A recession could mean big business for ‘exploitative lenders’

Last Friday consumer rights advocate Gerard Brody was sitting in a Senate estimates hearing, arguing for tougher rules for predatory lenders. It’s a battle he’s been fighting on and off for years. Now, with a pandemic threatening to upend the economy, it’s a battle that’s taken on new urgency. 

“People are going to be out of income, looking for quick fixes,” he says. “[It’s] more important than ever that this reform happens.”

Brody is used to his arguments falling on deaf ears. Almost since the last financial crisis, he and 20 other community organisations have been campaigning for legislation that would cap the repayments on short-term loans (which most people know as payday loans). They say that these lenders prey on Australia’s most vulnerable, entrenching them in a vicious cycle of debt. And they want the government to make good on its 2016 commitment to introduce new restrictions.

“Unless we restrain these exploitative lenders I’m really concerned their business will grow,” Brody says.

With Australia now bracing for a recession, financial counsellors are preparing for a flood of people facing financial hardship for the first time. Their biggest fear is that people laid off during the crisis will turn to online lenders for short-term credit to relieve the pressure.

“The group of people who are going to be contacting financial counsellors will have never come in contact with the community sector services before,” Fiona Guthrie, CEO of Financial Counselling Australia, said. 

“My fear is that people won’t know that they can speak to financial counsellors or talk to their bank, and end up with a payday loan. And that’s really dangerous.”

Brody and Guthrie’s concerns are exacerbated by the fact that the industry has been emboldened since the last financial crisis. No longer a collection of shady back-alley shop fronts, the short-term lending sector looks more like a group of slick financial start-ups, with friendly websites promising affordable loans in minutes. Many don’t require customers to upload payslips, instead relying on AI and data held with credit agencies to cross-check applications. 

Around 85% of short-term loans in Australia are now taken out online — up from 10% during the global financial crisis. And it’s big business — in the three years to July 2019, more than 4.7 million short-term loans were taken out by 1.7 million Australian households, with a value of more than $3 billion.

“It’s very different today,” Brody says. “It’s much simpler and easier to go online.” 

Predatory lenders are known for doing well in hard times. A report in 2012 found that the global financial crisis, along with a rise in the cost of living, had driven demand for short-term loans in Australia.

But reforms in the sector have been delayed for years, due to a lack of political will on both sides of government. Brody and his team at the Consumer Action Law Centre have even taken to counting the days — more than 1000 — since the reforms were promised. 

And then there’s the lobbying. Australia’s short-term lenders are represented by the powerful National Credit Providers Association (NCPA). In 2016 the NCPA enlisted Labor’s former shadow financial services minister Bernie Ripoll to rally against the reforms in Canberra. Ripoll is no stranger to the sector. In fact, he was the architect of Labor’s future of financial advice reforms and chaired a 2009 government inquiry into financial products and services in Australia. 

The NCPA, which has launched a campaign of its own, says the latest reforms, which would restrict loan repayments to 10% of a consumer’s income, will lock “ordinary Australians” out of the credit market. 

“Effectively what that does is reduce the amount a person can borrow,” chairman Michael Rudd said. 

Brody says there have been so many different inquiries into the sector that he has trouble remembering which one is which. But he fears the lack of political willpower is now about to have serious consequences, with Australia and the rest of the world about to enter recession.

“People are still a little bit in shock. But what are they going to do when they can’t pay their bills? That’s when we’re going to see the greater shock.”

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