ECONOMIC AND FINANCE COMMITTEE: CONSUMER CREDIT AND INVESTMENT SCHEMES

Mr KOUTSANTONIS (West Torrens) (11:41): I move:

That the 64^th report of the committee, on consumer credit and investment schemes, be noted.

I am pleased to present to the house the 64^th report of the Economic and Finance Committee, entitled Consumer Credit and Investment Schemes. I can tell that former premier Kerin is fascinated by my remarks, as he always is, and I will try to make them as entertaining as possible for him.

I do not propose to recite to the house a blow-by-blow account of the committee's inquiry and its report here today. The report is in excess of 100 pages and contains 24 recommendations, all of which would be done little justice were I simply to list them in the time available. Instead, I want to outline the main threads of the committee's inquiry.

In recent years the credit market has developed into a thriving and often bewildering process of products, providers, choices and, unfortunately, perils. The committee's inquiry into consumer credit and investment schemes had broad terms of reference that ranged from short-term fringe lending (often referred to as payday lending), through real estate investment schemes, credit cards and mortgage brokers. It was the intention of the committee to discover how this new, deregulated credit market operates, who are its customers and what are the problems—or, indeed, the benefits—that arise from it.

As the inquiry progressed it began to focus increasingly on the fringe lending and mortgage broking elements in the terms of reference, and the committee found considerable cause for concern with respect to these two areas. Fringe lending has expanded rapidly in recent years, and short-term loans have become a means by which many people may now seek to manage their finances in emergencies—and, in some cases, to enable discretionary consumer purchases. The providers claim that this is a legitimate form of activity and that people of whatever income—and it is largely low income people who access short-term credit in large numbers—should have the right to credit if they can prove a capacity to repay.

We do not dispute this assertion on its face but, when it comes to a sector of the industry that provides credit products which purport to be for short terms but which carry rates of interest that, when annualised, run into the hundreds or even thousands of per cent, the committee does not accept that such activity comes without responsibilities and conditions. It was the committee's conclusion that the current regulations surrounding the fringe lending markets are insufficient.

The committee notes that, during the final stages of the report's preparation, the Minister for Consumer Affairs announced imminent changes to the Consumer Credit Code, tightening the conditions under which short-term credit is provided. The committee supports these and congratulates the minister for that. In its recommendations, however, the committee found the following issues among those which are not adequately addressed at the moment and which should be reformed:

there should be mandatory financial mediation services;

credit providers should be licensed, with a fit and proper person test applied to obtain the licence;

providers should be made to make better efforts than at present to determine a customer's capacity to repay a loan; and

the Office of Consumer and Business Affairs should be given the power to compel lenders to use dispute resolution services and be able to initiate action against lenders if consumers are unable to do so.

The committee also recommended that consideration be given to capping interest rates.

In a full page advert in The Advertiser on 7 November, Cash Converters (a major submitter to the inquiry) stated that the committee 'did not support capping'. I want to state here that this is not a complete statement of our position. The committee recommended a consideration of capping—even if it were not the 48 per cent per annum model currently in place in New South Wales to which Cash Converters is very much opposed. While the committee acknowledges the legitimate right of providers to pursue their business interests, the provision of credit is a socially sensitive activity which can cause potentially devastating harm to the financial, emotional and social health of individuals and the community as a whole.

If the profitability of providers needs to be tempered for the protection and wellbeing of consumers then the greater good must be the priority. I encourage members to read the report as it relates to fringe lending (its being too detailed to elaborate fully here), as the evidence received from providers, customers and people such as Legal Aid lawyers dealing with clients in a financial crisis is very enlightening.

The other main thread of the report dealt with finance brokers, and in some respects the committee's findings in this area were even more troubling. Finance broking has also seen a rapid expansion in recent years—particularly on the back of the housing boom—as customers seek to take advantage of an ever-increasing range of financial products on the market, particularly mortgages.

In taking on a broker, customers place their trust in the broker's ability to obtain the best product to meet their circumstances from the suite of products available to them. The transaction involves providing sensitive personal and financial data which is then used to source appropriate products, yet the committee heard that brokers exist in an almost unregulated environment with no licensing, training or minimum standards imposed on them at all.

The committee heard that individuals are able to set themselves up as brokers without any form of financial qualifications and represent themselves as brokers when they may have only one product to sell, thereby acting as an agent, not a broker at all. That is the most concerning part. The committee heard of the potential for fraud and misrepresentation (indeed, hearing evidence of examples of just that), and the infiltration of the industry by organised criminal elements, specifically bikie gangs. In response, the committee recommended, amongst other reforms, the following:

licensing of brokers with a fit and proper person test applying;

disciplinary provisions applying to licences allowing for the cancellation of a licence;

conditions on the use of the term 'broker';

the creation of specific offences relating to brokers' misuse of customer information;

simplification of financial disclosure requirements;

the disqualification of individuals with serious criminal records for holding broking licences; and

the creation of a credit tribunal to deal with disputes.

Again, I encourage members to read this report, as its discussion on this matter, as well as on subjects such as credit card limits, real estate investment schemes and the pawn-broking industry, deserves more explanation than I am able to provide with these few comments.

