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Consumer Credit Review Submission by Cash Converters Victoria

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Consumer Credit Review Submission by Cash Converters Victoria Powered By Docstoc
					           Submission by

CASH CONVERTERS VICTORIA

             Response to



 Consumer Credit Review
           Issues Paper

Efficient, Effective & Fair Regulation


           Consumer Credit Review
           Consumer Affairs Victoria
               GPO Box 123A
           MELBOURNE VIC 3001


                29 July, 2005
Introduction


Cash Converters is the industry leader in second-hand retailing,
pawnbroking and the provision of a range of personal finance services
in Australia and internationally.

Cash Converters is an Australian franchise operation with its origins
and head office in Perth. Cash Converters is owned by a publicly listed
company, listed on both the Australian and London Stock Exchanges.
Cash Converters complies with the highest standards of corporate
governance and ethical conduct, is an exemplary corporate citizen and
has an unblemished record as a listed company for the past ten years.

Cash Converters has received numerous awards from industry bodies
and has also received many commendations and thanks from
regulatory authorities and Police Forces throughout Australia during
the twenty years of operation.

Each franchise is a small business, owned and operated by a
franchisee. On average, each store employs 12 to 14 employees.

As small business owners franchisees face the same pressures and
demands as any other small business as well as operating under one
of the strictest regulatory regimes, the Second Hand Dealers &
Pawnbrokers Act. With the introduction of Personal Finance Centres to
our business, an understanding of their obligation in relation to the
Consumer Credit Code is now a requirement and responsibility.

Cash Converters strength lies in a commitment to high standards and
this continues with the introduction and expansion of personal finance
services. For the purposes of relating to the issues paper, this will be
referred to as micro-lending and has also been referred to as pay day
loans.

There is an identified need for consumers to have access to micro-
lending services and the product needs to remain openly available to
consumers. It is an appropriate product provided in an ethical manner
by the vast majority of micro-lenders.




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Advances in technology have lowered the barriers to entry into the
market and with many new lenders being attracted to the market
competition ensures that product pricing is appropriate.

The manner in which regulation is applied is important. Whilst some
change in regulation may be seen to overcome issues identified, it is
also likely to have the unintended effect of removing micro-lending
from the market. The history of capping of interest rates on
pawnbroking in Victoria demonstrated this unintended effect. It led to
the demise of pawnbroking and drove the business underground and
placed the consumers at the hands of “loan sharks”. The capping was
removed to bring the business back out in the open where it can be
monitored, and legislation used to control the practice. At the same
time it restored a legitimate method of acquiring short term finance by
sections of the community that don’t have practical alternatives.

The proposed capping of interest rates, inclusive of fees and charges,
in NSW has created a market place of many micro-lenders operating
on the fringe of and around legislation to avoid the capping to remain
commercially viable and continue to provide the service. Although this
matter has been raised with Office of Fair Trading in NSW for
clarification on a number of occasions they are either unwilling or
unable to do anything about it. Anecdotal evidence raised at the
Sunshine forum indicates that “loan sharks” are becoming active in
this environment.

It was significant and vital that the issue of capping of interest rate as
a solution was raised at the Sunshine forum on 7 July 2005 and the
Dandenong forum on 28 July. It was reassuring to learn that this was
only mentioned in the context of NSW having recently done this and
that the Victorian Government has no pre-conceived outcomes in
regard to this review and has publicly stated it has no intention to
destroy the industry, the objective was stated as finding solutions and
allowing the industry to remain viable.

‘Mainstream’ lenders vacated the small loans market because it was
not commercially viable; this has been reinforced with recent
comments made by the Banks Association representative at the
Stakeholders Consultation Briefing held at the Consumer Affairs
Victoria offices on 24 June. In particular with an interest rate cap,
inclusive of fees and charges, there is no opportunity for banks to
enter the market.




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To measure the affordability of a micro-loan solely on the annualised
interest rate disregards the fact that the service provides small
amounts over short periods. Fees and charges expressed as an annual
interest rate is a misrepresentation of the product and will always
make the affordability comparisons with mainstream lenders
impractical.

It is the view of Cash Converters that a fair price for micro-lending will
only happen in a competitive marketplace.

Key points in regard to Cash Converters micro-lending practices are:-
   We do not require security to be provided by our customers.
      This removes concerns regarding small loans requiring high
      value security, repossession tactics and excessive repossession
      fees. It also removes any commercial value in allowing our
      customers to overcommit.
   Our system is internet based and allows our operators to
      connect to a national data base which prevents customers
      entering a number of our stores and becoming over committed.
   Cash Converters has had over 490,000 customers nationally in
      the last 3 years and we have never taken a customer to court.
      The risk is with the franchisee, not the customer.
   We do not “roll over” loans, this minimises debt spiral
   Fees and charges are not compounding.
   A high level of integrity and dignity in our dealings with
      customers is paramount.

