UnitingCare Australia welcomes the opportunity to submit to the Senate Economics References Committee inquiry into Credit and financial services targeted at Australians at risk of financial hardship.

The UnitingCare network consists of a number of member organisations providing a range of social services to Australia's most vulnerable, with 10 of those organisations involved in the provision of Financial Counselling Services across all Australian States and Territories. Our Financial Counselling services possess significant expertise and experience in the causes, consequences and alleviation of financial stress, and have an extensive history engaging with financially vulnerable cohorts targeted by payday lenders and consumer lease providers.

Consultation with the UnitingCare network found significant trends and issues including:

• Significant correlation between engagement with payday lenders and consumer lease providers and individuals in lower income brackets and/or poverty;
• Weaker regulatory requirements applicable to Small Amount Credit Contracts (SACCs) and other functionally equivalent products, providing an incentive for vulnerable cohorts to apply with such providers in the first instance; and
• Relatively poor market penetration for alternative, low interest small amount credit for those on low incomes as more appropriate alternatives to SACCs.

Our recommendations in scope of those findings include:

• The immediate passage of the National Consumer Credit Protection Amendment (Small Amount Credit Contract and Consumer Lease Reforms) Bill 2018 which has been proposed by both the Coalition and the ALP;
• The passage of the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018;
• Increasing Newstart and other social security payments may increase the capacity of at-risk individuals to live in modest comfort without needing to resort to high-interest, short-term loans or consumer leases where unforeseen circumstances require prompt access to funds;
• Strengthening the compliance requirements applicable to SACCs providers to eliminate the incentive of demand for those services from financially vulnerable individuals over other forms of finance;
• Identify opportunities to support low interest and small amount credit providers for financially vulnerable and low-income cohorts including facilitating Social Impact Investing; and
• Expanding the No Interest Loans Scheme (NILS) and increasing the threshold to incomes of $55,000 p.a.

Terms of Reference

The impact on individuals, communities, and the broader financial system of the operations of payday lenders and consumer lease providers

Payday lenders and consumer lease providers have a disproportionately negative impact on individuals and communities on the lower end of the income spectrum. The combination of easy access, high interest and the lack of knowledge of and/or access to suitable alternatives for low income cohorts where the social security net does not keep pace with the cost of living provides and incentive for the financially vulnerable to access payday loans and consumer leases.

Consultation with the UnitingCare network identified:

• A range of causes for demand for short term credit products from medical and veterinary bills to relationship breakdowns;
• The risk of appetite or larger, lower fee credit providers such as major banks creates a barrier to entry for low income earners;
• Providers of SACCs held a disproportionate appeal to the financially vulnerable by advertising their suitability for actioning short term cash flow issues such cohorts were poorly equipped to handle otherwise;
• 88% of SACCs applicants had applications for credit declines by main stream banks;¹
• High fees and interest resulted in some individuals paying from 800-3500% of the base cost of their loans; and
• A concerning prevalence of individuals with simultaneous current SACCs and historical engagement with SACCs.¹

There are several strategies which might act to alleviate these impacts, including:

• Increasing social security benefits to reduce or eliminate total demand for short term credit products;
• Expanding support for alternative low interest, short term credit providers such as the No Interest Loan Scheme (NILS) to expand its presence in the short-term credit market and the market's knowledge of the scheme; and
• Ensuring the regulatory arrangements controlling short term credit products is appropriate to the potential risks such products pose to high risk, financially vulnerable cohorts.

The impact on individuals, communities, and the broader financial system of operations of unlicensed financial service providers including 'buy now, pay later' providers and short term credit providers

'Buy Now, Pay Later' arrangements and other short-term credit arrangements ultimately exist to fulfil a similar purpose to payday lenders and consumer lease - to provide individuals with goods and services earlier than they would otherwise be capable of obtaining them. The only difference from the perspective of the consumer is that payday lenders are not part of a contract arrangement between a credit provider and a retailer requiring that credit be applied to specific goods or services. Consequently, there are similar impacts of such products on financially vulnerable individuals, there the lower barrier to entry to acquiring goods and services may result in individuals on the lower end of the income spectrum overextending themselves and being caught in a debt trap.

Specific concerns were raised regarding the marketing strategies for 'No Interest' promotions where the minimum repayment advertised will not see the total balance repaid before the entire interest component is applied. 'AfterPay' arrangements present similar risks to financially vulnerable customers as 'Buy Now Pay Later' schemes, though it should be noted that setting the repayment amount to action the balance in the timeframe provided is a better practice.

