THE CLASH BETWEEN IDEALISM AND REALITY A SUBMISSION to the SENATE ECONOMICS LEGISLATION COMMITTEE INQUIRY into the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011: formerly the Exposure Draft entitled the National Consumer Credit Protection Amendment (Enhancements) Bill 2011 from the FINANCIERS’ ASSOCIATION OF AUSTRALIA / INDUSTRY / SMILES TURNER DELEGATION Consultants: Phillip Smiles LL.B., B.Ec., M.B.A., Dip.Ed. Lyn Turner M.A., Dip.Drama Smiles Turner Ph: (02) 9975 4244 Fax: (02) 9975 6877 Email: [email protected] © Smiles Turner, November 2011 1 “You certainly, in a modern economy can’t regulate interest rates. That’s economics discarded for the last 30 years.” - Prime Minister Julia Gillard, 4 November 2010, Today Show, TCN Channel 9 © Smiles Turner, November 2011 2 INDEX Content Page Executive Summary 4 About this Submission 11 Section 1 - Market Characteristics and Supply Realities 14 If the Bill Proceeds to Enactment Unchanged 14 Section 2 - The Delegation’s Simple Alternative 24 Section 3 - A Detailed Analysis of the Current Bill 30 Section 32A 49 Section 4 - Explanatory Memorandum and RIS Deficient 57 Concerns in Regard to the Explanatory Memorandum 57 An Analysis of the Regulation Impact Statement 65 A Major Government Study Ignored by Treasury 76 An Analysis of the Minister’s Second Reading Speech 77 Section 5 - Non-Commercial Alternatives Grossly Inadequate 81 Decisions Demanding Alternatives, Without Timely Research 81 Not-for -profit, Non-commercial Credit Opportunities 82 Other Possible Alternatives 89 Section 6 - Business Realities 97 Business Cost of Loans for the Lender 99 Bad Debt Realities 110 Section 7 - Consumer Advocates Misguided 123 Consumer Advocates and APRs 123 Use of Direct Debits 123 Security for Loans 128 Repeat Loans (Rollovers) - the Reality 134 Section 8 - Consumer Protection Continues 141 A Consumer Profile 141 Centrelink Benefit Recipients and Borrowing 150 Consumer Complaints 151 Section 9 - Small Amount, Short Term Lending - A Social Need 161 The Social Need for Short Term Loan Availability 161 Section 10 - Facing the Realities 165 Idealism Compromised in the Face of Reality 165 The CALC Supplementary Submission 184 Other Consumer Advocates’ Submissions and Evidence 187 Total Number of Consumer Advocate Clients 191 © Smiles Turner, November 2011 3 The Research on Which the Consumer Advocates Rely 191 Site Inspections Overlooked 192 COAG Review 193 Criminal Elements 193 International Studies 194 Alternatives and the ‘Not-for-profit’ Sector Senate Inquiry 195 Review and Control Process 195 ASIC Now in Play 197 An Import Invitation 198 Conclusion 198 Appendices 200 Appendix 1 - Smiles Turner Research Appendix 2 - Income Generation under the 10%, 2% and 48% 2-tier regime Appendix 3 - 90 Day Potential Consumer Assessment Form Appendix 4 - Break Even Lenders’ Figures Appendix 5 - Economic Modelling Methodology Appendix 6 - About Our Consumer Please Note: Appendices 3 and 5 have been provided to the Committee as confidential documents. © Smiles Turner, November 2011 4 EXECUTIVE SUMMARY Putting the Inquiry in Context This Submission is fundamentally a consumer and industry analysis. When considering the current Bill the statistics must be recognised, whether to support consumers, consumer advocates ( not the same thing as consumers), or the lenders. Advocacy of the lenders’ position takes a minor role in comparison to presenting the facts, which clearly indicate that the current Bill’s objectives will not and cannot be satisfied without a major multi-billion dollar government investment in the alternative, non-commercial, not-for-profit credit providers. No choice for consumers Smiles Turner research, supported by the recent RMIT University research and the Consumer Action Law Centre Victoria (CALC) 2008 research, indicates that around 80% of borrowing is for purposes that, in our society, would be regarded as non -discretionary. This figure makes the opportunity to borrow small amount, short term loans a critical issue for most consumers. This in circumstances where less than 30% of borrowers have any alternative source of funds, as illustrated in repeated Smiles Turner and other research. No economic modelling Treasury has admitted that there as been no economic modelling carried out in regard to the 10%, 2% and 4 8% 2-tier regime included in the current Bill. Treasury has no evidence There is no evidence or financial analysis available to Treasury, from any credible source, to support the premise that small amount, short term lenders can break even lending at 48% inclusive of all fees and charges, under at least $3,000. Regulation Impact Study (RIS) and Explanatory Memorandum substantially flawed Both documents rely on flawed research, do not include