‘Buy now, pay later’ providers, payday lenders, and consumer lease providers accused of preying on financially struggling Australians will face a new Senate inquiry.
Described as “debt vultures” by critics, small consumer finance operators that fell outside the scope of the Banking Royal Commission will be forced to answer questions after the Senate passed Labor’s Jenny McAllister motion to refer them the Economics References Committee for inquiry.
The Senate inquiry is expected to scrutinise current regulation to see if it meets community standards and expectations, and financial counselling sector will be assessed on their capacity to provide services.
A report due by 22 February 2019 will consider regulatory reform in order to better address harm done to affected consumers.
Afterpay stocks tumbled as much as 23 per cent after news of the inquiry was published on Wednesday.
‘There is a crisis underway’
Labor MP Brian Mitchell declared the misbehaviour of payday lenders as a “crisis” that the government had ignored.
“The country is plagued by payday lending: loan sharks,” Mitchell told the House of Representatives on Wednesday. “There is a crisis underway.”
He pointed to recent statistics that showed the number of Australians being taken advantage of by payday lenders had more than doubled in the last ten years to 800,000 and said desperate Australians unable to afford credit through the usual means were turning to “loan sharks”.
Commenting on new reforms in this area, Mitchell said the legislation would “reform small-amount credit contracts; impose a ceiling on the total payments that can be made under a rent-to-buy scheme; [and] require payday loans to have equal repayments at equal payment intervals”.
It will also “remove the ability for small-amount credit contract providers to charge monthly fees on residual terms of a loan where a consumer fully repays the loan early; ban unsolicited sales of the schemes; and introduce broad anti avoidance protections to prevent payday lenders and rent-to-buy companies from circumventing the rules.”
The Consumer Action Law Centre has embraced the inquiry, with CEO Gerard Brody describing it as an “important initiative” that will expose financial services providers that “have been left free to prey on financially struggling Australians for too long”.
“Debt vultures advertise incessantly online and on TV promising a ‘life free from debt’,” he said.
“If you thought from watching the Royal Commission that the banks, insurers and superannuation companies have been ripping us off, they’ve got nothing on the unregulated debt management sector.”
Brody also urged the government to allocate more funding into financial counselling.
“Financial counsellors are irreplaceable, supporting and advocating for Australians doing it tough.
“They are expert and trusted and with more Australians than ever at risk of financial stress, we need both Federal and State Governments to provide additional funding for financial counselling.”
We’re not like them, Afterpay says
In a statement to the ASX, Afterpay said it “welcomed the opportunity to participate in any industry review” and supported “appropriate regulation”.
But the payments firm argued that the category of ‘buy now, pay later’ firms was “applied broadly and inconsistently”.
“Our service is highly differentiated from others in that category and outside of it,” Afterpay said.
“Afterpay promotes responsible lending and offers customers a fundamentally different proposition to traditional credit products.”
The payments firm also pointed out that most consumers paid on time and said it did not punish customers for rare late payments.
“Afterpay’s late fees are capped, minimal and intotal are lower than the costs Afterpay incurs when consumers don’t pay on time.
“This means Afterpay, unlike other services, is incentivised to promote responsible use and discourage late payments.”
FCA: “Small amounts quickly add up”
Financial Counselling Australia CEO Fiona Guthrie said financial counsellors were seeing more and more clients in debt to ‘buy now, pay later’ companies like Afterpay.
“The problem with this business model is that there are no requirements to lend responsibly,” she said.
“These buy-now, pay-later products, which seem particularly attractive to younger people, have the same problems as credit cards – small amounts quickly add up.
“The outcome is that many young people may be starting their financial lives with impaired credit ratings.”
Guthrie pointed out that calls to the National Debt Helpline had risen by 5 per cent this year, on top of a 12 per cent rise last year.