LENDERS 'VULNERABLE, DOWN A BLACK HOLE'
Written on the 14 April 2016 by Nick Nichols
THE corporate watchdog put a spotlight on the cash loan market when it ordered Nimble Australia to repay borrowers $1.5 million last month over allegations that it was not adhering to responsible lending obligations.
But now the National Credit Providers Association (NCPA) has launched its own offensive against the authorities, blaming loose legislation for putting the industry in a 'black hole' and leaving its members vulnerable to random and often costly rulings by the Australian Securities and Investments Commission.
The NCPA has also levelled a shot at ASIC over its evocative language when bringing these matters to court, arguing that it needs to stop referring to its members as payday lenders because this type of lending was banned three years ago.
The NCPA represents lenders who write about 85 per cent of small amount credit contracts (SACC) each year in Australia, although Nimble is not a member.
According to the NCPA chief executive Phil Johns, the SACC market operates in the most highly regulated financial services environment in the country.
"People think small amount credit contracts there's very little work with very little due diligence, but in fact it's the hardest loan to get over the line," says Johns.
He also says any lender that is focused on 'sales and not on compliance will not be in business in five years' time'.
"For any lender to write a SACC loan, even a $50 loan, there are just over 10,000 pages of Act regulations and ASIC regulations to comply with. In fact it is harder to approve a loan under $2000 than a bank to approve a $20,000 loan."
Johns says the court order against Nimble, and another being sought against Fair Go Finance, could be viewed by the general public as ASIC doing its job.
However, he says the headlines that these issues create mask the deeper concerns facing the industry, which last year serviced two million customers with loans totalling $667 million.
"There is no lender operating without legal advice, and the key point for both Nimble and Fair Go Finance is that both of those firms took legal advice from tier one law firms," says Johns. "And they implemented that advice as given."
Johns says regulatory conflict occurs when ASIC doesn't agree with that advice.
"Our members pay for that legal advice, sometimes costing hundreds of thousands of dollars. They think they have legal advice and that's the end of it.
"The reason we are in this black hole at the moment is that the National Consumer Credit Protection Act is what's known as principles-based legislation.
"The legislation says you will make reasonable inquiries of a consumer's financial situation, but ASIC doesn't define what reasonable is.
"Principles-based legislation is problematic when lawyers have differing views on the same situation.
"The lawyers at ASIC interpret the legislation one way and commercial lawyers might interpret another way."
Johns says most NCPA members are small businesses that don't have the financial clout of major lenders such as banks. He says often their only option when confronted by an ASIC notice is to accept its finding or spend at least $500,000 fighting it in court.
"Any ASIC action is going to cost $30,000 to $50,000, so going to court is not viable for many of the smaller business operators. They have to capitulate.
"They are an easy target and I don't think they go after the practices of the banks because they have the grunt and resources to push back."
Johns also argues that ASIC's record is not strong in court.
"It's a very mixed bag when the lender has the resources to fight them," he says.
Last year ASIC lost a case against Gold Coast-based Teleloans and Finance & Loans Direct after the Federal Court ruled that the companies operated outside the reach of the National Credit Act.
The NCPA would prefer to see costly court proceedings replaced by some form of adjudication, possibly overseen by a retired justice of the Supreme Court.
Johns also says consumers need to be reined in as well, arguing that in many cases borrowers lodge fraudulent loan applications by omitting relevant information on their applications. He says many NCPA members deal with clients who have been rejected by banks and who are aware of how to skirt around the system.
"Our sector would not exist if the banks provided small amount and medium amount credit contracts to everyone," he says.
"As far as consumer detriment and harm goes, the National Consumer Credit Protection Act is missing one key component that there is no concept at all about responsible borrowing under this act.
"The greatest leap forward we will have in consumer protection is when we put some resistance in for fraudulent credit applications.
"Even if it's found that the consumer lied on the application form, the consumer is still entitled to full internal dispute resolution and full hardship provisions. Can you imagine trying that on with your home insurer?"
Johns says there should be consequences for fraudulent credit applications in Australia.
"We can't fine people, but perhaps we could tag those people under comprehensive credit reporting so it impacts their credit score."
Author: Nick Nichols