Doctors and First Stop Money. Providers which do lend to welfare recipients, such as Cash Converters, gave evidence about their responsible lending practices in doing so. I quote a particular piece of evidence which was provided by Mr Day:
We at Cash Converters indicated that over 40 per cent of our customers are on welfare payments. We have a responsible lending structure in place that will lend a new customer a maximum of 10 per cent of net income and, out of that, we have a 97 per cent repayment rate. It does not necessarily happen at the end of the month. Some 30 per cent of them take longer, but there are no punitive penalties or additional costs involved in that.
That evidence is not consistent with an assumption that short-term, small-amount lending inherently and necessarily involves vulnerable and disadvantaged customers who are being forced to agree to terms which make it impossible for them to repay the loans.
This is a policy area which raises difficult issues. Clearly, there are people who are incapable of making sensible financial decisions, be that due to addiction, substance abuse, limited decision-making capacity or a range of other factors. But the suggestion that, somehow, this industry exclusively focuses on preying on and taking advantage of the weak and vulnerable was not borne out by the evidence. That was part of the political argument that Minister Shorten was pursuing at the outset when this legislation was introduced, and he had to backpedal on that to a pretty large degree.
The evidence that we considered also highlighted several serious concerns about the approach taken in the original bill, which led coalition senators to conclude that this was a hastily cobbled-together attempt to grab a headline rather than any meaningful attempt to come to terms with the difficult policy issues that arise from short-term, small-amount loans. We recognise that since then the government has sensibly come to the same conclusion as we have, and has responded to those concerns.
As I said at the outset, the coalition will not be opposing this bill. We welcome the fact that, on reflection, Minister Shorten has reconsidered his approach to this legislation, and that he has been prepared to consider the evidence which had been accepted by government members of the Parliamentary Joint Committee on Corporations and Financial Services as well. This bill started in a pretty unreasonable position but it has come a fair way. Given that the government has made significant concessions on all the issues that I have raised, the coalition will not be opposing this bill.
I rise to speak to the Consumer Credit Legislation Amendment (Enhancements) Bill 2012. Thankfully, Senator Cormann has outlined most of the reasons for the Greens' major concerns about this piece of legislation. It is clear that—despite the original intent to try and regulate what has become an industry that sucks the life out of very vulnerable, very poor, very disadvantaged people and exploits them by allowing them to be trapped in cycles of debt—rather than going to the heart of those problems and overcoming them, this bill has been watered down so much because of the government's agreement with the coalition that the bill basically now does nothing to offer the real protections that consumers desperately need.
A moment ago Senator Cormann said he does not believe that the short-term loans run by loan sharks that are designed to capture those who are less fortunate in our communities are as bad as people, particularly in the consumer rights sector, would argue. Let me go to a couple of statistics in the report Caught short that was released by the NAB only last week. More than 80 per cent of payday borrowers were receiving a Centrelink payment or the pension; 80 per cent of those who apply for these loans and are given them are on Centrelink payments or the pension. Borrowers are taking out more than 10 loans in a two-year period, with some taking out even more than 20 loans in that same period. Rather than being able to deal with a one-off loan, these people get caught in a cycle of debt and are trapped there—that is what the statistics continue to show. Borrowers have reported living with significant psychological, physical and emotional health problems that have been linked to their ongoing poor health over the periods of owing extensive debts as a result of being trapped by these short-term loan or payday loan schemes.
Many of those who engage in these types of lending practices are caught in periods of excessive gambling, alcohol consumption or illegal drug taking. These people are already considerably disadvantaged and the loan sharks are out there waiting to snap them up. The majority of borrowers are borrowing less than $300 at a time. You have to be in a pretty desperate situation to borrow less than $300 because you desperately need to pay your essentials day in, day out. The reasons for taking up payday loans, according to the NAB report, were to pay rent and basic essential bills: electricity, gas, petrol, car registration, school fees for kids and putting food on the table for themselves and their families. People are taking a $300 loan just to be able to go to the supermarket and buy the groceries for that week. These are the vulnerable people that we are talking about and that this bill is meant to be helping by addressing that cycle of poverty, that cycle of debt. Yet, unfortunately, the government has lined up side-by-side with the coalition and watered down this legislation in line with what the loan sharks wanted.
Cash Converters was one of the most prolific voices in relation to this bill, and yet since the legislation was first announced the Cash Converters share price has risen, despite the fact that the company went to the government and cried poor. Somehow, putting some proper regulation around these loan practices and making sure we can protect consumers was said to mean that its business practices were under threat. If loan sharks like Cash Converters and others are relying on the misfortune of people who have to borrow $100 or $200 to buy the groceries to feed their families, I do not think that is a very good business model for anyone to be relying on. I suggest that Cash Converters and other loan sharks consider what type of business they are in and stop preying on the very desperate needs of some of our country's most vulnerable people.
We know that borrowers continue to say the loans they take out are used to meet their daily living expenses. These are not one-off loans. The problem is that once they have taken out one of these loans they get caught in a cycle of debt and have to take out another loan in order to pay back the enormous interest, fees and charges that these loans incur. The loan sharks are able to tap straight into their bank accounts. They get paid, but all of a sudden people have no money left and they have to apply for a brand-new loan. That is how they get into this situation, where some people are taking out 10 or 20 loans in two-year period—that is, almost monthly for some people—just to keep up with the debt that they owe and put aside money for the rent, the bills and the groceries to feed themselves and their families.
People caught in this situation continue to say that they feel trapped in a vicious cycle and are continuously indebted to one or more of the short-term lending companies. Borrowers do not like needing to take out these loans in the first place. But we know that, when Centrelink payments are so low and the minimum wage continues to be far less than it should be, very vulnerable people continue to be exploited. Let us not even consider casual workers who, if they do not get shifts in a particular week, do not know what to do to pay their rent. Chances are that a lot of these people have to go to loan sharks, Cash Converters and others, to get the money to pay their rent. That is where the problem is in the beginning.
I want to take us back to when the legislation was first tabled. There was a lot of goodwill across the country from the consumer rights sector. There were a lot of people who thought that Bill Shorten and this government were going to do the right thing and that they were going to tackle this issue, take it with both hands and make sure we looked after the country's most disadvantaged people—those who are being taken for a ride because of the lack of regulation in place. We saw the coalition jump up and say that they would not support that. We saw lobbying campaigns—very well-paid lobbying campaigns from organisations, loan sharks, Cash Converters and others who paid thousands of dollars to organisations like Hawker Britton and others to directly lobby the government to get them to water down these reforms. As a result, this legislation does not have the teeth to really make a difference to Australia's most vulnerable people, who continue to be taken advantage of by these nasty schemes and who do not have the advocacy, the strength and support that this Labor government should be providing.
