Category: General Discussion

Australia to Launch A “Digital Transformation Office”, But With No Budget

The Commonwealth Government will establish a Digital Transformation Office (DTO) within the Department of Communications so that government services can be delivered digitally from start to finish and better serve the needs of citizens and businesses according to a joint statement from the Prime minister Tony Abbott and communications minister Malcolm Turnbul.

The DTO will comprise a small team of developers, designers, researchers and content specialists working across government to develop and coordinate the delivery of digital services. The DTO will operate more like a start-up than a traditional government agency, focussing on end-user needs in developing digital services.

The DTO will use technology to make services simpler, clearer and faster for Australian families and businesses.

People need to be able to transact services and access information anytime, anywhere. Like any other service industry, government should design its services in the most user friendly way. Interacting with government should be as easy as Internet banking or ordering a taxi through an app.

One of the DTO’s first tasks will be to ensure people no longer have to complete separate log on processes for each government service.  Instead, people should have a ‘digital identity’, which they can use to log in to each of their services across the government.

The DTO will also work closely with State and Territory Governments to identify opportunities for collaboration, including ways to make better use of myGov.

By designing digital services that are consistent and simple to use, fewer people will need to come into a shopfront or make a phone call.

The Government is committed to protecting the personal information it holds about individuals and businesses. Maintaining the security and privacy of personal information is a vital consideration for the DTO.

It is worth noting that there is no new budget for the DTO, “the government already has significant expenditure on service delivery and it is anticipated that much of the DTO’s work will be funded through existing expenditure”.

What Can Monetary Policy Do?

In a speech at the University of Edinburgh, External MPC member Professor David Miles set out the strengths and limitations of monetary policy. He argues that although central banks cannot keep inflation at a specific target at all times, monetary policy is more powerful than assumed by many economic models. But it is more reliant on being consistent with fiscal policy than is often recognised.

Central banks cannot keep inflation at target at all times. Nor would it be desirable for them to do so. The UK’s current experience is evidence of this; the significant fall in oil prices over recent months has, among others things, brought the level of inflation down to 0.5% with a chance that it will temporarily dip below zero in coming months.  But clearly ‘one should not expect a central bank to be fully able to offset the impacts of such huge swings in commodity prices on current inflation.’ This is why ‘having a flexible inflation target which… allows policy to be set so as to return it to target over several quarters’, such as that in the Bank of England’s remit, ‘makes sense’.

But while monetary policy cannot prevent actual inflation being blown off-target, there are other respects in which, David argues, monetary policy can achieve ‘a lot more than is implied by many economic models’. These models often focus on how expectations shape the forward-looking behaviour of consumers, primarily through substitution effects. ‘In practice, in a mid-sized open economy with a huge stock of mortgages that are largely variable rate the mechanisms by which changes in interest rates affect spending go far beyond substitution effects’. By influencing short term spending decisions through cash flow effects, the influence of monetary policy extends beyond its impact on expectations.

‘Once you take seriously the idea that significant parts of the transmission mechanism of monetary policy don’t work through substitution effects, and may not solely reflect the expectations of forward looking agents, that can affect how you see unconventional monetary policy’. The idea that monetary policy loses most of its traction at the zero lower bound ‘underestimates what a central bank that is able to use its balance sheet can do’. David makes clear that he does not think the current low rate of inflation in the UK warrants additional stimulus. But the MPC’s previous experience of unconventional monetary policy, suggests its effectiveness extends beyond just its impact on expectations about future interest rates.

However, even accepting that monetary policy may be more effective than is sometimes realised, ‘monetary policy cannot be expected to achieve price stability in isolation from things fiscal’. This is because ‘monetary policy has fiscal consequences and unless fiscal policy is set in a way which is consistent with the aim of monetary policy those aims will not be met.’

‘This is not the same thing as saying that monetary policy has to be subordinate to fiscal policy.’ But it does highlight the importance of the primacy of the inflation target in anchoring inflation expectations and raises important questions about the future of the Bank’s balance sheet.

