The Australian Securities and Investment Commission (ASIC) has announced regulatory outcomes against Thorn’s consumer leasing businesses Radio Rentals, RR and Rentlo Reinvented that will see millions in dollars of refunds and write-offs of fees to consumers.
The outcomes include $6.1 million in refunds to customers and write-offs of default fees, plus an additional $13.8 million in customer refunds of excess lease payments.
ASIC lodged the undertaking against Thorn because it was determined that Thorn contravened responsible lending obligations of lease providers, “which require them to make inquiries and take steps to verify the consumer’s financial situation, in order to assess whether the lease is suitable for the consumer, before it is entered into.” The violations occurred in 278,683 consumer leases entered into between 1 January 2012 to 1 May 2015.
Additionally, ASIC and Thorn are filing a Statement of Agreed Facts in the Federal Court, and will make joint submissions that the appropriate penalty to be paid by Thorn is $2 million.
A coalition of investors and other stakeholders have raised concerns with ASX-listed payday lenders and goods rental companies over lending policies to financially vulnerable Australians. The group, led by UCA Funds Management and seven other organisations, including other investors, engagement specialists, financial counsellors and advocacy organisations, took proposals to take to Thorn, Cash Converters and Money3 in 2015.
The engagement with companies and with government has yielded positive outcomes. Federal government is expected to promulgate legislation to tighten standards around leasing/lending to vulnerable Australians.
“It’s important to knowledge that Thorn said some time ago that they were going to transition all contracts to be in step with what the future regulations are expected to be,” said Michael Walsh, UCA Funds Management’s outgoing CEO. “The government’s most recent statement is that they will legislate, and as far as we know, Thorn aren’t resisting those regulations in lobbying of government. They are viewing this as an opportunity to lead an industry that needs to change its practices. I think that’s a good outcome, because you have new legislation protecting consumers, and in advance of it, they are saying they’re happy to operate as if they standards are in place already.”
Contraventions of responsible lending practices have been an issue in the payday lending and goods leasing sector in recent years. In 2016, payday lender Cash Converters agreed to refund AU$10.8 million to consumers and has paid an AU$1.35 million penalty after an ASIC. ASIC agreed to accept an enforceable undertaking from Cash Converters after concerns over the way Cash Converters processed small amount loans via its online website. In 2015, ASIC announced that Money3 has stopped offering its two-payments ‘fixed fee’ loan arrangement and agreed to refund more than $100,000 to consumers “following concerns raised by ASIC that it breached consumer credit laws and engaged in misleading conduct,” according to an ASIC announcement.
In 2015, , Credit Suisse’s Asia Pacific/Australia Equity Research team authored a report examining various social, regulatory and governance issues relating to ASX-listed payday lending and goods rental businesses Thorn Group, Cash Converters, Money3 and Flexigroup. The report, written by Sandra McCullagh and Chris Parks, explored disclosure and lending policy issues, how the sector targets its clientele, which can be drawn from the pool of financially excluded Australians that do not have access to mainstream banking and lending products, and also raised concerns that Thorn Group and other goods rental businesses are most exposed to potential regulatory changes that could negatively impact on their business model.
“If you think about where we started from, on the consumer leasing side, we pointed out that consumer leasing was pretty much the same as payday lending, and without the caps on interest rates and without the responsible lending guidelines,” Walsh said. “That kind of regulatory arbitrage which has been the term that Credit Suisse has used is the correct term. It was a textbook example of a social issue, with legislation showing that an externality and poor practices were financial risk as well.”
Walsh, who retires from UCA Funds Management in February, considers the engagement campaign with the sector to be completed.
“What’s happened in the listed company front is that they’ve eithers aid that they will support the new legislation, or they’ve left the sector,” he said. “It remains for the government to put that legislation in place. That pretty much winds up that campaign.
“One of the things we brought to the table is that it’s important to listen to not for profit organisations because they are talking to people on the ground who are affected by environmental or social externalities. That’s where you first learn of a brewing issue, very often first from NGOs. The investment community will say the NGOs have an agenda, which is true, but they’re also an important source of information.”