Evan Hughes
“For at least another hundred years we must pretend to ourselves and to everyone that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still.”
John Maynard Keynes, Economic Opportunities for our Grandchildren, 1930
Written at the outset of the Great Depression, Keynes was being neither glib nor disingenuous. Christ may have expelled the money lenders for fouling the temple, however society, housing and the entire fabric of the fiction of banking (that gold and silver is held safely against promissory notes and loans outstanding) is unfathomable without credit. As necessity developed with trade in the middle ages, credit became a way of life. Usury, defined in most common parlance as the extension of credit with unreasonably high rates of interest, however, is regarded with scorn; such lenders are subject to popular outrage; from Shylock to Chifley. As Day suggests[i], the Labor party might have scraped by in the 1951 federal election, but for the ‘last minute and astute intervention’ of nemesis Jack Lang’s revelation that during the Depression, though acting as a trustee for his wife, Chifley extended credit in the form of mortgages to a number of the townsfolk of his native Bathurst for rates considerably higher than those offered by the mainstream private banks. The fact in Chifley’s case, and in that of many loans to people of low income, is that credit would otherwise not have been given from mainstream sources. This saga provides an interesting point of irony in itself (and for the later thesis of this paper): but for Chifley’s ‘gotcha moment’ as a private lender, had he triumphed in 1951, he would almost certainly have nationalised the private banks and vanquished Menzies for good. In so doing, seventy years on we might be left with a wholly different arena for the provision of credit to low income people than that where we stand today, at the outset of a new ‘Great’ economic challenge.
This paper is not about housing, but rather small loans to vulnerable people attached to high charges and rates of interest. There is a tsunami of debt soon to befall tens of thousands of Australians with less access to capital because of reduced employment. Housing will remain stubborn and consumption is already inflation-affected. Many new borrowers will seek ‘payday loans’, so-called because when one lives week to week and unexpected expenditure or shortfall affects household circumstances, short-term credit can be sought to get the borrower through to the next payday. ‘Small amount credit contracts’ as they are termed in legislation and institutional practice are expensive financial products accepted grudgingly as a fact of life in Australia’s low-income landscape. Their existence is for many, the only way certain expenses might be met or families fed, however when left unpaid, as human nature allows, they become a perilous avenue into destructive debt cycles. Many of a newly-needy class of citizen would not require recourse to such credit but for their un(der)employment caused by restrictions via government edicts and lockdowns.
Payday lending was an import to Australia in the late 1990s regulated by the states. The relatively high rates of interest soon attracted media attention. Then Howard Government Financial Services Minister Joe Hockey dubbed the industry “an insidious practice that targets the less prosperous men and women of our society, the less financially savvy and the people who can least handle spiralling debt.”[ii] Whilst regulation was eventually federalised, it would be handled piecemeal over the ensuing decades, grinding to a halt in the last parliament. The industry infrastructure traditionally comprised loan offices, geographically located in places of hardship. Seedy high street shopfronts have given way to a new spectrum of financiers who use sleek television and algorithm-driven online advertising promoting products which can be obtained easily by smartphone, obscuring their nature behind the trendy aura of the FinTech boom. Amusing advertisements from millennial-friendly brands such as ‘Nimble’ have become omnipresent parts of our isolation television and internet browsing experience.
Another phenomenon has prospered locally, the buy now, pay later sector (BNPL), with retailers such as leading department stores brandishing at cashiers pronouncement of the acceptance of Afterpay. Companies such as Afterpay and Westpac-backed Zip, are not currently required to conform to the Credit Act (though Zip purportedly does) but should be. The achievement of reform in this sector is complicated with aggressive and intelligent political lobbying opposing anything meaningful. But isn’t that always the way?
An ‘AstroTurf campaign’ is a term to describe a movement with fake grassroots. In 2011, then Assistant Treasurer, Bill Shorten encountered a powerful lobbying effort ostensibly organised by the ASX-listed Cash Converters against a reform bill being presented to parliament. The Gillard government was seeking to tackle what it deemed to be excessive rates of interest and associated charges that were being levied by providers of short-term finance to low income Australians (payday loans). The initial reform proposition of a 10% maximum upfront fee and a cap of 2% cap on monthly interest rates for loans under $2,000 was fought vigorously by that company encouraging its consumers to directly petition the government (with their pro forma assistance). Thousands of “No Cap” postcards were dispatched to Canberra and the vociferous lobbying ultimately resulted in a watered-down bill that saw a 20% maximum fee and 4% cap.