We have heard Treasurer Swan going on and on about how he wants to tackle this gap between the rich and the poor. This legislation proves that he is all words and no action. The Treasurer has no standing when you consider that, rather than doing the right thing and putting a hard cap on the number of loans that people can take out and putting in place regulation to ensure that people cannot have that money taken straight out of their bank accounts and cannot have their homes secured against loans as little as $5,000, he only talks about tackling the rich and looking after the poor. You have to wonder how serious Mr Wayne Swan is. This would have been the perfect legislation to prove that, yet the government have gone weak at the knees and fallen for the big lobby groups engaged by those who are making hundreds of thousands and millions of dollars of profits off the back of very, very poor, hardworking Australians, who just want to cover their living costs, make sure their kids can go on school camp and put food on the table.
I want to tell you one story about a young fellow from Melbourne who took out his first payday loan to pay for repairs on his car. It was intended to be a one off-loan, but quickly it turned into a pattern of repeat borrowing because one cannot keep up with the excessive interest charged. Somewhere in the vicinity of 200 and 400 per cent is put onto these loans, including the fees and charges. He got caught after just wanting to fix his car so he could continue to get to work to earn some money to pay his bills. He ended up finding himself in a cycle of debt and a cycle of poverty. Initial payments left this young man without enough money to live on. It forced him to choose between taking out another loan or going without food until his next pension day. In order to obtain some quick cash to eat, to feed his dog and to put fuel in his car, this young guy continued to take out loans. These are the stories of people who get caught and get taken advantage of by loan sharks.
I want to tell you another story of a woman with two kids who desperately wanted to make sure her children could attend the school camp. She took out a loan of $170 because that is what she needed. She did not have the money. She was on a pension. She did not have secure work. She is a mum trying to run a household and put her kids through school. In the end, it cost her over $14,000 just because she wanted her two daughters to attend school camp.
I suggest that this bill has become so weak and so far from its purpose that, rather than delivering the security and the protections that the most disadvantaged and vulnerable Australians need, instead we are seeing legislation that could have been written by the loan sharks themselves, helped along of course by the opposition, who have no desire to tackle this issue. For them, it is all about looking after big business; it is not about the vulnerable people who struggle to pay their rent and put food on the table, or send their kids to school camp.
The point here is that the government continue to talk about wanting reform, yet when the hard decision needs to be made, when they need to stand up and take the big lobby groups head-on, they fail. That is what has happened under this legislation. This is the legislation the coalition want. We saw Senator Cormann say he did not like the first bill but he is more than happy to back this one. That is because this bill does nothing for those people who are caught in a cycle of poverty.
The Greens will be moving several amendments to this legislation to try to redeem some aspects. What is the point of saying we know that people get caught in this cycle of debt with payday loan after payday loan if we do not put a hard cap on how many they can take out in a year? What is the purpose of it unless you are going to do that? We will move an amendment to ensure that we cap at four the maximum amount of payday loans that one person can receive in a 12-month period. In addition, we will make sure that there is a proper registration list so that you cannot be forced to go to the next lender down the road because the other lender has already given you four loans—because you are still struggling so you will move on to the next one.
In addition to all of this, the government really need to look at how we can support people so they do not fall into these traps in the first place. Where is the proper support for those who cannot pay their bills at the end of the month because they simply do not earn enough? We know that, for those on Centrelink payments, Newstart is far, far too low. Where is the commitment from this government to increase the levels of Newstart rather than condemning our country's most disadvantaged people, who just want a fair go and to pay for the petrol for the car to drive them to the next job interview or to buy that new jacket because looking good at a job interview is important if you really want it?
Where is the support for those parents on the pension, those single mothers who are about to be cut off, to make sure they can send their kids to school camp rather than having to be sucked in by the empty promises and hollow support from the loan sharks. Many consumer rights organisations across the country have said that the best way to support people is to give them non-interest loans to pay for these essentials, and proper financial support and counselling. You have to teach people ways to get out of cycles of debt, not find ways to get the loan sharks out of their responsibilities of preventing people who are in cycles of debt.
The Greens will move three key amendments: putting a cap on the amount of loans that people can lend; ensuring that loans up to $5,000 cannot be secured against items such as the family home or the family car or others, because we know what happens: those people end up having those items taken from them. And we need a proper way of regulating just how many loans people have. These are all reforms, regulations and workable solutions to this issue that have been taken up in places such as the United States. They have worked well. It obviously took a bit of courage by the government of the day to ensure that they were implemented properly but they have worked.
That is the type of solution-finding, reform-enacting leadership that we should expect from the government here in Australia when it says it cares about Australia's poor. Frankly, you would have to wonder what type of hollow rhetoric that is when, rather than doing what the consumer needs, rather than looking after the rights of the consumer, this government has stood up for the loan sharks and handed them everything they want on a platter.
The loan sharks cried poor when this legislation was announced, when it was actually still intended to tackle these issues. It was a good piece of legislation. They cried poor, despite the fact that some of them had increased their share price in the vicinity of 10 per cent since this legislation was first put on the table. They are not poor. They say, 'We can't put in proper protection for consumers because that will mess with our business model.' Stop preying on those who are most vulnerable, those who are the most desperate, those who are there waiting for the picking, as the loan sharks know, and get a business model that is sustainable, ethical and is one that does not prey on the most disadvantaged and poorest in our community. This legislation is not the legislation that this government should be acting on if it is their will to tackle the gap between the rich and the poor.
Wayne Swan's words are hollow when you look at the details of this legislation. It is all very well and good to bang on about Gina Rinehart. What about the poor young fellow or the mother with two kids who cannot send her children to school camp without getting sucked into a cycle of debt? Where is the government's commitment to increase the Newstart allowance to ensure that essential service providers have to give proper grace periods for people and for those who are seen to be caught in cycles of debt can have proper supportive and empowering financial counselling? They are the things that, if Wayne Swan is serious about tackling the gap between the rich and the poor, he needs to do. He has failed dismally on this piece of legislation.
I rise to speak to the Consumer Credit Legislation Amendment (Enhancements) Bill 2012. This bill is the next step in the government's important agenda of reform of consumer law across this country to enhance protections from predatory trading practices. This is a journey that I was happy to see commence at the national level during my time when, back in 2008, I was a minister for consumer protection in the state parliament in my home state of Tasmania. It is good to see that it has now come to the Senate and that I am now here to be able to contribute to its fruition at this point in time.
