Treasury releases final recommendations on Small Amount Credit Contract laws

How the Government is looking to better regulate payday loans, and what it means for consumers.

In late 2015 the Government established a review into Small Amount Credit Contract (SACC) laws, which control payday lenders. Today has released the final report and recommendations for the sector. The review came about in an effort to facilitate financial inclusion for consumers and ensure lenders are able to properly determine whether borrowers can afford the loans they're applying for. The report also made recommendations for consumer leases.

There were 24 recommendations in total, 10 regarding SACCs, eight specifically for consumer leases and six combined recommendations.

If implemented, the recommendation which will influence borrowers and loan providers the most would be that total SACC repayments could not exceed 10% of a borrower's net (after-tax) income. Currently, this requirement only applies to Centrelink borrowers and is capped at 20% of a borrower's income.

Speaking to the Sydney Morning Herald, Phil Johns, head of the National Credit Providers Association, said the recommendation would be unviable for some lenders.

"The panel makes an incorrect assumption. They say lowering this will increase financial inclusion. If the product can't be commercially provided, then that won't be the case," he said.

However, alongside this recommendation is the removal of another. It will no longer be an automatic assumption that a consumer cannot afford a loan if they are a debtor under another SACC or they've had another SACC in the 90 days previously, so long as they meet the income requirement.

One of the combined recommendations is that SACC providers and lessors would be required to disclose an annual percentage rate (APR) alongside the fees and/or interest rate for the product. Currently, for loans under $2,000, no interest rate is charged, but rather an establishment fee of 20% and a monthly fee of 4% is charged. If this recommendation was carried out it would be similar to UK payday loans, where lenders are required to display the APR alongside the interest rate.

According to the report, the APR would be required to be shown both in the contract document and at an earlier point in time.

For some of the recommendations a few options were considered, and, for instance maintaining the ban on credit contracts with terms of less than 15 days, no changes have been made.

Stakeholders and interested parties are encouraged to submit their submissions to the Treasury by 17 May 2016.

SACC recommendations

• 1 - Introduce a cap on the total amount of all SACC repayments to 10% of a consumer's income
• 2 - Remove the assumption a borrower cannot afford a SACC if they are a debtor under another SACC or if they've had an SACC in the past 90 days if they meet (1)
• 3 - Keep the ban on credit contracts with terms of less than 15 days
• 4 - Direct debit fees should be incorporated into the existing SACC fee cap
• 5 - SACC contract must have equal repayments over the life of the loan
• 6 - Major banks should be encouraged to participate in the comprehensive credit reporting regime
• 7 - A monthly fee cannot be charged if a SACC is repaid early
• 8 - SACC providers cannot make unsolicited offers to current or previous customers
• 9 - SACC providers should not receive a payment or benefit for referring customers to other providers
• 10 - Default fees should be capped at $10 a week
• 19 - 90 days of bank statements need to be obtained and considered by SACC providers
• 20 - SACC providers need to make a proposal in writing to suitable borrowers
• 21 - Give ASIC powers to modify requirements for warning statements
• 22 - SACC providers need to disclose an APR
• 23 - Encourage strict compliance by providing automatic loss of the right of their charges under the contract for breaches
• 24 - Address and regulate indefinite terms, undefined business models and amounts.