Concerns were also raised regarding AfterPay's lack of engagement with credit-rating agencies, the instantaneous nature of approval and the scale of the organisations' financial benefit from late payments. AfterPay indicated that "AfterPay purchased do not affect credit ratings as we do not report to the credit-rating agencies"² in their response to a Mozo Survey.³ This may deprive other creditors of customer data required to make appropriate decisions regarding future credit applications from individuals at risk of financial stress. Further, AfterPay reported receiving approximately $28.4m in late fees across the financial year ending June 2018.⁴ This represented just under a quarter of AfterPay revenue for that financial year. There are concerns where cohorts at risk of financial stress may be inadvertently forming part of a corporate revenue stream.

Both Payday loans and Boy Now, Pay Later products have been identified as functionally equivalent⁵ to other product currently regulated in detail under the Australian Securities and Investments Commission's (ASIC) product intervention power. Substitute products with similar risk profiles and similar impacts on individuals vulnerable to financial stress should be regulated to similar standards, and UnitingCare Australia support initiatives that would ensure identical standards of regulation, such as the passage of the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018 with specific regard for the application of recommendations 21 and 22 of the Financial System Inquiry Report⁶ to SACCs and functionally equivalent products.

The impact of individuals, communities, and the broader financial system of the operations of debt management firms, debt negotiators, credit repair agencies and personal budgeting services

The ASIC report Paying to get out of debt or clear your record: the promise of debt management firm provides a wealth of information regardings the strategies employed by debt management firms and their impacts on low income consumers.

In addition to those concerns, UnitingCare Australia notes that Debt Management services and Financial Counselling Services are often perceived by financially vulnerable consumers as substitute goods, which is not necessarily the case.

Does current regulation of these service providers meet community standards and expectations and is reform needed to address harm being caused to consumers?

It is the opinion of the UnitingCare Australia network that the current regulatory regime is inconsistent with community expectations. In the opinion of UnitingCare, industries specialising in the provision of goods and services presenting inherent risks to consumers must be regulated in such a way as that risk is minimised, especially where those goods and services present a clear and demonstrable risk to vulnerable consumers including low income earners. The need for reform is exacerbated by the projected increases in the size of the payday lending and consumer lease industry,⁷ increasing gap between social security payments and the cost of living further fuelling demand.

Consultation with the UnitingCare network identified opportunities to better regulate the industry including:

• The immediate passage of the National Consumer Credit Protection Amendment (Small Amount Credit Contract and Consumer Lease Reforms) Bill 2018, with further amendments including:
  • Removing the distinction between consumer leases for household goods and other consumer leases;
  • Prohibiting unsolicited SACC invitations, including through third parties;
  • Debtors not liable for future payments and able to recover previous repayments in case of a breach;
  • Claims arising from breaches of any provision relating to SACCs and consumer leases under the value of $40,000 may be referred to the small claims court;
  • Ensuring the final monthly fee payable is calculated on a pro-rata basis;
  • Prominent display of comprehensive consumer lease price disclosures;
  • Depreciation of second-hand consumer leased goods in accordance with Australian Tax Office depreciation rates; and
  • Higher standards of application assessment with specific requirements to identify clients at risk of default.
• The passage of the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018;
• Appropriate regulation of Debt Management providers; and
• Appropriate support for the financial counselling sector as per below.

The present capacity and capability of the financial counselling sector to provide financial counselling services to financially stressed and distressed members of the community

UnitingCare believes the increasing prevalence of short terms, high interest credit products creates an increased risk of financial stress of the financially vulnerable, and that ensuring the Financial Counselling sector is adequately resources, supported and regulated is critical to minimising adverse impacts on individuals. Establishing a more suitable regulatory regime for Debt Management services may assist in increasing the barrier to entry to eliminate unscrupulous providers of what are essentially financial products that would usually be regulated by ASIC and require and Australian Financial Services License as a minimum.

Key issues compromising capacity and capability identified by the network include:

• An identified gap between Commonwealth and State government's support for financial counsellors and total costs of employment estimated to be approximately $15,000 per FTE;
• Increases in demand estimated to be between 10 and 30%;⁸
• Waiting periods of as high as six weeks in some jurisdictions;
• Increasing demand for financial counselling services in rural areas because of drought impacts in the Eastern States;⁹
• An increasing prevalence of ineligible individuals - not receiving a social security payment or entitled to a healthcare card - applying for assistance suggesting thresholds for assistance are artificially low; and
• A general reactive focus in establishing criteria for funded assistance.

Any other matters

Perhaps more important than the question of whether specific credit and financial services specifically target Australians at risk of (or indeed already under duress from) financial hardship is perhaps not the most pressing question. A more pressing question is why Australians currently or at high risk of suffering from financial hardship choosing to access products that by their nature pose a high risk of causing or prolonging financial hardship. The Case Studies provided in the Appendix sections below are examples of quite reasonable motivations not associated with personal choices. A reasonable conclusion drawn from that question would be that the social security net is insufficient to provide individuals with security from ad hoc expenses that might cause and individual short-term cash flow problems.