When it comes to finance and lending, predatory trading practices do not just rip people off, they also can fundamentally change the economic security and the situation of an individual's life, especially those who are already in a challenging financial circumstance. The lending practices to which I refer are those which offer small to medium amounts of money for a short term at a very high rate of interest, or a set fee—a market which I understand is worth some $500 million annually in Australia. These loans are typically designed for people who need to cover off on, maybe, bills at home or immediate debts to pay day-to-day expenses, or those coming up in the days to weeks ahead. They are then taken out on a security of anticipated income, hence the name 'payday loans'.
These debts are most typically unexpected expenses—things like car repairs or replacement of white goods and household essentials. In some cases, they are utilities expenses or rent costs, but in almost all cases they are taken out by people who live very much hand-to-mouth with as little capacity to absorb unexpected financial shocks down the line as they are at the time they take out the loan.
While payday loans help customers to deal with immediate financial issues, according to the Caught short report from the RMIT and the University of Queensland, only 20 per cent of borrowers considered themselves better off after using such short-term credit. Half actually considered themselves worse off, with a number caught in a vicious cycle of the extra expenses incurred in repaying the loan then requiring new finance to be sought. Worse, these loans have historically been marketed as cheap and easy access to money; we have all seen the signs. They either minimise or fail to mention the high level of interest, fees or other costs associated with taking out such a short-term loan. Lending assessment usually does not involve the kind of rigorous credit and means checking that one might expect from a robust finance sector.
In too many examples payday lending operations leave consumers with the impression that such loans are the best and the easiest option for them at that point in time. Rarely is this the case, and we are all aware of that. Indeed, about 80 per cent of payday loan customers are receiving Centrelink payments or pensions and would have access to alternative low- or no-cost options in the form of things like no-interest loans, applying for an advance payment on a regular payment from Centrelink, or something of that nature. The prevalence of consumer credit suppliers and the relative simplicity of the process, though, has meant that payday lending has very much become a first option rather than a last resort.
There is no doubt that the demand for consumer credit is high and that there are a number of legitimate and genuine purposes behind consumer credit operations. So long as they are informed about the market and their options, consumers should be entitled to choose the credit option that best suits their situation. But the main point of that, of course, is that it is so long as they are informed. There is an undeniable need to protect the most vulnerable in our community—those in vulnerable circumstances—from extraordinary costs and to provide information on alternatives to those who would turn to those types of payday lenders in the first place.
The bill before the Senate goes a long way to providing those people who have run into cash-flow difficulties and have the need for some form of short-term credit with access to a safe and fair industry. It will also help to ensure that consumers are fully informed of their options and the ramifications of taking out a short-term loan from a payday lender. This bill includes a national interest rate cap, which will limit the cost of credit for consumers. For loans of less than $2,000 and 12 months duration, which constitute the majority of short-term loans—I know that in my home state of Tasmania that is certainly the case—the cap will be costs of 20 per cent of the credit amount plus four per cent of the credit for each month of the loan contract. For mid-tier loans of $2,000 to $5,000 and of two years duration or less, a cap of $400 on establishment fee and 48 per cent per annum interest will also apply.
These caps fall in the mix of comparable international models, which range from Canada's 17 per cent cap to some US states which cap rates at 35 per cent. Therefore, lenders will no longer be able to charge exorbitant fees of one-third or one-half of the total amount of credit that is provided. No longer will people who borrow $300 for a week be hit with $100 in charges for a seven-day loan. Indeed, loans with terms of 15 days or fewer will be prohibited under this bill, and responsible lending requirements will be extended to brokers in this industry. Those obligations include a presumption that a credit contract would be unsuitable where it would be the borrower's third loan in the last three months, pushing the burden of proof for suitability to the contract parties. Lenders and borrowers will both have to demonstrate that lending is responsible. There is a presumption that the loan has to be suitable and responsible. Not only will lenders no longer be able to charge these exorbitant fees; they will have to demonstrate responsible lending requirements. These obligations include the presumption, as I mentioned, that a credit contract would be unsuitable where it would be the borrower's third loan in the last three months.
The reform package also introduces a regulation-making power to allow use of direct debit to be suspended, avoiding the risk of fees accruing to a debtor's account should repeated direct debits for loan recovery be unsuccessful. Direct debit fees have very much contributed to consumer credit charges compounding and eventually spiralling out of control. We know how direct debit works. If the funds are not there in the bank account, on top of the continuing direct debit set-up that has been formed to pay out these exorbitant loans and fees, the consumer is then also whacked by their bank, who also then puts a fee on the fact that they did not have enough funds in the bank to cover those outgoing direct debit expenses.
Direct debit fees have very much contributed to consumer credit charges compound and eventually, as I said, spiralling. One example that was published in Anglicare Tasmania's Pay day lending in Tasmania report says:
A 54 year old man recently separated and on a carer’s pension had taken out two unsecured loans for $100 each in separate instances to help with food and fuel, as his rent of $320 did not leave enough to live on. With the first loan he was charged an extra $11 for a card with his photo. His repayments were $74 a fortnight for two fortnights. The repayments for the second loan were $64 a fortnight over two fortnights. Unfortunately he did not leave enough money in his account for the second payment on his second loan and was charged a $16 fee by the company and a $30 default fee by the bank. He has now found himself overdrawn by $125 and is having difficulty in repaying the loan. He needed to access an emergency relief agency for food and fuel.
That is a very real example of how the direct debit system under these payday loan arrangements can spiral out of control at both the payday loan end but also at the financial institution end. That is why this bill addresses that issue, as I referred to.
Some lenders will be more affected than others by this bill, depending on the extent to which their current practices and costs comply with this national law. Those who approach their task responsibly and do so with due diligence will continue to be able to offer the services at a reasonable cost to consumers and with a reasonable return for their business. But those lenders who tend in my view towards predatory practice will need to change their approach. Those are the types of lenders whose business model depends on repeat custom with borrowers taking out multiple or consecutive loans in order to pay off interest and fees from previous loans.
These reforms need to be coupled with ways to inform consumers that they have other low-cost options to assist them to meet their day-to-day expenses, and it is incumbent not only on government but also on the industry to make people aware of the fantastic work of schemes like the no-interest loan scheme in my state of Tasmania, which I might add have an extremely low default or non-payment rate. We must do better in promoting the electricity and telecommunications hardship programs, which are already a mandated part of the utilities markets. That is why under this legislation small amount lenders will be obliged to disclose alternative options to their customers, not just hide the fact that they are not the only option out there. We must do better to promote the notion of financial literacy, especially in response to the precarious and uncertain employment conditions of a casualised labour market. Strong and consistent budgeting must be a feature of people's lives. Managing money and anticipating costs is part of that challenge, very much so. Again, I know that there are a number of community organisations providing that assistance to assist people with budgeting their finances in their lives. But requiring small amount lenders to make customers aware of the ASIC financial literacy website is one way that they can support these customers. That is moneysmart.com.au. Again, that is an important step towards these goals, among other alternatives that they can provide.
