ASIC sounds alarm on payday lenders breaching consumer protection laws

The corporate regulator has raised the alarm on payday lenders flouting consumer laws by pushing vulnerable borrowers into taking out bigger loans that provide them with fewer legal protections.

The Australian Securities and Investments Commission on Thursday revealed that since industry reforms came into effect in December 2022, there had been a fall in the number of consumers taking out payday loans, or short-term loans of up to $2000 with repayment terms between 16 days and 12 months.

But over the period until August 2024, ASIC found there had been a rise in customers taking out medium-amount credit contracts, or loans of between $2001 and $5000, which are not subject to the same consumer protections as smaller payday loans.

The regulator said some payday lenders had made changes to their business models or practices that increased the risk of breaching their lending obligations.

“We observed a contraction in the market and a rapid shift away from providing small-amount credit contracts,” ASIC said.

The Federal Government in December 2022 passed the Financial Sector Reform Bill 2022 introducing stricter regulations for payday lenders, like caps on repayments and bans on predatory marketing.

But ASIC’s review also found lenders may be breaching their legal obligations by “failing to identify an appropriate target market and distribute their products accordingly”.

An ASIC spokesman said this suggested lenders may not be distributing their product to the correct consumer group for reasons identified such as high levels of missed repayments.

ASIC commissioner Alan Kirkland said on Thursday the regulator was disappointed to uncover some lenders attempting to shift consumers into other forms of credit, some of which involved greater risks.

The average payday loan is now at $768, according to the ASIC review, with an average loan term of about 21 weeks.

“Consumers who access these products are often financially vulnerable. That’s why people who use small amount credit contracts are subject to additional protections,” Mr Kirkland said.

“Lenders are on notice that if we detect serious breaches of the law, we will consider taking further action.”

Mr Kirkland added ASIC had a strong record of taking enforcement action in response to lending practices that cause harm to vulnerable consumers.

Most recently in December, it took Ausfinancial, trading as Swoosh Finance, to court for allegedly breaching its lending obligations when providing credit contracts.

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

“Many of these borrowers were in challenging socio-economic circumstances and were experiencing financial difficulties,” ASIC deputy chair Sarah Court said at the time.

“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.”