In concluding, David considers the case for broadening the aims of monetary policy and finds that any such move would be ‘unwise’. ‘Flexible inflation targeting is not inconsistent with attaching significant weight to short term fluctuations in output and employment.’ Longer to medium term targets for economic activity are a different matter. ‘Either those other targets are consistent with an inflation target – in which case achieving the inflation target is likely to require that output and employment over the medium term do not drift away from them – or they are not.  If they are consistent then there is nothing much to be gained by adding them to the inflation target’.

In sum, ‘monetary policy does not hold all the cards’. It cannot, and should not aim to, keep inflation to target at all times, and that target itself needs to be consistent with fiscal policy. However, monetary policy can also influence the economy in more ways than standard economic models imply.

IMF Lowers Global Growth Forecasts by 0.3%

Even with the sharp oil price decline—a net positive for global growth—the world economic outlook is still subdued, weighed down by underlying weakness elsewhere, says the IMF’s latest WEO Update.

Global growth is forecast to rise moderately in 2015–16, from 3.3 percent in 2014 to 3.5 percent in 2015 and 3.7 percent in 2016 (see table), revised down by 0.3 percent for both years relative to the October 2014 World Economic Outlook (WEO).

Recent developments, affecting different countries in different ways, have shaped the global economy since the release of the October WEO, the report says. New factors supporting growth—lower oil prices, but also depreciation of euro and yen—are more than offset by persistent negative forces, including the lingering legacies of the crisis and lower potential growth in many countries.

“At the country level, the cross currents make for a complicated picture,” says Olivier Blanchard, IMF Economic Counsellor and Director of Research. “It means good news for oil importers, bad news for oil exporters. Good news for commodity importers, bad news for exporters. Continuing struggles for the countries which show scars of the crisis, and not so for others. Good news for countries more linked to the euro and the yen, bad news for those more linked to the dollar.”

Cross currents in global economy

In advanced economies, growth is projected to rise to 2.4 percent in both 2015 and 2016. Within this broadly unchanged outlook, however, is the increasing divergence between the United States, on the one hand, and the euro area and Japan, on the other.

For 2015, the U.S. economic growth has been revised up to 3.6 percent, largely due to more robust private domestic demand. Cheaper oil is boosting real incomes and consumer sentiment, and there is continued support from accommodative monetary policy, despite the projected gradual rise in interest rates. In contrast, weaker investment prospects weigh on the euro area growth outlook, which has been revised down to 1.2 percent, despite the support from lower oil prices, further monetary policy easing, a more neutral fiscal policy stance, and the recent euro depreciation. In Japan, where the economy fell into technical recession in the third quarter of 2014, growth has been revised down to 0.6 percent. Policy responses, together with the oil price boost and yen depreciation, are expected to strengthen growth in 2015–16.

In emerging market and developing economies, growth is projected to remain broadly stable at 4.3 percent in 2015 and to increase to 4.7 percent in 2016—a weaker pace than forecast in the October 2014 WEO. Three main factors explain this downward shift.

• First, the growth forecast for China, where investment growth has slowed and is expected to moderate further, has been marked down to below 7 percent. The authorities are now expected to put greater weight on reducing vulnerabilities from recent rapid credit and investment growth and hence the forecast assumes less of a policy response to the underlying moderation. This lower growth, however, is affecting the rest of Asia.

• Second, Russia’s economic outlook is much weaker, with growth forecast downgraded to –3.0 percent for 2015, as a result of the economic impact of sharply lower oil prices and increased geopolitical tensions.

• Third, in many emerging and developing economies, the projected rebound in growth for commodity exporters is weaker or delayed compared with the October 2014 WEO projections, as the impact of lower oil and other commodity prices on the terms of trade and real incomes is taking a heavier toll on medium-term growth. For many oil importers, the boost from lower oil prices is less than in advanced economies, as more of the related windfall gains accrue to governments (for example, in the form of lower energy subsidies).