I am proud to be part of a Labor government that is tackling this issue and protecting people from lending practices that are reckless or exploit people's financial hardships. I am proud to be part of a Labor government that took up the challenge to balance access to finance and protection for customers. When the opposition in government identified this issue as early as 2001, it still did nothing for the next seven years of government to assist those in this low-income predatory environment. It is only a Labor government which has been willing to do more than pay lip-service to this issue and actually address those difficult policy areas which lead to issues of inequity and unfairness. I think this is one of those policy areas that very much demonstrate inequity and unfairness involving some of the most vulnerable people in our community, those on low incomes trying to get by day to day and pay their bills and budget their finances, their finances being of a very low income, but at the same time facing the glitz of the payday lenders trying to entice them with a very easy, quick fix option which then ends up being a spiralling downwards once they enter the situation of having to pay the high fees and the high costs in repaying the loan. On top of that there is the setting up of a direct debit system which, as I demonstrated in the example from Anglicare Tasmania, can end up leaving them in a much worse position than when they started in the first place.
I commend this bill to the Senate and, as I said, I am very proud to be part of a Gillard Labor government that is tackling the payday lenders and addressing the needs of low-income consumers in Australia.
I will follow on from the considered comments of Senator Singh in relation to this matter. We need to look at the causes of why so many people are seeking payday lending. We need to look at why there has been an explosion in the payday lending market in recent years, particularly in my home state of South Australia. There is no doubt whatsoever that the introduction of poker machines in pubs and clubs has led to an increase in financial hardship and an increase in financial damage for individuals and families, and that is why I believe that poker machine reform, one-dollar bets in particular with a $120 an hour maximum loss, would make a real difference in the sort of business that these payday lenders generate. So I indicate my support for the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2012. I have been discussing this issue, pushing for tighter restrictions on small credit loans and in particular payday lending for many years. There are significant concerns that these types of loans when offered by unscrupulous lenders can take advantage of people who are already in financial hardship. I think we need to look at the causes of poverty and the reason why so many people are now seeking to avail themselves of payday lending.
The debt cycle of using credit to pay off debts and therefore accumulating even greater debts is a vicious one. I believe the amendments proposed in this bill will go some way towards controlling unscrupulous providers and limiting harm. However, I am concerned about the enforcement of these provisions. The current bill relies on complaint reports to ASIC, which will then investigate breaches of the law. I see that Senator John Williams is in the chamber. I think he is a person who has had considerable experience in dealing with ASIC over the whole issue of liquidators and unscrupulous lenders, as noted in his contribution to the recent Senate inquiry into this. Relying on ASIC is not the be-all and end-all, as I think Senator Williams has established.
Instead, I believe we should be focusing on a more proactive approach to enforcement. Last week I had discussions with Veritec Solutions, the company that developed an electronic database currently operating in Florida. I am very grateful for the time that I spent with the representatives from Veritec. The information that Veritec provided to the Senate committee that looked into this is worth reflecting on. In their submission, Veritec said that they were:
… specifically commenting how effective enforcement at little to no cost to Government can be achieved in order to produce the desired policy positions taken by the Amendment.
That is, these amendments to the consumer credit act. Veritec recommended:
… that the Committee consider a real-time verification system to efficiently and effectively ensure compliance before a covered transaction is entered into with an Australian consumer.
Veritec has gone into great detail on this. I believe that what Veritec has put forward has a lot of merit. That does not necessarily mean that we go down the path of getting Veritec to do this, but something of that nature—in other words, if not Veritec then another company that can provide the same sort of outcome or, if it can be provided, within government. But it seems that Veritec has a proven track record on this.
It is important to note that Florida has a tightly regulated and booming payday loans industry, with an average of 4.7 million transactions a year between 2004 and 2009. According to a paper by researchers Michael H. Anderson and Raymond Jackson at the University of Massachusetts, Dartmouth, headed 'Perspectives on payday loans: the evidence from Florida', this database real-time reporting solution was very effective. The paper focused on:
… the payday loan experience in Florida where the statute regulates the interest rate, fees, loan size and the protocol for resolving a loan that cannot be repaid at maturity.
According to this paper:
The Florida statute prohibits a consumer from having more than one payday loan at a time. Under state supervision, a real-time database is maintained of all outstanding transactions. When an application is submitted, the lender enters the database to verify that the borrower has no current open loan, is not in arrears on any past loan and is therefore eligible to be approved at this time. Once verification is successful, the borrower is still required to sign a statement confirming that no payday loan is outstanding and, in addition, give assurance that no loan was successfully terminated within the past 24 hours. The amount of the new loan, excluding all fees, is limited to $500.
That is what they do in Florida. That is something that Veritec has been involved in, and it seems that this independent analysis from Anderson and Jackson at the University of Massachusetts indicates that it has worked. It has been effective. My concern with this legislation from the government, though a well-intentioned, useful piece of legislation, regards its efficacy in the absence of ensuring some real-time reporting and having a database.
Only about two per cent of the value of these loans—some $2 billion—is considered lost or not repaid each year. That is pretty good. The aim of an online database is to allow small credit providers to access real-time credit information to ensure that applicants satisfy the requirements for a small credit loan. It can also be used to ensure that the credit contract in question is in line with the regulations. There are clearly benefits to both sides under such a system. First, it allows providers to be certain that they are lending responsibly. The database provides information not only on the applicant's credit history but also on whether the applicant currently has any outstanding loans, as Florida statute prohibits applicants holding more than one payday loan at a time, as set out in the paper.
Secondly, the system provides security for the applicant. They know that the terms they are receiving are in line with regulations, and they have the comfort of knowing that the sector is appropriately managed and controlled to cut down on illegal or immoral lenders. It is likely that a combination of good regulations and good enforcement has led to the strength of payday loans in Florida. These factors make them a much safer and more robust product overall, consistent with the intention of the legislation before us today.
A House of Commons report from February this year specifically recommended that the British government introduce legislation to establish an online database to monitor payday lending. That report was the House of Commons Business, Innovation and Skills Committee's Debt management: fourteenth report of session 2010-12, and it was ordered by the House of Commons to be printed on 21 February 2012. That report is very useful, and it says:
It is clear that credit checking is a key factor in ensuring appropriate lending to consumers. We are therefore deeply concerned with the evidence that payday providers are not recording all of their transactions. Examples of credit databases that do capture payday lending are available in other countries and we recommend that the Government require industry to introduce similar models in the UK as a matter of urgency.
That is what the House of Commons said. They looked at what Florida is doing.