An opposition-led 2018/19 Senate inquiry[iii] recommended: “that the National Consumer Credit Protection Amendment (Small Amount Credit Contract and Consumer Lease Reforms) Bill 2017 exposure draft released by Treasury be introduced, and passage facilitated by the government.” The bill was introduced by the Turnbull Government following a review into the SACC industry to strengthen protections for consumers, the recommendations were largely accepted by Minister for Revenue and Financial Services Kelly O’Dwyer in November 2016. Minister O’Dwyer held that role until 28 August 2018 under Treasurer Scott Morrison. Josh Frydenberg had become Treasurer on the evening of 23 August, when Morrison replaced Turnbull as Prime Minister, thereafter a new financial services triumvirate was pronounced: Stuart Robert MP assumed the role of Assistant Treasurer, Senator Zed Seselja assumed the role of Assistant Minister for Treasury and Finance, whilst Michael Sukkar MP was elevated to Assistant Minister to the Treasurer. The financial services ministry disappeared from view until it was taken up again in May of the following year by Senator Jane Hume, who incidentally served on the committee inquiry above and whose office delivered the dissenting report. Quite why a piece of reform legislation that was introduced by the Turnbull ministry was unable to pass through that parliament, whilst not one but two private members bills were introduced emulating the bill word for word, may never be known. In a joint press release from Labor MPs Madeline King and Chris Bowen, released on 27 August 2018, it was claimed that “Stuart Robert earlier this year campaigned inside the Liberal Party against attempts to introduce payday lending legislation to Parliament which would protect consumers from soaring interest rates and skyrocketing fees – leaving cash-strapped families at the mercy of unscrupulous lenders.”[iv] Stuart Robert is the Federal Member for Fadden, an electorate taking in the Gold Coast, which might be described as the original source of the payday lending epidemic in Australia, home as it was through the 1990s of Australia’s first major Casino, Conrad Jupiters, and host to many lenders including Southport’s own Swanepoels of recent Cigno / Gold Silver Finance fame[v].
A new committee referral has taken place with a private Senators’ Bill introduced by Senator Jenny McAllister who led the previous inquiry as deputy chair of the Senate Economics committee. This attempts to present the same piece of legislation, word for word to a new parliament. Submissions have been made and hearings were set to take place on 13 March 2020, as it happened, the very Friday that Scott Morrison effectively shut down Australia. The passage of this legislation is crucial in alleviating substantial financial outlay by vulnerable borrowers (in fees and interest).
However, tighter regulation is not the cure to this disease, nor is further spending on financial counselling services recently committed by the Morrison government. Whilst welcome, those measures are akin to social distancing procedures and the deployment of personal protective equipment rather than a vaccine. Financial counselling and regulated lending do not overcome the major problem, which is a lack of financial inclusion in an inflationary world for low income people in an environment of growing unemployment and underfunded vocational training, supported by a system of inadequate welfare payments. Without trying to fix the entire Australian economy, let’s focus on one, the silver bullet:
Many low-income Australians have limited access to banking and ultimately no access to mainstream credit. Business models of the main lending institutions revolve around residential and investment property financing. The risk premium of widescale unsecured lending to low-income people is not high enough to justify the losses that inevitably accrue in times of financial shock, or the reputational risk associated with pursuing that debt. Compounding this is that in vacating the field of low-income lending, banks abandon consumers to predatory alternatives which stain their financial history hindering later pursuit of mainstream finance. Mortgage brokers regularly warn customers against using products such as Afterpay if seeking finance; regular payday loan transactions are a red flag to credit officers.[vi] There has been initiative; a number of fintech companies offering small amount personal credit are backed by the banks. However, this is largely owing to the fact that fewer young Australians are applying for credit cards and the banks are attempting to counter the first mover advantage secured by the market leader.
Thousands of consumers (and thereby scores of retailers) rely on sales through Afterpay. You buy a product from a retailer using Afterpay paying a proportion of its ticket price. The retailer then pays a commission to Afterpay, assuming the debt which is repaid in interest-free instalments. Simple enough: lay-by with instant gratification. Even though credit is extended, BNPL is not bound by law to check creditworthiness. There are concerns. Whilst not the direct fault of such companies, without careful regulation, the dangerous end of the spectrum can be seen in the following real-world scenario:
Single mother, two children, has not worked for four years, has a variety of health issues, is receiving Newstart Allowance from Centrelink and currently homeless as she has not been able to pay her rent. Now has two payday loans and four After Pay Accounts for things her children wanted and now has received an email from a collection agency for an After Pay that she cannot remember buying. now looking at accessing her superannuation to clear her debts. [vii]
An underlying economic concern regarding BNPL is the inflationary risk. Large retailers efficiently derive finance costs and incorporate them into pricing decisions. Whilst no different to the effect of credit card charges, BNPL merchant commissions are significantly larger and cannot be passed on as a surcharge.