There is reference in the Issues Paper to the proliferation of small
amount credit, where consumers – particularly vulnerable,
disadvantaged & low income – borrow small amounts over short
periods.

It is important to Cash Converters that the point is made that we do
not target any of the above mentioned consumer groups in any
specific way with our micro-lending services.

Under, “changes to the credit marketplace”, there is a reference to the
pawnbroking industry diversifying with one prominent network now
offering pay day loans and small amount loans, as an alternative to
pawnbroking. This is not a strategy by Cash Converters in the
marketplace. We have been providing communities with the service of
pawnbroking for many years and intend to continue to do so with the
same approach we have taken in the past. The micro-lending
component of our business has been developed to expand the services


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to our local communities. A need was identified and a solution
implemented. This has brought a new customer base to our business
and was never intended to be an alternative to pawnbroking.

Under the Regulatory Environment section of the Issues paper section
(g) refers to Pawnbroking and the issue of pawnbroking loans not
being subject to an interest rate cap.

We would like to highlight that the comprehensive and thorough
review of the Regulations of Pawnbrokers, conducted in 2000/2001,
came to the clear conclusion that the capping of interest rates was not
favoured. We can see no reason why this issue would be mentioned in
the context of the Consumer Credit Code. We understand the
connection with unconscionable fees charged in a pawnbroking
transaction; however this is a separate issue that can certainly be
dealt with by enforcing current legislation that covers pawnbroking.
Cash Converters welcomes the opportunity to be involved in this
Consumer Credit Review and acknowledges the Government’s role in
seeking solutions to issues arising from the growth of micro-lending.
We will support the process in any way possible to ensure an efficient,
effective and fair outcome is achieved.



Response to Terms of Reference.

Term of Reference #1

Having regard to the current high level of consumer indebtedness, the need
for low income consumers to have access to affordable credit and concerns
about the prevalence of predatory lending practices:
Examine the efficiency and fairness of the operation of credit markets in
Victoria, including but not limited to:
   a) the nature and extent of microfinance in Victoria, including options
       for/barriers to the provision of microfinance
   b) irresponsible and unethical advertising and lending practices
   c) emerging issues such as reverse mortgages
   d) the increasing role played by intermediaries

Cash Converters provides micro-lending under the description of
providing affordable, small amount loans for short periods.
These are provided under the guidelines of the Consumer Credit Code.
Our businesses have specific floor space dedicated to this style of
transaction, with an environment that provides integrity, dignity,
comfort and compliance. Personal Finance Centre is the Cash
Converters branding that covers these particular services.


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Types of Microfinance
From the discussions and forums attended it is apparent that the NILS
(No Interest Loans) and LILS (Low Interest Loans) have limited
application. They are cumbersome and resource hungry for community
assistance organisations to provide and monitor. Without significant
Government assistance and subsidisation it is difficult to see how these
services could become an alternative to commercial micro-lending.

Issue 1: What are the current experiences of microfinance in Victoria?
From Cash Converters perspective a concise explanation of what a Pay
Day loan is would be appropriate for this response.
A Pay Day loan is an advance against income to help people with short
term cash need. A repayment plan is agreed to and a direct debit is
arranged to provide efficiency. The average loan amount is approx
$220, the length of the loan is generally 30 days. It is unsecured,
convenient and provided in a professional way in a safe and
comfortable environment. The documentation and process is designed
to comply with legislation. The cost of providing this loan is set to
provide affordability for customers and viability for franchisees. With
over 97% of customers repaying their loans this suggests the cost is
affordable.

Some additional information regarding Cash Converters micro lending
profile in Victoria -
    Cash Converters has 26 franchised outlets in Victoria with 25 of
     these choosing to provide micro lending.
    Over 50 people are employed in providing this service in Victoria
     and a further 50 people employed in support roles such as
     training, administration, marketing, accounting and management.
    The set up cost for each franchisee is approx $150,000
    There are ongoing fees associated with being a franchise.
    Loans are for 30 days.
    Average amount of loans, $220
    Number of pay day loans in 04-05 year, nationally 280,908,
     Victoria approx 96,000
    Customer income mix, 80% wage and salary, 20% fixed pension.
    Costs to provider per $100 of principal lent are estimated to be
     $28 for new loan and $24 for existing customer.
    Fees and charges for customer per $100 is $35
    Lending limitation, max of 15% of net monthly income
    Default on direct debits, 24% on first instance.
    Bad debt written off is approx 3%



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The assumption that many low income consumers rely on micro-
lending, does not appear to be supported by any data or research.