I understand that this legislation has been a long time coming and that it has been the subject of much discussion and consultation. However, I believe the aspect of enforcement cannot be ignored, and I believe it has been ignored with this legislation. It was my intention to move a second reading amendment calling on the government to request ASIC undertake a study into the appropriateness of introducing such a database in Australia. After receiving an undertaking from the government to approach ASIC and request this report I will no longer be moving the second reading amendment that I have circulated. However, I seek to table a letter that I have received from the Minister for Employment and Workplace Relations, the Minister for Financial Services and Superannuation, the Hon. Bill Shorten. It is undated, but I received it last week, and it is in relation to this piece of legislation. I seek leave to table this document.
The document from Minister Shorten refers to the proposed second reading amendment, which says that while the government does not support a second reading amendment to the bill the minister is prepared to write to ASIC requesting a report on similar terms. That is very pleasing, and I am very grateful for the engagement with the minister's office in relation to this.
The minister proposes that paragraph A of what I have requested be limited to the enforcement provisions in relation to small-amount credit contracts in the bill, and that is fair enough. He will also direct ASIC to consider in its response whether or not there are any limitations in the amendments that would prevent ASIC from taking court action or severely restrict its capacity to do so, including the inability to obtain evidence in order to establish the requirements necessary to prove an offence. This would focus attention on particular concerns raised by stakeholders, says the minister. He also undertakes to make this request within three months of the commencement of the provisions to the bill.
I will be asking the government to set out what time line it would like for the reporting of this bill, because I think it is important. This bill, although it is well-intentioned, will not do the work it is meant to do unless there is enforcement. That is why the House of Commons debt management report was very clear on this matter. If I go back to the House of Commons report, on page 17 it says the consumer credit counselling service informed the committee that data coming into its social policy team raised questions 'about the level of credit checking that goes on' and why individuals who are struggling to repay their debts were still able to get payday loans. That is a very key issue. The House of Commons committee actually recommended that payday lenders be required by law to record all loan transactions on such a database, so that consumer credit histories can be accurately monitored. The House of Commons has got it right, the state of Florida has got it right, and academics at the University of Massachusetts have got it right; but this legislation has not quite got it right in terms of insisting on this. I am concerned that this will be a piece of feelgood legislation that sounds good, is well-intentioned, but will not do what it is meant to do without having that technological solution.
There is no doubt that, for many, payday loans or small-credit loans are not a good option. But the factors in this bill, if strongly enforced through an online database or similar system, will make them a viable financial option for many people. I look forward to seeing the report from ASIC. I hope it will make a valuable contribution to this debate and will give us another opportunity not only to discuss these issues but to seek to amend the legislation to ensure that the online database, that sort of reporting, becomes a key aspect of the enforcement of this legislation. One of the questions I will ask the government is whether, if there is a recommendation, this aspect of enforcement can be dealt with now without any further amendments to the legislation. That is a real issue that I want to explore in the committee stage.
I am pleased to speak in support of this bill. In doing so, I think it outlines a fine example of the COAG process working well to offer better regulation for Australian consumers and businesses as well as, importantly, protection for the most vulnerable consumers in our society. The Consumer Credit Legislation Amendment (Enhancements) Bill is part of a second tranche of legislation that is being introduced by the government to reform our consumer credit laws to make them fairer and more accessible while protecting the most vulnerable in our society.
The background to the bill is that in July 2008 the Council of Australian Governments agreed that the Commonwealth would take over responsibility for the regulation of trustee companies, mortgage broking, margin lending and non-deposit-lending institutions, as well as certain areas of consumer credit laws. From the COAG meeting, the rationale for the decision was the need to ensure 'consumers were better protected in their dealings with credit products and credit providers'. In response to that COAG meeting and the agreement that was reached there was a phased approach to the introduction of legislation by the government. The first phase was the National Consumer Credit Protection Act that was passed by this parliament and agreed to by the various states. The second phase is this legislation that is before the Senate at the moment. This legislation deals in particular with payday lending, credit cards, business lending and other forms of credit. These reforms were agreed to by COAG on 19 April 2010 and legislation containing the new requirements was brought before the parliament last year. That legislation was referred to a committee, and I was fortunate to be a member of the committee, the Corporations and Financial Services Joint Committee, that had a detailed look at the provisions of the original legislation and issued a report in December 2011.
I want to point out the position of the coalition in the lead-up to the action that the government has taken on this very important area of reform. In 2001, the now shadow Treasurer, Joe Hockey, said:
Payday lending is an insidious practice that targets the less prosperous men and women of our society, the less financially savvy and the people who can least handle spiralling debt.
It is not often that I agree with Joe Hockey, but on this occasion in respect of that quote he was spot on. He summarised some of the issues associated with the provision of payday lending credit in our country. The question remains, given that that quote was made in 2001, why for the remaining six years of the Howard government Mr Hockey and his colleagues did nothing about this issue. They did nothing at all when in government to protect the most vulnerable in our society and reform this area of consumer credit. Once again, it took a Labor government to take this issue up through the COAG process, get agreement of the states and introduce this legislation.
In respect of the Corporation and Financial Services Committee's deliberations regarding the original bill, it was a difficult task that the committee had. The task was to look at the legislation and to ensure that it struck the right balance and that it was appropriate legislation and regulation allowing people who were providing consumer credit to run a profitable business into the future.
And, importantly, it was about allowing those who are in a position to access and repay such consumer credit to gain that access without an unreasonable burden on their right to access such credit and, also importantly—and this is where regulation in the past has not kept up with what has been occurring in society—protecting those who are most vulnerable, those who in some circumstances are not in a position to repay the payday loans that they take out and ensuring, given those circumstances, there is appropriate regulation and protection into the future.
We believe this legislation strikes the right balance. It does that by ensuring fairness in the protection of the most vulnerable accessing this credit; also by allowing those who are running businesses in this area to do so in a profitable manner and ensuring those who are in a position to repay these loans can access such credit.
This bill has four or five main aims: to enhance access to hardship provisions in the credit code; to introduce a protection against negative equity for holders of reverse mortgages; to introduce caps on costs for small-amount credit contracts, particularly in relation to upfront fees and ongoing interest charges; and to ensure greater consistency between the treatment of consumer leases and credit contracts.
With respect to short-term lending, or payday loans, a comprehensive amount of evidence and research data was presented to the committee during its inquiry. I would like to quote from what is probably the most comprehensive study conducted in recent years—that is, the joint study by RMIT and the University of Queensland, which was released in August 2011. That report provides probably the most up-to-date analysis of the circumstances of consumers accessing short-term loan credit. As part of the study, 160 interviews were conducted with consumers across Queensland, Victoria and New South Wales who had borrowed between $50 and $1,500 from non-bank lenders for short periods of time. The data that was produced by this study is instructive of the characteristics of those people accessing this credit, the amount of credit that they are accessing and the terms and conditions under which they access that credit. It highlights why the government have taken this action in protecting the most vulnerable consumers with greater regulation in this area. The researchers concluded that:
… poverty pervades the lives of most borrowers interviewed.
