Far North Queensland borrowers thought higher interest rates were better for them

Customers in Far North Qld were often sold loans under the impression interest rate charges up to 48pc meant a better deal.

Lynda Edwards of Financial Counselling Australia.

Banks charging overdraft fees to disadvantaged customers are in the firing line of the financial services royal commission, which today heard numerous sordid tales of Aboriginal and Torres Strait Island people being gouged by financial services companies.

In one instance, a car dealer in far north Queensland targeted Indigenous car buyers with loans with interest rates of 48 per cent — the maximum legal interest rate — for second-hand cars brought into communities outside of Cairns in the wake of Cyclone Yassi, when the dealer knew people in the communities had received relief payments of between $2,000 and $3,000. People would then default on the loan repayments, and the same car would be repossessed and then resold to other members of the community, said Nathan Boyle, policy analyst for the corporate regulator’s Indigenous Outreach Program.

Mr Boyle said a lot of customers believed that the higher the interest rate charged on a loan, the better the terms were for the consumer. “If people can’t understand interest rates, it means they have difficulty understanding other financial products,” he said.

Mr Boyle told the royal commission into banking, which is holding its hearings in Darwin this week, that Commonwealth Bank had a supposedly “fee-free ATM” on Palm Island, which was designed not to charge fees and overdrafts to vulnerable customers. However, the bank’s own internal customer advocate had recently told Mr Boyle that it was charging fees and was now working out how to refund those customers. “It’s not a perfect system,” Mr Boyle said. “People tend not to understand what a formal overdraft is,” he said.

The royal commission heard there were numerous problems when financial services companies engaged with Aboriginal and Torres Strait Islander people, including a lack of education, poor levels of financial literacy, cultural issues such as “gratuitous concurrence” wherein Indigenous customers agree with the propositions put forward by a salesman despite not wanting to sign onto a product. Many Indigenous customers spoke English as a fifth or sixth language.

Royal Commissioner Kenneth Hayne interjected at one point to ask if overdraft fees could be cancelled on basic accounts. “Is that going to lead to a problem of which I need to think?” Mr Hayne asked Mr Boyle and Lynda Edwards of Financial Counselling Australia.

Mr Hayne continued: “If you wanted a formal overdraft you’d have to apply and the bank would have to meet the responsible lending obligations.”

Ms Edwards said banks had not been proactive in promoting their low-fee, no-fee and basic accounts. She also said meeting the criteria for a town to be considered for the Australian Banking Association’s fee-free ATM network was difficult.

Wilcannia, a small town in western NSW, is one of the ten most disadvantaged communities in Australia but it did not meet the criteria for a fee-free ATM, Ms Edwards said.

Mr Boyle said ASIC had been told of very significant overdraft fees, including some overdraft facilities which didn’t have monetary limits. He said people “get trapped in an overdraft cycle”.

Mr Boyle said the government was also poised to launch a consultation on the practice of “book up”, where shop keepers hold debit cards and run a register for groceries in indigenous communities as an informal store account. He said where “best practice principles” were followed, book up was a good service. But he said better record keeping requirements for shop keepers would make it easier for ASIC to take action where customers were being gouged.