Cash Converters prepares for probe penalties

Payday lender Cash Converters has put aside up to $13 million for possible penalties and remediation.

Cash Converters shares were drubbed by investors.

Australia’s largest payday lender Cash Converters has put aside up to $13 million for possible penalties and remediation as a result of a corporate watchdog investigation into its lending practices.

The pawnbroker and small loans provider said it had been co-operating with an investigation from ASIC into its compliance with responsible lending laws, with issues flagged that could hit the group’s bottom line. “The board has decided to book a provision in the range of $12m-$13m in its fiscal 2016 annual financial statements in respect of any potential compliance issues in its credit assessment processes,” the ASX-listed Cash Converters said. “The company has sufficient cash reserves to meet its obligations under this provision.”

Cash Converters shares were drubbed by investors, with the stock plunging 11.5 per cent on the news. Shares closed 42.5c, down 5.5c.

The ASIC investigation revolves around responsible lending issues with small-amount credit contracts, colloquially known as payday loans, which Cash Converters appears likely to have breached.

Although the probe is at the very early stages, ASIC believes Cash Converters has been taking advantage of a large number of consumers who may not have had the capacity to repay a loan, and is also concerned about whether they needed the loan, or whether the loan was the right amount. Payday lenders must adhere to responsible lending practices or face legal penalties.

The move by Cash Converters to book the provision appears to indicate money will be set aside for reimbursement, remediation or settlement. The group opens its books on Tuesday to report its full-year results.

It is unclear whether ASIC’s investigation is tied to a class-action suit in NSW that settled during the 2015 financial year, in which Cash Converters paid $20m into a fund for distribution. The 37,500 customers claimed they were charged excessive interest on short-term loans.