Finance industry wants tougher stance on Payday lenders

Payday loans can charge as much as 500 per cent interest per annum.

Pay day lenders should be clearly identified, named on a public register and directors and top executives should have to pass fit and proper tests, says an industry body which represents major finance companies.

Consumer advocates have welcomed the proposal to define high interest short term lenders but say all finance firm directors and executives should have to pass the same fit and proper tests.

The Financial Services Federation (FSF) which has 60 members including car and consumer finance firms BMW Financial Services, Turners, Avanti Finance and Latitude Financial Services, is proposing a focus on pay day lenders as part of its submission to the Credit Contracts Legislation Amendment Bill.

The bill which has passed its first reading, is currently sitting with the finance and expenditure select committee which will hear from more submitters next week.

The bill is proposing an interest and fees caps on high cost loans - those with interest rates over 50 per cent per annum - so that borrowers do not end up paying more than 100 per cent of the original loan principle amount.

But Lyn McMorran, chief executive of the FSF, said the proposed cap would be hard to enforce as lenders would be able to roll over the loan into a new loan as soon as the 100 per cent threshold was reached and there would be nothing stopping consumers from moving their debt from one lender to another.

Instead she said the body believed there should be a more targetted approach focusing on payday lenders.

"They are the ones causing the most harm. They are the ones where people get into spirals of debt."

It wants pay day lenders and loans to be defined in the legislation and then clearly marked on the Financial Services Providers Register - an online register of all companies which provide services to the public.

The providers would then be limited to payday lending and would not be able to provide credit contracts outside of those definitions.

It also wants the directors and executives of those payday lenders to undergo fit and proper person tests which would be "more manageable" for regulator the Commerce Commission than asking the entire sector to do that - a proposal in the current bill.

But one financier, who did not want to be named and was part of the payday sector, accused the FSF of trying to stop payday lenders from expanding into the consumer and vehicle finance sector.

"It is in the best interests of its FSF membership base that it attempts to exclude other financial providers from operating in its space (consumer & vehicle). They are particularly keen to ensure this doesn't happen as a number of the biggest "Payday" firms are entering vehicle and "prime" consumer lending."

But McMorran said it didn't have a problem with payday lenders expanding into the car and consumer finance sector as long as they were not lending at high interest rates.

"I have no problem with them doing that but I don't think they should be doing it at 500 per cent. If it is a personal loan it should be at suitable rates so it is affordable."

Lyn McMorran, chief executive of the Financial Services Federation. Photo/Supplied.

"We don't want to prevent competition."

The financier said he believed all directors and top executives should undergo the same rigorous proper person tests regardless of which sub sector they fall into within the Commerce Commission remit.

"To suggest that manageability and work volumes of the Commerce Commission should be a reason for its members to undergo a lesser level of scrutiny is laughable.

"One must only look to the GFC [global financial crisis] to see the negligence of directors and executives at what were once considered top tier finance companies and the damage caused by the collapse of these firms."

A spokeswoman for FinCap, which represents New Zealand's budgeting advice service, said it also believed fit and proper tests should apply to all directors and executives.

"There is irresponsible lending throughout the lending industry regardless of the interest rate."

She said part of the reasoning for a fit and proper test for lenders was to prevent mobile traders from being able to open up new companies and start trading again.

"If the test only applied to pay day lenders it would no longer apply to mobile traders or car finance companies."

The spokeswoman said it agreed with the FSF that it would be helpful to define what a payday lender was and that particular attention be paid to enforcement of the sector.

"We agree with FSF that there should be particular attention on pay day lenders when it comes to enforcement.

"A definition would be a good start. At the moment high cost loans are defined in the Responsible Lending Code as loans of over 50 per cent per annum but there isn't any associated definition of what a short term loan is. Pay day loans are essentially high cost short term loans."

But FinCap also believes the proposed 100 per cent repayment limit won't be enough to make a difference and instead wants an interest rate cap of 50 per cent imposed on the payday sector which would effectively make it uneconomic for the sector to operate.

"...the measures that they are introducing will be very ineffective and won't effectively reduce the harm from high cost lending.

"Ideally we would like to see no access to high cost short term in the market. This would be achieved by an interest rate cap of 50 per cent per annum."

But McMorran said its members did not back the 50 per cent interest rate cap.

"While our members are not in this market, it cannot be ignore that there is clearly a demand for high cost lending products, and this will not go away if people are desperate for short-term finance to meet essential need.

"Care needs to be taken to avoid driving compliant lenders out of business completely, potentially forcing vulnerable consumers to fill that needs with noncompliance or event black-market lenders and leaving consumers worse off than they are currently."