Risks to recovery

The distribution of risks to global growth is more balanced than in October, notes the WEO Update. On the upside, lower oil prices could provide a greater boost than assumed. Other risks that could adversely affect the outlook involve the possible shifts in sentiment and volatility in global financial markets, especially in emerging market economies. The exposure to these risks, however, has shifted among emerging market economies with the sharp fall in oil prices. It has risen in oil exporters, where external and balance sheet vulnerabilities have increased, while it has declined in oil importers, for whom the windfall has provided increased buffers.

Policy priorities

The weaker global growth forecast for 2015–16 underscores the need to raise actual and potential growth in most economies, emphasizes the WEO Update. This means a decisive push for structural reforms in all countries, even as macroeconomic policy priorities differ.

In most advanced economies, the boost to demand from lower oil prices is welcome. It will also lower inflation, however, which may contribute to a further decline in inflation expectations, increasing the risk of deflation. Monetary policy must then stay accommodative to prevent real interest rates from rising, including through other means if policy rates cannot be reduced further. In some economies, there is a strong case for increasing infrastructure investment.

In many emerging market economies, macroeconomic policy space to support growth remains limited. But lower oil prices can alleviate inflation pressure and external vulnerabilities, giving room to central banks to delay raising policy interest rates.

Oil exporters, for which oil receipts typically contribute a sizable share of fiscal revenues, are experiencing larger shocks in proportion to their economies. Those that have accumulated substantial funds from past higher prices can let fiscal deficits increase and draw on these funds to allow for a more gradual adjustment of public spending to the lower prices. Others can resort to allowing substantial exchange rate depreciation to cushion the impact of the shock on their economies.

Lower oil prices also offer an opportunity to reform energy subsidies and taxes in both oil exporters and importers. In oil importers, the saving from the removal of general energy subsidies should be used toward more targeted transfers to protect the poor, lower budget deficits where relevant, and increase public infrastructure if conditions are right.

Bank of England Releases GFC Court Minutes

The Bank of England today published, in a special release, the minutes of Court and related meetings from the crisis period of 2007-09, in appropriately redacted form.  This follows the Bank’s 11 December 2014 announcement of a series of proposals to enhance the transparency and accountability of the Bank. As part of this announcement, the Governor committed to publishing the 2007-2009 Court minutes, as requested by the Treasury Committee.

In the period covered by these minutes the Bank was operating within the statutory framework established in 1998. Court was much larger than the present Court, a number of members had standing conflicts of interest, and there was no provision for a non-executive chairman (to compensate for that, the Governor established the practice of having all Court business discussed first in the non-executive directors’ committee). At the time, the Bank had no powers to take actions to manage macro-prudential risks.  It was not responsible for banking supervision and there was no bank resolution authority.  The roles, in a crisis, of the Bank, the Treasury and the FSA were ill-defined. These deficiencies were rapidly identified during the period covered by the minutes, and were addressed both by the 2009 Banking Act and subsequently by the 2012 Financial Services Act, which radically changed both the role of the Bank and the structure of its governance.

Governor, Mark Carney said:

“The financial crisis was a turning point in the Bank’s history. The minutes provide further insight into the Bank’s actions during this exceptional period – the policies implemented to mitigate the crisis, the lessons that were learned, and how the Bank changed as a result.

The Bank is committed to increased openness and transparency and these minutes, in combination with the other recent reviews, provide a complete record of the Bank’s activities during the crisis.”

UK PRA Published its New “PRA Regulatory Digest”

Continuing their efforts to strengthen the effectiveness of their effective communications, the UK regulatory authorities have created a monthly digest of relevant releases and news. They say that

“this digest is for people working in the UK financial services industry and highlights key regulatory news and publications delivered for the month. Readers are encouraged to continue to visit the Bank of England website throughout the month, subscribe to alerts and visit the calendar for upcoming news and publications.”