Another reasonable conclusion might be a lack of availability or awareness of more appropriate low interest, low risk products for consumers on low income to access to resolve a short-term cash crunch. Information failure and/or asymmetry results in consumers at risk of financial hardship paying more than they should - and in many instances more than they are able - for credit services. Adam Mooney, the CEO of Good Shepherd Microfinance notes that "we continue to invest in growing the NILS network, but we know more is needed to reach the increased demand"¹⁰ in the 2017 Annual Report.

The Department of Social Services has committed funding across the last two budget cycles to building outcome measurement capacity for Social Impact Investing, for which the "Government will provide $6.7 million over four years from 2018-19"¹¹ Such a mechanism may provide an opportunity to facilitate private and philanthropic investment in the expansion of the NILS scheme, with the quantifiable economic costs of physical and mental health impacts of financial stress saved through intervention forming the basis of the counterfactual to determine appropriate returns.

Appendix 1 - Case studies from UnitingSA

CASE STUDY - BUY NOW, PAY LATER

Tell us a bit about your client:

The client 'Sam' (not his real name) is a 19 year old male who was referred to the service internally to address payment plan with utility provider. Sam lives independently with no dependents and is in receipt of Youth Allowance.

Sam experiences literacy issues and mental health issues. He has a pet dog that he describes as 'the most important thing in my life.' It was due to the dog needing vet care that the client engaged with the service the company provided. This occurred not once, but twice, and the client was making two separate payments to the company.

Sam had previously had a regular payment plan set up with the utility provider however this had been broken. He had tried to contact the retailer a number of times however any offers that Sam made of an affordable payment plan were declined. This was due to the client not offering a payment plan to cover usage and arrears.

During discussion with Sam it was identified that he had two accounts with the company which were impacting his financial position and placing him in financial hardship. The client was making two payment per fortnight to the company being $80 and $120 which was a total of $20 per fortnight to this company. This was impacting the amount of money Sam had available to make payments on utilities and impacting other arrears such as food.

What is the company name?

Vet Pay

What did the company do that caused harm to your client?

This company takes advantage of people who are vulnerable. Sam is a very vulnerable person who places the welfare of his dog above all else. The company had placed him in sever financial hardship with payments of $200 per fortnight expected. The client's total income was, in total, $450 per fortnight. Payments are 44% of Sam's income.

The financial counsellor discussed with Sam contacting the company to see if the debt could be combined and one affordable payment be sought. Sam was very reluctant to address this as he feared if he did not make the payments as contracted he would not be able to obtain assistance in the future should his dog need further vet treatment.

As a financial counsellor, what did you do that made a difference to that person?

The financial counsellor contacted the utility retailer and negotiated an affordable payment plan for Sam. This payment plan was to be reviewed in three months. Payment plans were to be paid by Centrepay. The client expressed gratitude for the assistance of financial counselling.

The financial counsellor informed the client of the micro credit loans that could be applied for with the organisation.

CASE STUDY - AFTERPAY AND ZIP PAY

Martha (not her real name), a single mum aged 42 with two young children (2 1/2 and 1 1/2) presented for assistance with her energy account. Her financial position has significantly changed due to a breakdown in her personal relationship leaving her struggling to meet her financial obligations. The young mum receives parenting payment single and family tax benefit and is purchasing her own home.

During discussions regarding her financial position Martha revealed she regularly uses Afterpay and her current fortnightly payments total $300. Martha also has Zip Pay and is incurring interest charges as she is struggling to make payments on time. Martha explained that she uses the buy now pay later schemes to purchase items for her young children as it makes them happy. In particular she spoke about how her 18 month old son likes to unwrap things. Martha is socially isolated as she does not have friends or family in the area.

Martha's statement of financial positions showed a fortnightly deficit of $137.

The electricity account was the client's first priority and was the focus of the initial appointment.

Martha had contacted Afterpay and they were unwilling to set up a hardship plan. Zip Pay reduced payments but are charging interest. These payments will be the focus of Martha's next appointment. The financial counsellor has been gathering information on local play groups and parenting support networks which she will share with Martha.

CASE STUDY - AFTERPAY - COOBER PEDY CLIENT

The client Bessie (not her real name) is a 45 year old female residing in a remote region of South Australia. She is in receipt of government payments: Disability Support Pension. Bessie has multiple complex health conditions.

Bessie is a client of the DV program and was referred to the Low Income Support Program to apply for a micro credit loan to attend a tertiary medical facility in the capital city for a medical procedure. Bessie identifies with having an issue with compulsive shopping on line.