The study indicated that the users of short-term loans are commonly unemployed, receive government assistance, have lower rates of home ownership and are likely to be in their 30s or 40s. Of the 112 interviewed, 78 per cent received Centrelink benefits, less than 25 per cent were in paid employment and 75 per cent lived in rental accommodation. Only nine of the people interviewed owned their own homes and, unfortunately, eight of them were homeless. Of the 112 borrowers interviewed, only seven had credit cards and 68 had a poor credit history. I think that really underlines and highlights the need for regulation in this area and why the government have taken the steps that they have.
Some of the evidence of the welfare organisations who appeared before the committee was instructive. St Luke's Anglicare summarised the situation of payday lending in this country at the time and said:
Payday lending is undoubtedly the most expensive form of credit. There is a real question mark over whether these loans alleviate financial hardship or in fact exacerbate it.
Balancing that there was also evidence from a number of corporations and companies that provide credit in this space, particularly about the original provisions of the bill that were before the committee and the parliament. I am not going to go into the details of the evidence presented by a number of payday lenders—the corporations that provide this sort of credit—but I draw the Senate's attention to pages 97 to 98 of the report where the financial figures associated with payday lending on behalf of Cash Converters, one of the biggest suppliers of payday loans in the country, were presented to the committee. They highlighted the fact that these loans make up on average 50 per cent of the income of an ordinary business operating in this space. Their evidence was that provisions were too harsh, they did not strike the right balance and, importantly, that evidence was not challenged. That evidence of the financial position of many of those corporations and the effects that the original bill would have on their financial position was not challenged. I think that undermines the position taken by Senator Hanson-Young and the Greens in relation to this debate. They did not present any alternative evidence to the committee to dispute the figures that were produced by a number of corporations regarding the effects that the original bill would have on their business.
In the wake of that, the government have considered the recommendations of the committee in its report—quite sensible, balanced recommendations, I believe, which did have the overwhelming majority support of committee members—and we have reformed the bill. The bill now strikes the right balance. In respect of payday loans, there are a number of elements in this legislation which deal not only with protecting the most vulnerable but also with ensuring that those who operate in this space can operate a profitable business.
The elements of the bill are to: increase the cap on short-term small amount contracts to a 20 per cent establishment fee and a four per cent monthly fee; shorten the term for small amount credit contracts from 24 months to 12 months; remove the prohibition on refinancing of small amount credit contracts; introduce a mid-tier cap of 48 per cent plus $400 for loans of between $2,000 and $5,000 with a term of two years or less; place a prohibition on loans with terms of more than 15 days; place a maximum of 200 per cent total cap on charges for all lending; require consumers accessing small amount credit contracts to provide three months of bank statements and assist ASIC in their investigation; enhance the responsible lending requirements for brokers in this industry, particularly those who operate payday lending facilities through websites, and link them to ASIC's MoneySmart website; as well as address the risks of fees associated with debtors' accounts through repeated unsuccessful use of direct debit to seek payments incurred under small amount contracts. These are a suite of provisions that give greater protection for the most vulnerable consumers.
I draw the Senate's attention to evidence that was presented to the committee by some of the welfare agencies that operate in this area, particularly the Redfern Legal Centre. It acknowledged in its submission to the inquiry that there was a requirement for caps on fees and administrative costs associated with this. The centre said:
We acknowledge that the payday lending market is characterised by certain features that make small amount loans more expensive, including the high risk of default, and the high fees and the administrative costs of short term loans. There should be a limit on the amount of fees and costs that can be charged under small amount credit contracts to protect vulnerable consumers. It is important to recognise the role that payday lending plays in indebtedness amongst socioeconomically disadvantaged individuals.
That perfectly summarises the position of the need for reform and the government's reasons for its action in this area.
The bill also introduces new protections for seniors in respect of reverse mortgages. Seniors often can be particularly vulnerable when the value of the mortgage is greater than the value of their home. This is known, of course, as negative equity and to address this issue the bill will implement Australia's first statutory protection against negative equity. Reverse mortgage lenders and brokers will be required to discuss with the borrower the different scenarios and show them how the equity in the home will reduce according to the amount borrowed and different movements in house prices. This will ensure that when seniors access reverse mortgages they have the necessary knowledge to make decisions that protect their best interests and ensure that they do not end up in a vulnerable position.
The bill further introduces several important enhancements to the national consumer credit laws, which are aimed at protecting borrowers from severe enforcement action that is often taken by lenders, including the confiscation of property. These changes mean that the borrower is given the best chance to reach an agreeable arrangement with a lender in circumstances that are balanced and fair without being subject to costly court action. The bill also provides for regulatory balance between credit contracts and consumer leases, which are largely regulated consistently with credit contracts, to reduce the incentive for some providers to provide leases in a way that can disadvantage consumers.
All in all, this is a balanced set of reforms that takes into consideration the recommendations of the Joint Standing Committee on Corporations and Financial Services. It is a bill that will ensure the protection of the most vulnerable citizens accessing consumer credit in our country while also allowing those who have a requirement to access such credit to do so and for those running businesses in this important area to be able to do so in an ongoing profitable manner.
In respect of the foreshadowed amendments by the Greens, proposed by Senator Hanson-Young, I point out that to date in all of the deliberations that have occurred on this bill, through the committee process and through the debate in the House of Representatives, the Greens have not sought to move amendments to the legislation. The position put by Senator Hanson-Young this morning is the first that the parliament is aware of. I point out that the committee process, undertaken by the corporations and financial services committee, was a balanced approach. Senator Hanson-Young was involved in the hearings of that committee; she saw the evidence. None of the contrary evidence was presented in respect of the financial position of many of the corporations acting in this industry. For her to come in here now and say that the government has failed, when the government has taken a reasonable, balanced approach, assessing all of the evidence, ensuring that there is greater regulation in the industry, but at the same time allowing people to run profitable businesses in consumer credit, is simply misleading. It is another example, unfortunately, of the Greens dealing themselves out of the consideration of this important issue.
Their intransigence and inability to negotiate and compromise on this will mean that they have dealt themselves out of the debate on this issue. That is unfortunate because it is an area of regulation that requires a commitment from all sides to ensure that it works into the future.
This bill will enhance Australia's consumer credit regime. It will ensure the protection of the most vulnerable citizens and it is with a great deal of pride that I commend the bill to the Senate.
