The federal government is planning to pass new legislation to overhaul the payday lending sector, implementing recommendations from a 2016 review the former government failed to action.
Key points:
- The federal government will implement recommendations from a 2016 report into payday lending
- Those reforms include capping repayments and prohibiting lenders from making unsolicited offers
- An end-of-year deadline has been set by the government to pass the legislation
The reforms will cap a borrower's repayments at 10 per cent of their income, prohibit lenders from making unsolicited offers and referring customers to unregulated credit providers, as well as introduce anti-avoidance measures to stop dodgy operators from restructuring and reopening businesses.
Financial Services Minister Stephen Jones says the reforms are a priority for the government.
"It's about ensuring that, where small amount credit is offered, often referred to as payday lending, it's done in a safe environment, and vulnerable consumers aren't exploited.
"This is long-overdue reform. The previous government conducted a review back in 2016, which recommended the reforms that we've introduced into parliament," he said.
On Friday, the Senate economics committee will hear from financial counsellors, consumer advocates and the complaints authority on the proposed changes and problems within the sector.
'Predatory' system needs to change
The plan to implement the recommendations has been welcomed by consumer advocates and financial counsellors, who say the current system is "predatory".
Lyndall Millburn has worked as a financial counsellor in Canberra for eight years and says people using payday lenders are often desperate.
"People don't borrow these loans for frivolous reasons," she said. "They don't have high incomes, and they kind of need something straight away.
"The majority of them [are] dependent on Centrelink for their income, and it just comes down to Centrelink not being enough money.
"They are best budgeters if they can get through on Centrelink, they're better budgeters than me. But, when unexpected costs come up, there's just no way that they have the capacity to save for any of them." Ms Millburn said.
Many of Ms Millburn's clients are promised quick cash and easy repayments, but the costs aren't always clear up-front.
"They make it sound really, really easy in their ads," she said.
"But what the advertising doesn't disclose is the costs, the 20 per cent establishment fee, the 4 per cent interest per month, which equates to 48 per cent interest per year.
"I think they're very predatory, and I think they are predatory to vulnerable people," Ms Millburn said.
With those fees and strict repayment schedules, payday loan debt can be almost impossible to escape and, Ms Millburn says, it is common for clients to take out more payday loans to cover the costs of repayments.
"One of my clients has seven payday loans," she said.
"After she pays the payday loans, and 25 per cent of the income on rent, she's left with 11 per cent of her income, and that comes down to $150 a fortnight for food utilities, cars, kids, clothing, phones, everything."
Consumer Action Law Centre policy director Tania Clarke says the reforms should have been put into action years ago.
"Really, they are seven years overdue, because the independent Treasury review of small amount credit contracts took place back in 2016," Ms Clarke said. "We've really been waiting a long time for it."
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