It is hard for most people to fathom why anybody would borrow money from a "loan shark". The sums they lend are not large, the life of their loans not long, their interest rates usurious, their default fees worse and their collection methods crude.
Now they are offering instant credit by text. Tap in a request with name, address, driver's licence details and bank account number and the sum appears in the account within minutes. A month later the unwary borrower may owe half as much again.
It is hard to imagine that fringe financial services provide any value to the economy, yet they probably do. There will be circumstances in which short-term credit is needed to finance worthwhile transactions and cannot be quickly obtained from banks or any other source. Governments heeding calls to clamp down on the industry need to proceed with care.
Nobody could accuse New Zealand governments of a rush to regulate. In 2007, Labour received a report on fringe lending practices in South Auckland that recommended a cap on interest rates, advertising restrictions, a right to cancel a loan within 30 days and a limit on repayments as a proportion of household income.
The Consumer Affairs Ministry advised that an interest cap was too hard to set. If too low it would drive "ethical funders" out of the market, if too high it would become the ruling rate. The Government decided to do little more than distribute pamphlets to help low-income people calculate the true cost of cars bought on credit, something that was rife in Auckland before the collapse of finance companies and the global financial crisis.
After the crisis both parties went to the 2008 election resolving to regulate finance providers, but little has happened. National has made some improvements to the accountability of financial advisers and set up a new regulator, the Financial Markets Authority, but the low end of the market has been largely left alone - until yesterday.
Commerce and Consumer Affairs Minister Simon Power announced at a "financial literacy summit" in Wellington that he will summon the financial sector and community groups to another "summit" in Auckland in August to consider what can be done.
National prefers rules of disclosure and consumer education to control of interest rates, repayment levels and other lending terms. It is right to be wary of the sort of regulation that Labour, too, rejected in office. It would be easy and tempting to try to save some people from their own poor judgment but it is fairer for all and better for the economy that a solution is found in financial education.
Improved financial "literacy" is needed not only at the income levels where loan sharks prey. Literacy means the ability to understand financial concepts and products. It is part of the Retirement Commissioner's task to promote it, and the KiwiSaver scheme has given greater numbers of employees a reason to take more interest in how funds perform and consider the weighting of risk.
Mr Power told his summit yesterday that the recent spate of "low ball" offers to small shareholders highlighted for him the need for financial education. Why anyone would sell for less than the sharemarket price is as big a mystery as someone taking out a $600 loan for 45 days at interest of 50 per cent or more. The low share seller, like the shark victim, may have his eyes open and find the transaction convenient for any number of reasons that defy financial logic.
Law can require fair disclosure of loan terms and literacy can help everyone to read a financial contract. But nothing can ensure they read it. There has always been a demand for lenders of last resort. Restrictions can simply drive it under a regulator's radar.