Government backtrack on rate caps criticised
Labour, New Zealand First and the Greens campaigned to cap interest rates. Now consumer advocates are saying a planned crackdown on interest charged by loan sharks is too soft. Marc Daalder reports.
Submitter after submitter hammered home the exact same point at Wednesday's meeting of the Finance and Expenditure Select Committee: legislation meant to curb the damage done by predatory lenders will be toothless without a cap on interest rates.
The Government's alternative, a 100 percent limit on the total costs of loans, would mean someone who took out a $500 loan would not repay more than $1000. Commerce and Consumer Affairs Minister Kris Faafoi has previously defended this about face on the part of Labour by insisting a cap would drive loan sharks out of business, and that some people needed them.
Faafoi was not available for comment on Wednesday's meeting, as he is travelling with the Prime Minister in Tokelau, where his parents were born. However, he told Newsroom in March that "The Government didn’t propose an interest rate cap in addition to a total interest and fee cap as we don’t think there are enough safe credit lenders in the sector to meet the immediate needs of some consumers who unfortunately do need access to credit quickly."
UK model seen as useful
Joe Lanne, the Policy Director for the United Kingdom's Citizens Advice Bureau, indicated that a cap wouldn't imperil consumers in need of credit. Lane phoned in to the select committee meeting to share his organisation's experience with the interest cap passed by the UK in 2015.
The UK implemented a dual system for payday loans, capping interest rates at 0.8 percent per day and implementing a 100 percent cost cap, as suggested by Faafoi. Fees for defaulting on loans were also capped at £15.
This system has been remarkably effective, Lane said. "Following cap, we saw a reduction of 50 percent of people coming into our office for debt advice. The average cost of a £250 loan fell from £100 to £60."
Under the new regulation, the interest market did shrink, Lane said. "But crucially, those people who were excluded from borrowing due to the reduced cost because they were no longer eligible, were generally better off. More than two-thirds of people who were declined [loans] said that they were better off as a result of that, 12 months later."
None of this would have been possible without the interest cap. "The crucial part of our message ... is the importance of that daily cost cap, the 0.8 percent. That's really the part of our consumer protections that actually reduced the cost of borrowing," Lane said.
"What the FCA found is that if you increase that daily cap, the number of people who are falling into arrears hits 40 percent and that was a level they found unjustifiable," he added.
The 100 percent cost cap is just backup, he said. "The total cost cap is really a backstop to stop lenders trying to find a loophole in that protection."
Calls for a 50 percent cap
The figure that Kiwi consumer advocate groups are throwing around is an annual one, not a daily one. This figure - often 50 or even 30 percent annually - is multitudes smaller than the UK's, which figures out to nearly 300 percent a year. But they're also targeting different types of debt.
The UK's caps were limited to high-cost, short-term payday loans - anything with an annual interest rate of more than 100 percent and which is meant to be repaid entirely or substantially within 12 months.
Meanwhile, the proposed cost cap in Faafoi's bill would kick in for any loan with an annual interest rate of just 50 percent or higher. This is because New Zealanders are falling prey to a wider range of predatory credit.
Christchurch Budget Service's Murray Spackman told committee members that one of his clients had been charged 547 percent per annum on a loan. Melanie McNatty of Presbyterian Support Otago told MPs that a community member had paid out $8,000 in fees and interest to a mobile shopping truck for a single flip phone. Newsroom previously reported on shopping trucks that targeted low-income community with overpriced goods and high-interest loans.
Consumer NZ's Jessica Wilson said that "loans with interest rates of 500 percent will continue to be seen in the market unless an interest rate cap is set below 50 percent."
Groups like the Child Poverty Action Group and FinCap also support an interest rate cap.
The Commerce Commission, which would be responsible for enforcing any cap, didn't take a position on whether a cost cap or interest rate cap was preferable. The commission's chair, Anna Rawlings, did tell Newsroom that the regulator was capable of implementing either standard.
In addition to an interest rate cap, some groups called on the Government to limit total debt repayments to 10 percent of any given borrower's income.