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Financial summit must be focused

10 August 2011

Financial summit must be focused

The Financial Services Federation is calling for this week's Financial Summit to focus on measures that protect society's most vulnerable from "loan sharks" without over-regulating the 97% of lenders who already operate responsibly and effectively.

"Because there is a misperception about what a loan shark is there is a risk that any response to this issue may have unintended consequences for the wider consumer credit market if it's not well focused," says Kirk Hope, Executive Director of the Financial Services Federation.

Arguably the term "loan shark" includes any lender with particularly high interest rates and those who ignore the regulations and best practice guidelines already in place. For example this includes lenders with interest rates of around 8% per week with no time limits for these purportedly short-term loans, which have annualised interest rates upwards of 400% per year. While making up a very small proportion of the overall household credit market, these lenders have a major impact when people get sucked into long-term, high interest debt.

While there have been calls for capping interest rates to address this problem, overseas experience shows that this is not the answer. Capping interest rate caps can distort credit markets by causing average interest rates to increase as lenders move towards the cap. It can also potentially reduce the availability of consumers who need it and drive an underground market for credit which would be very difficult to police.

The Financial Services Federation's position paper (available at www.fsf.org.nz ) outlines a number of proposed measures to address this issue, including:

* A requirement for lenders with interest rates over a certain threshold to be licensed

* A requirement for all lenders to belong to an industry body

* Higher penalties for lenders that breach terms and conditions of high interest loans

* Maximum loan terms to prevent high short-term interest rates from becoming annualised

* A requirement for lenders to refer people to a budget advisory service where they are clearly in financial need.

"We believe that introducing these additional obligations will address the issue while enabling consumer credit markets as a whole to continue to operate effectively," said Mr. Hope.

The measures proposed by the Financial Services Federation are consistent with voluntary efforts across the wider consumer credit industry to promote responsible lending. This includes the Responsible Lending Guidelines developed by the Federation in consultation with social agencies and adopted by its members earlier this year.

ENDS

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