The profile of Cash Converters micro-lending customers is in line with
the comments made at the Sunshine forum. Approximately 80% of our
customers have occupations that provide wage and salary incomes.

It has been made clear that a capping of 48% PA, inclusive of fees and
charges, would translate to approximately $3 on a $200 loan over 2
weeks. It then goes on to state that, “to make this sort of lending
more profitable pay day lenders often impose a flat fee or charges.”
This language clearly reflects an attitude, and is not reasonable or fair
in relation to the commercial provision of micro-lending.

Collecting $3 for lending $200 is not profitable. To claim the lender is
trying to make more profit is misleading. The use of the word “impose”
is inflammatory and designed to engender hostility against the lender.
The fee structure that operates in the Cash Converters micro-lending
service is based on commercially sound approach of covering all
associated costs and giving a return to the business stakeholders,
whilst providing a fair and competitive service to our customers.

There are many factors in a customer choosing a particular form of
credit, or credit provider, over another. These include; perceived
integrity, perceived security of information that is provided,
convenience, operating hours, handling of the relationship,
environment, preparedness to provide a solution and value.

Traditional sources of credit are unable to deliver funds at such
transaction costs. The costs of providing a new loan with Cash
Converters equates to approximately $28 per $100 with a return to
the owner that provides a viable business. I would consider this to be
reasonable from a commercial perspective & demonstrates an
approach that is designed to be fair, competitive and sustainable.

Fees and charges applied in micro lending cannot be assumed to
invariably create profit. Micro lending is a risky, market driven
business and profits are dependent on a variety of factors, many of
which can be out of control of the business owner.

The average loan amount provided through Cash Converters pay day
lending was $220 as at June 05. This has remained fairly static over
the last year. This would indicate the marketplace has identified the
consumer needs and is providing a service that satisfies the need.


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The period of the loan provided is 30 days. There is the ability to pay
early with no additional costs. There is no change in fees or charges
over time and, as stated earlier, there is no security taken or lean on
goods.

Australia wide Cash Converters has provided services to about 50,000
new customers in the last 12 months to June 2005. The total number
of transactions over this period has been approximately 280,000. This
demonstrates a level of trust and satisfaction with the way Cash
Converters provides micro-lending.

Cash Converters believes the marketplace will continue to evolve and
with improved efficiencies micro-lenders will be able to provide value
services in a competitive marketplace. With the increase in use of
micro-lending and improved education of consumers, the market place
pressure will increase, inevitably in favour of the consumer.

Issue 2: What are the options for the provision of microfinance in Victoria?

Whilst consumer advocates claim there is a lack of ‘affordable’ small
amount loans for short term finance, there is no suggestion of what
affordable is. It appears that NILS & LILS are not viable and are
basically government grants. This is a responsibility of government to
provide these services. As far as options for provision of micro-lending
in Victoria, it is clear, from the size of the marketplace, that a need
has been there, and now a product has emerged to satisfy that need.
We do not believe an option is to eliminate the industry.

What is affordable? In most sectors of our economy we instinctively
reject price controls, but not with the price of credit. Modern
justifications for price control are generally reactive when expressed;
they focus on concepts such as “fairness”, “unconscionability”,
“exploitative” and “bargaining disparity”. Factors such as the cost of
providing the credit, the effects of competition amongst credit
providers the resultant credit rationing, often get lost in the emotional
melee.

Micro-lenders must charge a certain level of fees in order to stay in
business.
We believe a setting of maximum fees and charges will eliminate
competition. The current marketplace has a high level of competition
to ensure the cost of micro credit remains fair for both operators and



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consumers. We firmly believe that continuing competition will lead to
lower costs for consumers.

Issue 3: What are the barriers to the provision of microfinance in Victoria?

From Cash Converters perspective the barriers to provision of micro-
lending have largely been overcome and compliance within the
existing code, whilst cumbersome, has been achieved.

Issue 4: What could government do to facilitate the provision of
microfinance?

We believe the role is less that of a facilitator and more that of
monitoring the code and having the strategy and resource to act on
non-compliance.

Issues 5: What evidence is there of irresponsible or unethical lending?
Issue 6: Are advertising practices in line with community standards?
Should credit advertising carry “health” warning?
Issue 7: What is the evidence of impact of advertising on demand for
credit?

These are genuine issues for C.A.V. to address based on community
feedback and monitoring of advertising.
The environment of high levels of debt does not act as a catalyst for
restriction or abolition of marketing of products and services. If this
was the case, almost all advertising of any product or service may
disappear.

Cash Converters operates in a small specific market and chooses not
to comment on issues out of this market place.