We think the Australian Regulatory authorities should learn from this, as at the movement we have separate and disconnected release streams from RBA, APRA and ASIC. The UK effort shows the power of bringing material together into a more digestible form.

We think this should be coordinated by the Council of Financial Regulators (CFR). This body is the conductor of the regulatory orchestra, and has only had an independent website since 2013.  It is the coordinating body for Australia’s main financial regulatory agencies. We discussed the role of CFR recently.

UK’s Financial System Not “Entirely Safe”

The UK’s financial system is not “entirely safe” according to former Bank of England governor Lord Mervyn King, speaking on BBC Radio 4’s Today programme. He questioned the banking system’s ability to withstand another crisis and argued the core problems that led to the meltdown have not yet been dealt with.

“I don’t think we’re yet at the point where we can be confident that the banking system would be entirely safe. I don’t think we’ve really yet got to the heart of what went wrong.”

The warning comes despite banks and other financial institutions being forced to hold more capital to prevent the risk of failure in the event of another downturn.

King, went on to say that imbalances between global economies have not yet been resolved. He added keeping base rate at the low of 0.5 per cent cannot go on .

“The idea that we can go on indefinitely with very low interest rates doesn’t make much sense.” However raising interest rates now “would probably lead to another downturn”.

He was at the helm of the Bank of England during the GFC.

His comments mirror some of the concerns highlighted in the recent Murray report.

Long-Term Unemployment Will Impact Wage Growth

In economic circles, the relationship between wage growth and unemployment is an important factor. Many will focus on the relationship between short-term unemployment and wage growth, but a paper released by the Bank of England highlights that long-term unemployment is also an important factor in the equation. Given the fact that wage growth is slowing in Australia, and long-term unemployment is rising, these findings are important.

The relationship between wage growth and unemployment is a key trade-off concerning monetary policy makers, as labour costs form a critical part of the inflationary transmission mechanism. One important question is how the composition of the unemployment pool, and specifically the share of long-term unemployment, affects that tradeoff. Detachment from the labour force is likely to increase with unemployment duration, so that the long-term unemployed search less actively for jobs and therefore exert less downward pressure on wages. If so, short-term unemployment may pull down on wage inflation more than long-term unemployment does. In this situation, policymakers might anticipate a period of high wage growth if short-term unemployment starts to fall to low levels even if the long-term unemployment rate remains elevated.

But there may be complications arising from the integral dynamics of unemployment. In this paper it emerges that the estimated disinflationary effects of long-term unemployment hinge on whether or not wage growth becomes less sensitive to unemployment as the latter rises – a form of non-linearity. One reason why the negative relationship between wages and unemployment might become flatter at high levels of unemployment is that workers may tend to resist cuts in their nominal wages. When unemployment is low, wage growth tends to be high as firms compete for a scarce pool of resources. But due to worker resistance to wage cuts the reverse might not hold to the same extent, with a relatively large increase in unemployment needed to reduce wage growth during a recession.

Why does this non-linearity matter for the measured effect of long-term unemployment on wage growth? It is because long-term unemployment inevitably lags behind movements in short-term unemployment as it takes time for the new unemployed to move into the long-term category. So high levels of long-term unemployed are only associated with lengthy periods of high unemployment. A flattening off of the relationship between wages and unemployment at high levels of unemployment would then imply that long-term unemployment does little to reduce wage inflation further. The apparently different effects of short and long-term unemployment on wage inflation could therefore be merely as a result of timing rather than labour market detachment among the long-term unemployed.