One of the frustrating aspects of the 2018-19 committee hearings was that the media interest focused on the BNPL sector, largely because Afterpay is a widely followed and popular stock whose price has taken a wild ride and can fill column inches. The inquiry was fundamentally about determining a course of action for payday lending: an old story. Neither that committee nor ASIC has hitherto recommended a clear course of regulation for the BNPL sector. Its participants lobby both sides of parliament effectively and Afterpay is an enormous Australian success story (though it will be interesting to see whether the new Cold War warriors on the Coalition backbenches begin taking note that recently a major stake has been taken by China’s Tencent Group).
Fintech credit solutions for low-income or unbanked Australians haven’t been the only innovations from the banking sector, there have been small positive steps taken through initiatives like microfinance provided by Good Shepherd’s No Interest Loans Scheme (NILS), backed in part by the National Australia Bank. This is a scheme that has been regularly promoted by the Prime Minister (perhaps because the biblical image from the book of John 10:1-21), in Parliament in response to domestic violence and as recently as during the aftermath of the devastating bushfires of January this year[viii]. One has little doubt that the virtues of this tiny scheme will be extolled by the Prime Minister further during the ‘snap back’ in the coming months. Let us not forget however, that this same Prime Minister had ample opportunity as both Treasurer and in his current office to pass legislation to cleanse the temple (John 2:13-22) and properly regulate the payday sector that his Good Shepherd is attempting to counter.
The grandiose proposition is this: NILS should not be a worthy but proportionally tiny scheme administered to a fraction of at risk, low income people, it should be a Federal powerhouse delivering low interest and where viable no interest loans to the entire spectrum of Australia’s disadvantaged. It could be administered through Australia Post and online. Such a program could operate in the consumer lease sphere with online partners such as Amazon. The potential for the accumulation of ABS data is extraordinary. In many instances, repayments could be garnished thereby making it federally secured debt. Billions in superannuation investment would be channelled towards a government backed scheme that would deliver returns far above treasury bill rates. This is nationalised securitisation; even the Future Fund would invest in it. It is surely a matter of time before a large noble, sustainable asset manager steps forward to take this up with government. IFM Investors surely are sharpening their pencils for better ideas than office blocks, airports and carparks in the wake of the COVID-19 challenge.
And we’re back to romantic ideals of nationalisation. Many would propose the above is as laughable a conception as Chifley’s Quixotic campaign against the private banks, whose recklessness in the 1920s Mr Chifley regarded as exacerbating the Depression. The banks campaigned ferociously and won.
Labor similarly lost the 2019 election, indeed the very same Bill Shorten who was stared down by Cash Converters above, was thwarted by another AstroTurf campaign launched by similarly vested interests in the backlash against the proposed ALP reforms to dividend imputation credits. It was backed by a House Economics Committee Chairman in Tim Wilson and, rather cosily, an investment management Chairman, Geoff Wilson. They put on an incredibly impressive show. Elderly Australians were being encouraged to treat their franking credits with the fervour of members of the NRA having their guns taken away: “From our cold dead hands”. It was not one thing of course that caused the upset win for Scott Morrison, however as with Chifley’s doomed bank nationalisation agenda taken into 1951 against a bombastic but otherwise unloved Robert Menzies, perhaps Labor ought never underestimate a well-funded campaign by the financiers on behalf of the Conservatives.
[i] D Day, Chifley, ch. 31, ‘a real last minute bombshell’, ebook loc 8660 of 13211 [ii] S Green, ‘Pay Dirt’, The Age Newspaper, November 16, 2013 [iii] Senate Inquiry into Credit and financial services targeted at Australians at risk of financial hardship, reported 22 February 2019 [iv] http://www.madeleineking.com.au/media/portfolio-releases/parliamentary-friends-of-payday-lending-takes-over-payday-lending-reforms/ [v] S Danckert, ‘‘Predatory’ payday lender run by rugby player loses court bid, The Sydney Morning Herald, 15 April 2020 [vi] L Chung and C Kruger, ‘Avoid using Afterpay if you want a home loan mortgage brokers warn’, The Sydney Morning Herald, October 20, 2019 [vii] Senate Inquiry into Credit and financial services targeted at Australians at risk of financial hardship, Submission 2, Financial Counselling Hunter Valley Project Inc, p3 [viii] https://www.pm.gov.au/media/delivering-more-immediate-support-australians-impacted-bushfires
Evan Hughes runs a private Investment Management Company and worked as a researcher in the office of Jenny McAllister during the 2018/19 Senate Inquiry into Credit and financial services targeted at Australians at risk of financial hardship.