any reference to contemporary research, include conclusions that appear to have no evidentiary support, ignore lenders’ unavoidable business costs and reveal there has been no consideration of the capacity of the nominated alternatives to handle the borrowers redirected from the commercial sector. RIS minus critical industry facts This RIS recommendation was conceived in September/October 2010, prior to Treasury receiving major research results, calculation charts and economic modelling from the Financiers’ Association of Australia (FAA)/Industry/Smiles Turner Delegation (the Delegation) via a series of Discussion Papers, industry and consumer consultation meetings and Delegation/Treasury meetings this year. Treasury RIS recommendation ignored Despite other issues associated with the RIS, Treasury did nominate a relatively realistic $30 fee for every $100 lent. This is a far cry from the current Bill’s $12 per $100 (for the first month - 10%, 2%) included in the current Bill without any explanation for the change of direction, either in the Explanatory Memorandum, or f rom the Minister. The socio-economic disaster This socio-economic disaster will occur because: all commercial lenders lending under $3,000 and most lending from $3,000 to $5,000 will exit the industry sector; those lenders will no longer be available to lend their current total loan book of $1.2 billion annually; © Smiles Turner, November 2011 5 at least 70% of the 750,000 individuals currently borrowing at least one loan annually (total over 1.5 million) will have to turn to the non-commercial, Government and bank subsidised lenders; based on Smiles Turner research, a significant proportion of the 30% of intending borrowers (225,000) will attempt to access their untried alternate source of credit. A large proportion of these people will be rejected and will have their optimism completely dashed, when they are forced to join tens of thousands of other rejected borrowers travelling to join the queues at the non-commercial credit provider’s premises; and the non-commercial, not-for-profit lenders will face the challenges of: ▫ a 100 fold increase in loan applications, as they currently do not satisfy even 1% of the total existing market; ▫ reducing their application time from the present 4-6 weeks in most cases, to between 2 hours (payday loans) and 24 hours (microloans); ▫ 86% of these applications not satisfying the non-commercial, not-for-profit lending criteria and having to turn these people away; ▫ having less than half the number of lending offices (according to bank media releases and one quarter according to ACOSS) currently operated by the commercial lenders, with many of the not-for-profit offices currently only operating part time, with volunteer staff; ▫ recruiting and training 2,500 full-time equivalent people, to replace the commercial lenders’ current highly trained and experienced staff; ▫ handling the growing avalanche of enquiries commencing 1 July 2012 and substantially increasing until 1st January 2013, when virtually none of the commercial lenders will be lending in the sector; ▫ lifting their total loans from the less than $20 million advanced annually in recent years, for less than 25,000 loans, to over $1 billion for at least 525,000 people applying for loans approximately twice each year; and ▫ the establishment of major internet lending facilities to replace the 58 internet lenders (known to the Delegation), with close to 300 sites feeding leads into them. The economics of industry destruction under the current Bill The issues contributing to industry destruction, such as: the fixed costs faced by the lenders that cannot be reduced, because of relative market power, the Veda Advantage/Dunn & Bradstreet duopoly, ASIC’s expensive compliance requirements, bank fees, and State and Commonwealth awards; plus the currently included 48% cap extending the number of successful loans needed to make up for one bad loan from 8.3, to as many as 71, depending on the length and size of the loan - a practical and mathematical impossibility in the sector’s lending environment. This guarantees business failure; and the total inability of payday lenders to break even, from 1 January 2013 , under the 10%, 2% regime included in the current Bill; and the total inability to break even of microlenders who lend amounts all under $3,000, secured or unsecured, under the 48% inclusive interest rate cap regime included in the current Bill; and the challenges facing lenders who lend above and below $3,000, not being able to lend enough to replace the under $3,000 loans, abolished under the current Bill, that previously contributed to paying fixed costs. All the above means certain abolition of the industry sector. 1930-40’s price