One final point I make on behalf of the committee is the exasperation felt by members with respect to the national bodies established to regulate many of these issues. The Consumer Credit Code, which oversees much of the activity covered in the report, is managed by a ministerial council process which has various subcommittees and bodies that maintain and amend the laws as required.

This process operates on a consensus model, which means that no significant change can occur at an individual state level until a national position accommodating all jurisdictions is reached. The committee understands the underlying principle at work here and the desirability of national uniformity of regulation when it comes to credit. The slow pace at which urgent reform is conducted on this process means that in many cases individuals are suffering significant loss right now while the laws that may assist them are still being negotiated in other places.

The committee is of the opinion that, to the extent that they can, agencies should act to provide basic protections with supplementary and/or complementary regulations while broader reforms are worked through. Again, I encourage all members to consult the report for a detailed examination of the matters on which I have touched.

I had a constituent come to me just before we conducted this inquiry. He was repaying a loan of $5,000 to someone who would not pass a fit and proper person test. He was required to pay $1,500 a month for five years for a loan of $5,000. This person cannot go to a bank to get a $5,000 loan because he has bad credit. He cannot go to a family member to get $5,000 because they do not have it, either. It is a vicious spiralling circle until they have to go to these people—who, I assume, are members of bikie gangs. In this case, the person was forced to pay $1,500 a month for a $5,000 loan. I do not know what the annualised rate is, but I believe it is well over 1,000 per cent interest. Members may think, 'What kind of person would take out a loan like that?' The answer is that desperate people do.

The one thing that struck me was the evidence taken from representatives of Cash Converters. I thought there would be a high default level on these loans, but there isn't because working class people pay their debts. They pay their debts quickly. The way in which the interest is set up means it takes longer to pay because of the interest charged by these institutions. What really concerns me is that the four big banks—ANZ, NAB, Commonwealth and Westpac—are no longer interested in the little guy because there is no money in it for them. They are happy to withdraw from this marketplace and allow the void to be filled by people without good character; and I think shame on them. They have a responsibility to enter this marketplace and make these loans available. We all have seen the ads. We all have seen the Cash Converters ad where the young girl goes to the bank manager, and the bank manager says, 'Jump through all these hoops to get your loan or go to Cash Converters to get one quickly by showing your driver's licence and a pay slip.' The four major banks have to re-enter this market because people are being extorted.

I urge all members to read our report. I know it is difficult for the minister to introduce changes, because we need to have national reform. Hopefully, ministers from all states and territories and the federal government will get together and bring in urgent reforms to this market. We have a housing boom. It is getting harder to get into the housing market. People are becoming more desperate to finance their loans or to save enough money to get into the market, and we may be paying for it in five to 10 years when we may see some sort of subprime problem in Australia as a result of these loans being given out. It is up to the four major banks and the state and federal governments to get involved. I recommend the report to the house.

Mr GOLDSWORTHY (Kavel) (11:54): I, too, am pleased to speak to the motion moved by the member for West Torrens, Presiding Member of the Economic and Finance Committee (of which I am a member), in relation to the inquiry into consumer credit and investment schemes. As I have mentioned in previous contributions to the house, I have had some experience in the finance and banking industry, having been employed by one of the four major banks in the country for more than two decades.

This was a reasonably lengthy inquiry. We received quite a number of submissions and heard from a number of witnesses, who were all too happy to come before the committee and advise its members of the experiences that those people and companies have gained in the time they have been involved in this industry. There are certainly a number of deficiencies in the way in which these matters are currently handled, in legislative terms. I am aware that the Minister for Consumer Affairs (who is here in the chamber) has indicated that the government is currently reviewing the legislation and is carrying out some work on it, and that there will be further considerations in that regard.

As I said, there are quite a number of deficiencies in the current system, and the manner in which these things are managed came to the fore during the committee's deliberations. As a consequence, a 105-page report has been tabled in the house, with some 24 recommendations. The presiding member indicated that he would not canvass those recommendations in his contribution, and I will not do so either. There is concern in 'money lending land', if I can use that terminology. There are a number of loan sharks out there and, in particular, outlaw motorcycle gangs. Here in the house we have been deliberating on legislation for the last several sitting days specifically in relation to the activity of outlaw motorcycle gangs.

This area of lending money—short-term lending—is one in which we are certainly aware that outlaw motorcycle gangs are involved. Obviously, criminal activity comes into play in this regard. Extortion is used as a mechanism to have the borrowers pay back exorbitant amounts of money in interest, default, penalties, default interest—whatever terms are used. We know that there is criminal activity in relation to this and that extortion comes to the fore, which obviously is against the law.

I would like to focus on a specific area about which I had concerns during my involvement with this inquiry, and that is the skill of the employees of the organisations that provide credit. I have some concerns about the skill of those employees in assessing the creditworthiness of individuals who are applying for loans. Whether it is a matter of a few days, to the next payday, or a land financing deal through mortgage finance brokers—whatever the lending proposal may be—I have some concerns in relation to the skill of individuals assessing creditworthiness.

The committee heard from providers, such as Cash Converters, that it has a credit scoring computer program. Some data is entered into the program and it indicates whether the applicant is a good, medium or bad risk. Basically, the program assesses the applicant—whether they get $50 or $200, or whatever the advance might be.

Debate adjourned.