Issue 8: Should credit providers be legally compelled to make a
satisfactory assessment of capacity to repay? If so what should this entail?
Issue 9: Is there a need to further assist consumer decision making? If so,
how is this best done?

The Cash Converters micro-lending process makes a responsible
assessment of ability to pay and sets a limit of a maximum of 15% of
net income that a customer can borrow.

We would support improvement of communication methods and
material to better inform consumers of the micro–lending process.
C.A.V. material could be distributed and utilised by micro-lenders.



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Issue 10: Do all groups in the community have ready access to credit?
Issue 11: Is credit regulation appropriate for all groups in the community?
Issue 12: What other emerging marketplace practices or credit products
need attention?

No Comment

Issue 13: If credit is facilitated by traders who are separately regulated –
such as estate agents – should there be a requirement for the estate agent
to inform the consumer if a referral is made to a related entity? Do the
linked credit provider provisions of the Code provide sufficient regulation?

No Comment.

Term of reference #2

Having regard to the desirability of national harmonisation of credit laws
and the legislative review principles underlying National Competition Policy:
Examine the effectiveness, efficiency and fairness of the current regulation
of credit in Victoria, with particular reference to:
    a) the continuing relevance of the Credit Reporting Act 1978
    b) options for/ barriers to compliance and enforcement
    c) unfair contract terms in consumer credit.



Issue 14:
Should the Credit Reporting Act 1978 be repealed and if not, what parts of
the Act should be retained and why?

No Comment

Issue 15: What are the barriers to enforcement and compliance? Is
enforcement adequate? How could it be enhanced?
Issue 16: Are there barriers to consumers taking action in VCAT to enforce
their rights under the Code?
Issue 17: Is VCAT always the best vehicle for the determination of
consumer credit disputes and enforcement actions?
Issue 18: Should all credit providers be required to belong to an approved
ADR scheme, as is the case with other financial service providers?

Cash Converters supports a more proactive and co-operative
relationship with those who have disputes, hardships or changes of
circumstances that require a flexible approach to resolve. A suitable
format and process for this will need to be explored. The concept of an
alternative dispute resolution, (ADR), that is accessible and effective
for the micro-lending industry, appears to be practical and workable.
This could certainly achieve efficiency and fairness in this area.


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Funding for an industry specific ADR scheme for micro-lending could
be financed with a registration fee associated with the credit provider
registration scheme and an annual fee associated with re-registration.


Term of Reference #3

Having regard to existing research, commission research into:
  a) the credit market in Victoria, with particular reference to fringe
      lending and any special features in rural and regional Victoria
  b) the effect on consumers, industry and regulators of introducing
      ‘positive’ credit reporting.

Cash Converters fully supports the commissioning of research and is
prepared to co-operate and contribute appropriate information to this
project. We believe this research needs to be conducted by an
independent body in order to get the best outcome that will benefit all
stakeholders. Cash Converters would be prepared to assist in
developing the scope and detail of the research.
Cash Converters agrees with the viewpoint that the Consumer Law
Centre Victoria research done in 2002 is not relevant to today’s
marketplace. The industry has changed in size, appearance and
approach to such a degree that these findings do not reflect the
current marketplace and consumer profiles.

Term of Reference #4

In light of the findings flowing from Terms of Reference 1, 2 and 3:
Commission research into:
    a) the credit market in Victoria, with particular reference to fringe
       lending and any special features in rural and regional Victoria
    b) the effect of introducing ‘positive’ credit reporting on consumers,
       industry and regulators

Although this is not referred to in the issues paper, it is listed on the
publication circulated at the public forum.

We would like to see the recommendations not only enhance consumer
and public benefit, but also include the continued availability of
microfinance to the community. In terms of a fair outcome with the
recommendations, the sustainability of the industry should be an
objective.

In a Queensland Office of Fair Trading report, it was highlighted that
“ensuring pay day lenders are regulated is preferable to banning pay


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day lenders altogether and forcing borrowers unable to access
mainstream credit to pursue even more detrimental avenues of
credit.” This viewpoint also supports the inclusion in the
recommendation support for the viability of micro-lenders in
continuing to provide a service to consumers.

It is Cash Converters strong opinion that legislation that effectively
bans micro-lending will be counter-productive from a consumer
protection perspective.

There are already tools for the Government to control predatory
behaviour and “cowboys” within the industry, enforcement of the rules
is required, not over regulation.

We believe solutions that focus on consumer and industry education
will enable people to be more responsible and result in better informed
consumers making better choices.

The point raised at the Dandenong forum on 28 July regarding the
introduction of a Code of Compliance to assist the existing legislation
and address the specifics of the various lending categories has merit in
pursuing.


We hope this response assists in an efficient, effective and fair
outcome.


John Brophy
State Manager
Cash Converters Victoria




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