Simon Power Speech to Financial Summit Auckland
Hon Simon Power Minister of Consumer Affairs
Speech to Financial Summit Auckland
Thanks, Sir John, for those remarks.
Ladies and Gentlemen ...
A woman from a small South Island town borrowed $250 from a payday lender over the internet.
The loan was for two weeks and with interest and fees she was due to pay back $375 from her loan of $250.
But she was not able to pay the full amount back within the two weeks.
The contract contained a roll-over clause, which meant if she didn't pay it off within the two weeks then the amount would roll over and interest and penalty interest would be added on top of the interest already accrued.
The woman paid as much of the debt as she could for several weeks but was not able to pay it all off.
By the time she sought help from a budget adviser - three months later - her original loan of $250 had rolled over to more than $1500.
Not only that, but when the budget adviser looked more closely at the contract - and she had to look very closely because it was almost illegible - she discovered an interest rate of 624% and a penalty interest rate of 104%, making a combined interest rate of 728%.
Ladies and Gentlemen, welcome to the Financial Summit.
The sort of behaviour I have just outlined needs to be looked at very closely, and that's why we're here today.
I'm sure many of you could tell similar stories.
We have much to do, so I won't keep you long, but to give you a flavour of some of the issues we face, I point to findings of a survey on third-tier lenders conducted by the Ministry of Consumer Affairs.
* Perhaps the most interesting is that between 35 and 40% of third-tier lenders are not on the Financial Service Providers Register, as they are required to be by law.
* There has been significant turnover in third-tier lenders in the past 5 years: about half of those in business in 2006 have left, and 127 new lenders have entered the market.
* Although the number of third-tier lenders has not changed significantly, there has been a 60% growth in outlets - from 210 in 2006 to 336 this year.
* Third-tier lenders tend to focus their business in lower income areas: for example, there are 47 outlets in South Auckland alone.
* Advertising tends to target those without an adequate credit history, emphasises the ease, speed, flexibility and normality of third-tier loans, often does not disclose borrowing costs, and sometimes includes incentives to refer friends and families to the lender.
It's clear to me that this fast-growing industry fuelled by advertising focused on ease, speed, and normality of third-tier loans all aimed at those on low incomes and beneficiaries is a recipe for, if not disaster, then danger.
Add in the fact that sole lenders are not complying with regulations and do not belong to a dispute resolution scheme and you know we have a lot of work to do.
I know that the Registrar of Financial Service Providers is taking a keen interest in this aspect.
But it's not just about so-called third-tier lenders.
It's about the whole of the credit side of the balance sheet.
Some of you will be aware that, as Minister of Commerce, I have undertaken an overhaul of the rules and regulations that govern the investment side of the financial sector.
That work included:
* Establishing the Financial Markets Authority.
* Requiring all financial service providers, including financial advisers, to be registered and belong to a dispute resolution scheme.
* Implementing the financial adviser regime.
* Licensing auditors and trustees.
On becoming Minister of Consumer Affairs in May, it became clear to me that we also needed to look at the credit side of the balance sheet as well.
To that end, we'll be looking at quite a range of topics today, including:
* Responsible lending - how do we get this across the lending industry?
* Responsible debt management - how do responsible lenders deal with borrowers over the term of a loan.
* Dispute resolution.
* Financial Literacy.
* Credit advertising.
* Access to affordable credit/social and community lending.
* Dealing with those in financial difficulties.
If we are to consider these issues, we need to recognise the problems some people face with spiralling debt, and together determine solutions to address the causes of problem debts.
I'm approaching this with an open mind, but it is clear to me that we do need to address some of the problems that have traditionally afflicted this part of the sector.
And if that requires legislative amendments then I will not shy away from that.
Allow me to put to you some of the ideas that have already been raised with me and on which I would be interested in your views:
* Amending the Credit Contracts and Consumer Finance Act to provide for a distinct consumer credit contract oppression test - as opposed to general credit contract oppression tests.
* Requiring disclosure at the time that a credit arrangement is made, in addition to potentially identifying further improvements to the disclosure of fees, interest rates, and the consequences of default.
* Either extending the voluntary, responsible lending guidelines to more widely apply across the lending industry or putting in the legislation a requirement that credit providers establish that a credit contract is suitable for the proposed borrower.
* Requiring credit providers to have additional registration requirements to lend responsibly - over and above the basic requirements under the Financial Service Providers (Registration and Dispute Resolution) Act.
* Improving the accessibility of the hardship provisions currently in law.
* Amending the Credit (Repossession) Act to require that items must be stipulated in contracts if they are to be used as security or to potentially identify items that could not be used for security.
* Investigating the potential for further improvements to the way we are trying to improve financial literacy.
* Putting a cap on interest rates and fees.
There are some interesting ideas there and I'm really looking forward to your thoughts on them and what else that might work.
But a fundamental question that we do need to answer is what to do to the main piece of legislation in this area, the Credit Contracts and Consumer Finance Act, to provide more protection for consumers, and the extent to which we can leverage off the financial sector reforms we have already undertaken.
I'm certain you will be able to help me come to a view on this.
After today my officials will continue to engage with the chairs of the groups to ensure they are kept up with the direction we are going, and I would encourage others to continue to talk to MED officials.
That's enough from me - I now want to hear from you.
Ladies and Gentlemen, there's a great deal of interest in what we're doing, and what comes out of today will help shape legislation and practice in this area into the future.
Let's talk throughout the day.
I now hand over to Diane Robertson from the Auckland City Mission who will provide some thoughts from a "consumer" perspective.