ASIC puts payday lenders on notice

The corporate watchdog has sounded the alarm on payday lenders shifting vulnerable customers up to higher-value loans that provide fewer consumer protections, a day after lashing the super industry.

ASIC says there has been a decline in consumers taking out payday loans since more consumer protections were put in place.

The corporate watchdog has sounded the alarm on payday lenders shirking their legal obligations by shifting vulnerable customers up to higher-value loans that provide fewer consumer protections.

The Australian Securities & Investments Commission said on Thursday there had been a decline in consumers taking out payday loans – short-term loans under $2000 – since reforms in 2022 were put in place to better protect consumers.

Over the same period, there was a steep rise in consumers taking out higher loans of between $2001 and $5000, known as medium amount credit contracts. These loans are not subject to the same protections as smaller payday loans.

Over a two-year period, there was also an increase in the total number of missed repayments for these higher-value loans, but a decline in the total number of missed repayments for small amount credit contracts, better known as payday loans.

ASIC found some payday lenders had made changes to their business models or practices that would increase the risk of breaching their responsible lending obligations.

“We observed a contraction in the market and a rapid shift away from providing small amount credit contracts,” ASIC said in its report on payday lenders.

ASIC has sounded the alarm on payday lenders shifting vulnerable customers up to higher-value loans that provide fewer consumer protections.

Taking a sample of five lenders, ASIC found in the December 2022 quarter, before the reforms kicked in, more than 80 per cent of small and medium credit contract loans were under the $2000 mark (payday loans). By mid-2023 this was down below 60 per cent and has since declined further, to about 55 per cent.

The average payday loan now sits at $768, with an average loan term of 21 weeks, while the average medium credit contract loans is much higher, at $2500, with a longer loan term of 3o weeks

Some credit providers that previously offered only payday loans have since switched to only offer loans above $2001, while others

had “significantly increased” the number of contracts with customers for loans between $2001 and $5000, ASIC found.

“Some consumers who previously obtained credit for amounts of $2,000 or less can now only obtain credit from the same provider

for greater than this amount,” the regulator said.

“Consumers who access these products are often financially vulnerable. That’s why people who use small amount credit contracts (payday loans) are subject to additional protections,” ASIC commissioner Alan Kirkland said.

“ASIC has a strong record of taking enforcement action in response to lending practices that cause harm to vulnerable consumers. Lenders are on notice that if we detect serious breaches of the law, we will consider taking further action.

“We were disappointed to uncover that some lenders may be seeking to shift consumers into other forms of credit, some of which involve greater risk.”

ASIC’s action against payday lenders includes, most recently, taking Ausfinancial, trading as Swoosh Finance, to court for allegedly breaching its responsible lending obligations when providing credit contracts.

ASIC also alleged Swoosh failed to properly inquire about, and verify, the consumers’ financial situations before offering them a credit contract.

“Many of these borrowers were in challenging socio-economic circumstances and were experiencing financial difficulties. Some of them had frequently used early wage advance services, had multiple existing loans and buy-now/pay-later commitments, and many showed clear signs of financial distress, such as direct debit dishonours, negative bank balances or credit defaults,” ASIC commissioner Sarah Court said.

In some cases, Swoosh loans were used to consolidate existing debts or to pay for basic household items, such as groceries and car service or repairs, ASIC alleged. Borrowers typically used their cars as security for the loans, which were generally between $2,000 and $3,000, and were charged upfront fees of more than $400 and an annual interest rate of 47 per cent

Originally published as ASIC puts payday lenders on notice