I rise to contribute to the debate on Consumer Credit Legislation Amendment (Enhancements) Bill 2012. Short-term lending is necessary when people are in serious financial trouble and it is there to help them out. But sadly, in some cases people dig themselves into a deeper hole. As Senator Xenophon asked: why are people desperate for short-term loans or, as we know them, payday loans? Sadly, some have a gambling addiction. Others simply cannot get through with the cost of living. Mr Acting Deputy President, I want to bring that point to your attention—that is, the cost of living.
We heard the Greens' Senator Hanson-Young state her case today, but the cost of living is one of the biggest complaints I hear when I talk to people. It is mainly around rural and regional areas of New South Wales, but it is also right across the state and the country. Amazingly, the carbon tax is adding to that cost of living! This will mean more people will be in a desperate situation, seeking payday loans, short-term loans, to pay their bills, whether they be electricity accounts or the registration on their car. Those monthly bills come forward all the time and are never ending. That is where we see the most need for payday loans.
We need control over credit lending. The Senate Economics References Committee is currently inquiring into post-GFC banking practices, and my colleague Senator Bushby, who is here, is the capable chair of that committee. We have been getting information about low-doc loans and how they have been approved. We have had witnesses saying that information was falsely put on application forms—whether by the brokers, the bank or whoever—and that they have been putting in cash flows of people applying for the loans as $75,000 or $80,000 a year in income when in fact they were pensioners. This is of concern, and no doubt when the committee, very capably chaired by Senator Bushby, hands down its recommendations on 31 October those lending practices will attract a lot of attention.
As I said, people become desperate. I remember a couple of months ago talking to my colleague Senator Cormann about the cost of these payday loans. Senator Cormann gave an example. He said, 'If I lent you $100 today and you paid me $101 back tomorrow, would that be fair?' I said, 'Yes, that sounds fair enough.' But, of course, if you paid $101 back tomorrow on a $100 loan, that is a 365 per cent interest rate, which we would all think is a very high interest rate.
The point I make about this legislation is that the committee has done its job and done its job well. Minister Shorten simply had it all wrong, hence the big backflip by the government to get it right. The government has acknowledged the flaws in the original bill it presented to parliament last year by amending the legislation from its original form. The government was forced back to the drawing board by the unanimous recommendations of the Parliamentary Joint Committee on Corporations and Financial Services. The committee, including government members, recommended that the government revisit the payday lending changes and undertake further consultation with industry. This is most important and I commend that committee for its cross-party recommendations. Obviously the government had it very wrong before with what it was proposing. We are pleased that, under pressure, the government has agreed to increase the caps for small amount credit contracts, shorten the terms for small amount credit contracts from 24 months to 12 months so as to restrict the time that interest is being paid, and increase establishment fees from 10 per cent to 20 per cent and interest rates per month from two per cent to four per cent for small amount credit contracts. Those are important changes.
There will also be allowed an additional $400 fee to be charged for mid-tier loans between $2,000 and $5,000, the removal of the multicontract prohibition on lenders under certain circumstances and a commitment to prohibit loans with a term of 15 days or fewer. In other words, all short-term loans must be more than 15 days. These changes represent a significant concession to both industry and opposition concerns with the original bill, and strikes a much better balance between the bill's two key objectives—namely, to provide appropriate consumer protection so that consumers are not simply being blatantly ripped off, whilst making sure that short-term lending remains available, accessible and as affordable and competitive as possible.
I see so many people get in so much trouble with credit cards. I have had credit card debts myself during my life, and when you get your statement you think, 'How much can I afford to pay this month?' Of course, 20 to 22 per cent interest is charged for late payments and for the full amount not being paid. You ask yourself the question: 'Why is the interest rate so high?' I think the answer to that would be because of the level of bad debts that those who issue credit cards have to make up for. Sadly, we do not live in a country or a world where people are perfect managers of credit. That is simply not the case. Many are vulnerable.
Sadly, many have gambling problems. They will get access to money and think, 'I can double this money down at the club'—or at the racetrack, the TAB, online or wherever they choose to gamble. Everyone in the nation can now gamble online. It is an addiction, a disease. That is why we need credit control to protect those who are vulnerable and who cannot manage money. We see it all the time.
A lot of bank issues come to my office, and we say to people: 'You are in trouble now. You have mortgaged your home. You have borrowed this to invest in that. Why did you borrow the money in the first place? Can't you see that you didn't have the cash flow to pay for it?' They say that they trusted some clever adviser who said to invest in it and get a great return. Sadly, that ends up in misery in many cases. People can be irresponsible when it comes to borrowing money, especially the younger generation. I lecture my children. I always say, 'There are two ways you can learn in this life: listen to me, because I have made all the mistakes, or go and make the mistakes yourself, but the latter is a very expensive way to learn.'
I refer to those credit cards where hopefully the credit given out to people has tightened up a bit. I saw for years the willy-nilly lending, people having a credit card and maxing out with debt, late paying their payments, 20 to 22 per cent interest compounding month to month. Then I have seen people actually go and get another credit card and borrow on that credit card to make the payments on the previous credit card, and on it compounds. People are vulnerable, and that is why we need credit controls.
Back to this bill. I think the committee has done an excellent job. Obviously the government has made a monumental mess of its original plan. It is good to see that the government has rolled over on the original plan and has now gone with the committee's recommendations. We see that people do need money quickly. Many are desperate. As I said, when it comes to those bills to be paid, essential ones like electricity, even the Taxation Office in some cases, motor vehicle repairs, maintenance, registration, insurance—we know how the bills continue to come into the household all the time. I think this is a fair piece of legislation that will not be opposed by the opposition.
I come back to the cost of living. We are going to see more and more of this lending because the cost of living is going up so much. Electricity prices rose 18 per cent at 1 July in New South Wales, half of that attributed to the carbon tax. We are now seeing the flow-on to small business. Households have not got their electricity bills yet, they are a three-monthly bill. You wait until early October when they receive their first bill and we will see more of this payday lending where people are in financial trouble. The cost of living is escalating. I had a friend based in Uralla in the New England area who came back from overseas and he was amazed at the cost of living in Australia, the cost of food. He said, 'Why can I buy a T-bone steak from Australia in Europe cheaper than I can buy it in Australia?' A very good question. We know what the farmers and the primary producers are being paid. I have never been to Europe or America or anywhere like that. People tell me they go to America and they say you fill a shopping trolley in America and it might cost you $80 or $100. The same trolley in Australia costs $200. Why is this when many of these products, vegetables and other food, are produced here? So the cost of living will continue to go up. It will get even worse if the Gillard Labor government is elected at the next election and come 1 July 2014 we will see another half a billion dollars fuel tax imposed on our truckies some reason. It simply will not reduce our CO2 emissions. Are we going to just shut the trucks down and not transport our exports to the waterfront or bring the food and clothing et cetera into the country towns that do not have rail? This will be another cost and we will see more of this short-term payday lending being demanded and accessed.