It was identified that there were multiple payments to the company that were impacting her financial position.

As part of the application process the client is requested to submit the most recent three months of bank statements. It was noted by the loans assessment officer the amount of payments Bessie has made to the company.

On review of the bank statements for October 2018 the client has made a total of $915.08 in smaller, multiple payments to the company. This is 42.75% of Bessie's monthly income that was paid to the company.

Due to the financial hardship that the client is experiencing due to payments to the company it would be highly unlikely that Bessie would qualify for the micro credit loan. This would impact the ability of Bessie to attend the medical procedure at the tertiary health centre.

This issue with multiple payments being made to the company was identified by the Low Income Support Team Leader and discussed with the financial counsellor. Bessie is not currently engaged in the financial program. This case study has been added as it demonstrates the issues we are seeing with this company in regional areas. This case demonstrates the ease in which clients can obtain multiple accounts with the company which can greatly impact the overall financial position.

Isolated, vulnerable people such as Bessie are particularly at risk when they have access to online shopping.

Appendix 2 - Case Studies for Uniting in Vic.Tas

CASE STUDY - SUE AND BOB

Sue and Bob live in Broadmeadows (20km north of Melbourne's CBD), with their two children aged 12 and 16.

Sue works full-time and earns $1030 per week. Bob is on Newstart and receives around $200 a fortnight. He is unable to work after he had a car accident while driving a company truck in September 2017 and injured his back. He is unable to work and not receiving WorkCover, as at the time of the accident, Bob was unlicensed.

Bob took out payday loans from MoneyMe, Wallet Wizard and Sunshine Loans to pay for the registration of their two cars, as well as covering utility bills and rent when money was tight. They could not afford the loans but were desperate because they didn't want to be evicted or disconnected. Repayments on the three loans is around $550 per fortnight, with very high interest rates and fees meaning that they will be repaying these loans for a significant period of time.

They have not sought support from family as they feel ashamed. Sue suffers from anxiety and Bob depression.

After paying rent and the loan repayments, the family is left with $635 per week, well below the 2018 poverty line pf $742 a week disposable income.

CASE STUDY - GEOFF

Geoff is a single man in his late 60s, who has received a disability support pension for twenty years. He has no assets and has been a carer for his partner for the past five years.

He has taken out two loans from Cash Converters to pay for things his partner needed, a long term loan of $600 and a short term loan of $200. He had also borrowed money to purchase a fridge. After costs and loan repayments, Geoff was left with $21 per fortnight, meaning any unexpected costs would send him further into debt.

With assistance from a financial counsellor at Uniting Victoria Tasmania, Geoff's loan terms were renegotiated so that he made monthly payments to Cash Converters of $25. Noting that the client has been contacted unsolicited offering the loans, and that he had not had glasses with him when he signed the contract and had felt pressured, the financial counsellor was able to request financial hardship arrangements, which meant that he did not have to pay interest or default charges. He has now paid off his loans.

¹ Marston, G and Shevellar, L. In the Shadow of the Welfare State: The Role of Payday Lending in Poverty Survival in Australia. Journal of Social Policy. 2014. 43(1): 155-172.

² https://www.abc.net.au/news/2018-08-24/afterpay-late-fees-24pc-income-asic-loophole-credit/10156902

³ https://mozo.com.au/credit-cards/guides/australia-s-afterpay-obsession-a-report-into-the-features-buying-habits-and-traps-of-the-modern-day-layby

⁴ Afterpay Touch Group Ltd, Appendix 4E - Preliminary Final Report, pg 44, 45

⁵ Australian Securities and Investments Commission, Design and distribution obligations and product intervention power: Revised exposure draft legislation: Submission by the Australian Securities and Investments Commission, pg 4, 5.

⁶ Financial System Inquiry, Final Report, page xxv

⁷ Digital Finance Analytics. The Costs of Inaction in Payday Lending [online]. 2018. Accessed 19 July 2018 from https://policy.consumeraction.org.au/wp-content/uploads/sites/13/2018/06/180605-DFA-PayDay-Impact.pdf

⁸ Consumer Action Law Centre, https://policy.consumeraction.org.au/2018/05/16/ninety-additional-financial-counsellors-for-victoria/

⁹ Department of Agriculture and Water Resources. Rural Financial Counselling Service (RFCS) [online] http://www.agriculture.gov.au/ag-farm-food/drought/assistance/rural-financial-counselling-service

¹⁰ Good Shepherd Micro Finance, Small Loans Big Hearts: 2017 Annual Report, page 5

¹¹ Commonwealth of Australia, Budget Measures Budget Paper No. 2 2018-19, page 177