Cash Converters is deeply concerned that an interest rate cap on top of all the other protection measures will lead to financial exclusion. Photo/Ben Fraser
Cash Converters is deeply concerned that an interest rate cap on top of all the other protection measures will lead to financial exclusion. Photo/Ben Fraser
New Zealand's pay day lending market is likely to shrink substantially under proposals by the Government to introduce a daily interest rate cap of 0.8 per cent and high-risk borrowers could find themselves out of luck.
Commerce and Consumer Affairs Minister Kris Faafoi announced on Tuesday the Government would addthe cap to its proposals for overhauling the Credit Contracts Legislation Amendment Bill after submissions to the finance and expenditure select committee repeatedly called for an interest rate cap.
The cap is in addition to the proposal to limit interest and fees over the life of a loan to 100 per cent of the amount borrowed for high-cost lenders - those who charge interest of more than 50 per cent per annum.
New Zealand is an outlier in not having an interest rate cap with 25 out of 36 OECD countries having interest rate caps on high-cost lending.
In 2015 the United Kingdom introduced a daily cap of 0.8 per cent. A report two years later by its regulator the Financial Conduct Authority found around two thirds of companies dropped out of the pay day lending market and the amount of money lent had dropped by more than 40 per cent.
Christopher Walsh, a senior researcher at financial product comparison site MoneyHub said the 0.8 per cent per day cap would likely result in a fall in the number of operators. "We know payday lenders are good at assessing credit risk, but they need to charge the right level of interest to keep operating. If interest rates are capped at around 290 per cent per annum, it's arguable that there will be some contraction in the market as riskier borrowers become unprofitable."
Some businesses will find they can't operate within the proposed restrictions, says law lecturer Victoria Stace
Victoria Stace, a law lecturer at Victoria University who undertook joint research into the issues in New Zealand's consumer credit market and the proposals for reforming it, said it would not be the end of the pay day lending market.
"Australia and the UK both have thriving pay day lending markets."
But she said there was a possibility some businesses would find they can't operate within the proposed restrictions.
She said 0.8 per cent interest per day compounded was still a large amount. It was not unusual to find companies charging interest rates of 1.2 to 1.5 per cent a day and those companies would have to reduce their rates.
"But the big ones will manage."
Stace said no one knew exactly how big the pay day lending market was and she believed there were at least 30 companies operating in that space.
It would also reduce higher risk lending as the lower return would mean businesses couldn't afford to have high default rates.
"One consequence is some people who are very bad risk borrowers won't be able to get loans. Is that a good or bad thing? That is debatable."
In many cases those people should not be going to pay day lenders, she said.
The proposed change has left Cash Converters, one of New Zealand's biggest pay day lenders, assessing its position.
Erin White, national personal finance manager at Cash Converters, said it was disappointed the Government intended to introduce an interest rate cap.
"Throughout the legislative process we have strongly supported the Government's efforts to improve consumer protection while maintaining financial inclusion across the community.
"We are deeply concerned that an interest rate cap on top of all the other protection measures will lead to financial exclusion for tens of thousands of New Zealanders who access short-term credit every day without any issue."
White said it was also assessing what the proposed interest rate cap could mean to its employees and customers, if it was passed into law.
Cash Converters has around 400 staff across the country.
Another pay day lender, Save my Bacon, said it was moving out of that area of the market.
Save My Bacon chief risk officer Neil Perkins, said it had moved away from payday loans to longer-term loans whose interest rates were below the proposed cap.
Asked about the impact of a rate cap on the industry Perkins said experience had shown that the number of loan providers reduced in the UK under similar measures.
"It is important that vulnerable consumers be protected and some companies will find these changes a challenge to manage."
The bill is expected to pass later this year before coming into effect from March next year.