In summary, I say congratulations to the committee for righting the wrongs of the previous legislation put forward by Minister Shorten. It is obviously a far better result—not perfect but far better. I come back to the point that we should be thinking why people are demanding payday loans. It is because they are desperate because of the cost of living. We know who we can look at around this chamber when it comes to increasing the cost of living over the last year or two.
I rise to make a brief contribution today and add my support to the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011. I would like to start by saying that I absolutely agree with Senator Williams when he talks about why people access payday lending. That is because they are desperate and vulnerable. And that is exactly why we need to put in safeguards to ensure that those people that are accessing these loans are not taken advantage of. The bill we have before us seeks to do that.
This bill continues the government's commitment to support the most vulnerable in our community, by protecting consumers who seek credit. It will also deliver part 1 of phase 2 of the COAG national credit reforms. The credit industry needs reform; for too long exorbitant costs have spiralled out of control. We must stop these uncontrolled costs and support those in our community who are most vulnerable. In supporting those who need it most we are moving to stop borrowers suffering from uncontrolled costs, help them reduce debt spirals and combat the current failure to utilise alternatives.
Short-term small amount lending, sometimes called payday lending, is an area that is long overdue for regulatory reform. People who take out short-term loans are generally low-income earners or are financially disadvantaged. They may require a small amount of money to pay a utility bill or to get a household appliance fixed. Thinking they have nowhere else to go, people often turn to payday lenders, who offer credit on a short-term basis, usually charging extremely exorbitant costs for the service. Under the stress of having to find some credit to meet a financial obligation, people do turn to payday lenders. However, there are other options already in the market that are available such as schemes through Centrelink or the highly successful No Interest Loan Scheme, the NILS scheme, that operates in my home state of Tasmania. I understand that all other states offer similar schemes.
The bill introduced by the Gillard Labor government will go some way to addressing this issue of payday lending to provide more protection for consumers who may need to engage in short-term credit. The high and largely uncontrolled costs associated with accessing short-term loans can exacerbate current financial problems that borrowers may already find themselves in. This means that people who access these payday lending services are more likely to suffer from uncontrolled costs and get caught up in debt spirals which are very difficult to get out of. So this bill will protect consumers and deliver in the area of credit reform. In making enhancements to protect consumers can I say that the government has engaged in significant consultations to deliver the best package of reforms possible. We have conducted significant consultations of the issues under phase 2. Consultation began in July 2012 with the release of the green paper National Credit Reform: enhancing confidence and fairness in Australia's credit law.
The bill builds upon the national consumer credit reform, which was introduced as part of the national partnership agreement to deliver a seamless national economy. The National Consumer Credit Protection Reform package is dependent on the states referring their powers to the Commonwealth under the COAG agreement. Tasmania was the first state to introduce the required legislation into parliament, where it was passed in 2009. This shows Tasmania's commitment to national consumer credit reform.
The government has also consulted directly with payday lenders and consumer groups, and coming out of these consultations we have changed provisions within the enhancements bill in response to issues raised by both. We have also made amendments as to the issues that have arisen out of inquiries into the bill conducted by the Parliamentary Joint Committee on Corporations and Financial Services and the Senate Economics Legislation Committee.
This bill may not be 100 per cent perfect or achieve everything that the Consumer Action Law Centre wanted, but it is a start and it provides significant protection for consumers. The bill will introduce a national interest rate cap that will limit the costs of credit for consumers so that they will no longer be charged relatively high rates and high costs for these types of credit. This is Australia's first ever national interest rate cap and will apply to loans of less than $2,000 and 12 months duration. For these short-term small loans a cap on costs of 20 per cent of the credit provided, plus four per cent of the credit provided for each month of the credit contract, will apply.
In payday lending situations there have been cases where people borrowing $300 can be charged over $100 for a seven-day loan, and then can meet repayments on this loan only by not paying other bills, such as rent or power, relegating them to the cycle of debt that I touched on earlier. The bill also introduces other protections, including tailored response lending obligations that help support the position of borrowers who have already defaulted on payday lending services or who make repeated use of small, short-term lending. The bill will implement the government's election commitment on reverse mortgages, meaning that new laws will introduce appropriate protections against negative equity and will also provide better information for those seniors who are considering taking out a reverse mortgage.
Another element of the bill amends the National Consumer Credit Protection Act 2009 to deliver greater regulatory consistency between consumer leases and credit contracts. It will also deliver specific improvements to consumer law, including opportunities for borrowers to obtain variations to their repayments when they experience financial hardship.
I turn now to talk in more detail about the excellent service offered in Tasmania and its no-interest loans scheme which I mentioned earlier. The NILS Network in Tasmania provides interest-free loans for household essentials, car maintenance, education essentials and medical and dental services for individuals or families on low incomes. There are no interest charges or fees: borrowers pay back only the cost of the item or service. As the NILS Network says on its website:
NILS loans have the capacity to turn people’s lives around. Loan recipients often find that for the first time in their lives they are able to own something new and reliable. There is also a sense of pride and achievement associated with the completion of a loan.
The NILS Network also has many testimonials from users of the scheme, and I quote from one of those:
I was left with absolutely nothing but a suitcase full of clothes and care of my teenage daughter. I was residing in a women’s shelter. My husband had a bad gambling problem. He gambled away years of battling virtually in two years. I finally moved into a Housing home and of course, had nothing. I heard about NILS and applied for a washing machine as I have arthritis and am recovering from an illness. I washed by hand and could not afford to get credit or be accepted as a customer. I am so very grateful that NILS exists.
This story highlights very well the reason the government has taken this action. Many low-income consumers take out payday lending loans as a first point of call rather than using them as a last resort. Part of this reform is to make consumers think about other options, such as NILS, when they are faced with temporary financial shortages. Sometimes it may appear easy to take out a short-term loan but, for many, due to the costs involved, they are just delaying the inevitable and making their situation worse down the track.
I am pleased today to be supporting this bill that introduces a number of measures to protect consumers from the exorbitant costs associated with payday lending, and I commend the bill to the Senate.
I thank all of those senators who made a contribution to this debate. The Consumer Credit Legislation Amendment (Enhancements) Bill 2012 continues the government's commitment to ensuring that all Australians get a fair deal when they use credit. In particular, this bill is aimed at ensuring that vulnerable consumers, such as some seniors or those on low incomes or people who find themselves in financial hardship, are adequately protected when they borrow money. I commend the bill to the Senate.
Question agreed to.
Bill read a second time.