Originally published by The Spinoff

Amid fears of growing financial hardship throughout New Zealand, a comprehensive campaign against high-interest lenders looks to be gaining new ground.

Payday lenders, trucks shops, loan sharks: the names alone are enough to conjure up grim images of shady operators and hustlers lurking in dark spaces to prey on the financially vulnerable. While the reality isn't always as cinematic, their business models don't do much to improve the common perception.

High-cost lenders are notorious for their opportunistic advertising and for providing quick and easy loans to people, often without ensuring they're able to pay the money back. With interest on loans sometimes as high as 600% per annum, the debt can easily grow out of control and destroy lives, pushing people into a deep hole from which it can be impossible to climb out.

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With New Zealand entering an economic slump and unemployment predicted to peak at 10% in the next year, there are fears that vast waves of financially struggling households could be seduced by the convenient quick cash of payday lenders, leading to crippling debt and rampant poverty.

That's why some months ago, the government expedited a piece of legislation to hamper high-interest lending. The Credit Contracts Legislation Amendment Act – which was passed in 2019 but came into force in May this year – carries with it a number of new restrictions, the most significant being the interest and fees cap that prevents someone from being charged more than 100% of the value of any amount borrowed. It means that if an individual borrows $500, they will never have to pay the lender back more than $1000, including all fees and interest.

Payday lenders and truck shops are also now required to make reasonable enquiries into the borrower's financial situation to ensure they're able to repay the loan without substantial hardship and that the loan is likely to meet their needs. Truck shops, in particular, must also assess a customers affordability before selling any goods on credit.

With violators risking a $600,000 fine, the new rules are apparently too much for some high-cost lenders, forcing them to exit the market since the legislation came into force. Chequers Finance says on its website that it's no longer issuing loans due to the government's crackdown, while pawnshop and payday lender Cash Convertors announced in June that it was closing four stores and laying off 80 staff as a result of the new laws.

As for the other payday lenders operating in New Zealand, some have since augmented their models so they're now charging just below the 50% interest that constitutes a high-cost loan. Moola, one of the largest in the country, now describes itself as a responsible lender on its website and has applied the interest cap in its loan calculator. Meanwhile, Christchurch-based Save My Bacon has maintained that it was already moving away from payday loans long before the new rules came into force.

"The company has – even before changes to the legislation – been transforming the business away from high-cost loans and more towards flexible longer-term, lower-interest loans," Save My Bacon CEO Tracey Gillman said.

With such changes in the market, the pressure certainly appears to be yielding results. However, Tim Barnett, CEO of financial capability body Fincap, said it isn't just the interest cap but also the power and awareness borrowers now have that's influencing the landscape.

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"[Payday lenders] relied on people not going and complaining and they relied on poor monitoring to make their models work," he said.

Under the Credit Contracts Amendment Act, borrowers who have been given unaffordable or unsuitable loans will now be able to claim statutory damages at disputes resolution schemes, which could include refunds of all interest and fees and compensation for any harm. Lenders are also required to meet a "fit and proper person" test and submit statistical information about their business to the Commerce Commission on an annual basis.

Barnett said these requirements along with serious government efforts to raise awareness is "creating a new norm". The legislation is now very similar to that of the UK which has been highly successful in forcing payday lenders to either adapt or leave the market entirely.

There are, of course, concerns that by ensuring loan sharks lend responsibly and scrutinise the financial status of borrowers, desperate borrowers will be rebuffed and forced to seek loans from even more nefarious sources like gangs.

To contend with such a risk, the government has been investing significant resources in financial capability services to form a sort of safety net – a place people can always go to find a solution to their money woes. This includes financial mentorship services like Moneytalks – a free helpline where people can discuss their finances and figure out a plan to extract themselves from debt or access responsible loans. There are also not-for-profit businesses funded by banks that provide responsible interest-free or low-interest loans for people who are struggling financially, such as Kiwibank-championed Ngā Tāngata and BNZ-supported Good Shepherd.

Good Shepherd CEO Fleur Howard said she's completely in support of the move against loan sharks, which often pull people simply looking for a quick fix into the world of long-term money problems.

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"We're firmly of the belief that the cons of these high-cost loans far outweigh the pros," she said.

"With those choices gone, people who are looking for these loans are now more likely to access a service such as ours that has positive outcomes in terms of a fair, short term financial solution, as well as contributing to longer-term financial capability and wellbeing, or decide to access a much longer-term solution such as financial mentoring."

While many lenders have abided by the new laws, whether or not there'll be much enforcement of operators who choose to flout them remains to be seen. The Commerce Commission confirmed it's still assessing lenders' compliance with the legislation but hadn't opened any investigations into alleged breaches of the new high-cost lending rules.

In the meantime, it's claimed a couple of scalps through recent successful legal cases against payday lenders for breaching the old Credit Contracts Act over the past few years.

In seperate cases, lenders Ferratum and Pretty Penny were found to have breached responsible lending requirements and had failed to ensure their loan agreements weren't oppressive. Both were ordered to pay back borrowers and Pretty Penny said it would withdraw from New Zealand in its settlement agreement.

High-cost lenders have a habit of reincarnating as other companies and Pretty Penny could very well reappear as something else. In any case, a couple of prized payday-lending pelts nailed to the wall sends a very strong message to others looking to issue a loan at 600% interest.

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