Last week the Government announced it is going to get tough on loan sharks and truck shops.
The proposed changes include payday loan companies who provide short-term unsecured loans of small amounts intended to get the borrower though to the next payday. While they generally have a maximum term of a month or two, these small sums can become very large amounts very quickly.
According to the websites of these lenders, the loans are often used to pay for groceries, power bills, vehicle breakdowns, and the like. The reality is there are probably a host of other reasons why desperate people end up at the doorstep of these sharks. Every lender has different terms, but they do have one thing in common – outrageously high interest rates: 500% per annum is not unusual, plus default interest, plus application fees, plus dishonour fees, plus reminder letter fees, plus this, plus that, plus a bit more.
True to form, our Prime Minister went all cuddly and fluffy on the issue; saying the changes are needed to “make New Zealand the best place to raise a child.” She could have expressed it more directly because the problem deserves stronger language and strong measures. The truth is these loan sharks are predators who prey upon desperate individuals. They are ratbags that should be driven out of business.
Unfortunately governments are good at talking about getting tough on fringe money lenders but they are not good at doing anything about it. Five years ago the then National- led government took a tough stance but the outcome changed very little. The changes they made to the Credit Contracts and Consumer Finance Act in 2015 did not deal with the substantive problem which is the exorbitant fees and charges. What it did do was require better disclosure of the fees and charges.
As predicted at the time, better disclosure did not eliminate the problem - it was yet another example of a government being seen to be doing something rather than actually fixing things. In effect, our politicians in Wellington turned a blind eye to it, and were horribly naive to think that requiring loan sharks to disclose their outrageous fees would actually stop people from taking out loans at scandalous interest rates.
Some may say, let the free market work and if people want to pay high interest then so be it. But free market principles are based on people acting rationally and of their own free will. There is nothing rational about desperate people paying 500% interest on a loan to buy groceries or to fund an addiction.
According to the PM, the proposed measures will cap the total interest and fees that can be charged to no more than 100% of the loan amount. The cap will put an end to the compounding effect of fees and interest. Details are yet to be finalised but will only apply to high-cost lenders.
The new legislation will also impose fines for "irresponsible lending", will require consumer lenders to register as a Financial Service Provider and will require their directors and executives to meet a 'fit and proper' test. The potential fines are $600,000 for a company and $200,000 for individuals.
The motivation for requiring registration is probably because it then gives a regulator the authority to de-register problem lenders and ban directors and executives, therefore removing them from the industry.
Although the proposals are likely to see an end to the most outrageous and abusive forms of loan sharking, it will not be the end of payday lenders entirely. Some payroll companies are now catching onto the idea of providing payday advances that give salary and wage earners access to their pay before the scheduled payday - at interest rates much less onerous than fringe money lenders. This will not be any comfort to beneficiaries, who are the ones most likely to be the ones who resort to payday lenders.
The Government is also tackling so called "predatory behaviour" by truck shops and others who sell door-to-door on credit or other deferred payment. They intend solving this by requiring all mobile traders to pass the ‘fit and proper person’ test as well. This seems more like a measure to address problem operators rather than problems with the industry as a whole. This may be because the problems are less clearly identifiable, until the complaints are received. In my view this does not go far enough and will not eliminate rogue operators.
Unfortunately the law changes are not due to come into effect until 2020. It's a shame it's going to take that long to deal with a problem that needs to be addressed urgently and one that is relatively simple to fix.
Frank Newman, an investment analyst and former councillor on the Whangarei District Council, writes a weekly article for Property Plus.