By modifying statistical models of labour market dynamics to incorporate this insight, this paper finds that there appears to be much less difference between the short and long-term unemployed in terms of their marginal influence on wage behaviour than is suggested by the recent literature. When the non-linearity described above is not taken into account, estimation results corroborate the finding already established in the literature that it is predominantly the short-term unemployed that matter for wage inflation. Long-term unemployment in this specification tends to have no statistically significant effect on wage inflation. When the non-linearity is taken into account, long-term unemployment has a much larger effect on wage inflation. For some of the specifications considered, the data fail to reject the hypothesis that short and long-term unemployment rates have equal effects on inflation. In some instances, the models even suggest that long-term unemployment creates more of a drag on wage growth than short-term unemployment does, all else equal. Statistical uncertainty makes it difficult to draw a very precise conclusion, but the results in this paper caution against excluding long-term unemployment from estimates of aggregate labour market slack as is suggested by much of the recent literature. Both the short-term unemployment rate and the long-term unemployment rate are likely to contain useful information for judging the degree of wage pressure in the economy.

How The Mining Boom Lifted Living Standards

In the RBA Bulletin for December 2014, there is a detailed analysis and modelling to show how the mining boom impacted the Australian economy. This is important because as we know the boom is fading, and the RBA has been looking for the housing sector to take up the slack.

The world price of Australia’s mining exports more than tripled over the 10 years to 2012, while investment spending by the mining sector increased from 2 per cent of GDP to 8 per cent. This ‘mining boom’ represents one of the largest shocks to the Australian economy in generations. This article presents estimates of its effects, using a macroeconometric model of the Australian economy. It summarises a longer research paper, which contains further details and discussion of the results (see Downes, Hanslow and Tulip (2014)). The model estimates suggest that the mining boom increased Australian living standards substantially. By 2013, the boom is estimated to have raised real per capita household disposable income by 13 per cent, raised real wages by 6 per cent and lowered the unemployment rate by about 1¼ percentage points. However, not all parts of the economy have benefited. The mining boom has also led to a large appreciation of the Australian dollar that has weighed on other industries exposed to trade, such as manufacturing and agriculture. However, because manufacturing benefits from higher demand for inputs to mining, the deindustrialisation that sometimes accompanies resource booms – the so-called ‘Dutch disease’ – has not been strong. Model estimates suggest that manufacturing output in 2013 was about 5 per cent below what it would have been without the mining boom.

Graph 3 also shows an estimate of the increase in the volume of goods and services produced arising from the boom. Higher mining investment directly contributes to higher aggregate demand. Furthermore, higher national purchasing power boosts consumption and other spending components. Higher mining investment also increases the national capital stock and hence aggregate supply. There are many further compounding and offsetting effects. The estimated net effect is to increase real GDP by 6 per cent.

RBABoom1The mining boom raises household income through several different channels within the model (Graph 8). As of 2013, employment was 3 per cent higher than in the counterfactual, largely due to the boost to aggregate demand. Real consumer wages were about 6 per cent higher, reflecting the effect of the higher exchange rate on import prices. Property income increased, reflecting greater returns to equities and real estate. A larger tax base led to lower average tax rates, all of which helped raise real household disposable income by about 13 per cent. As can be seen in Graph 8, household consumption is estimated to initially rise more slowly than real household disposable income. That is, the saving rate increases. This reflects inertia in consumption behaviour, coupled with a default assumption that households initially view the boom as temporary. In the medium to long run, as it becomes apparent that the change in income is persistent, savings return toward normal and consumption rises further. In the long run, consumption will adjust by about the same proportion as the rise in household disposable income.

RBABoom3Changes in the composition of consumption are an important determinant of how the mining boom affected different industries (Graph 9). Demand for motor vehicles and other consumer durables are estimated to have increased strongly, reflecting lower import prices and strong income growth. Relative price changes for most other categories of consumption were smaller, with consequently less effect on their relative demand.

RBABoom4 The mining boom can be viewed as a confluence of events that have boosted mineral commodity prices, mining investment and resources production. This combination of shocks has boosted the purchasing power and volume of Australian output. It has also led to large changes in relative prices, most noticeably an appreciation of the exchange rate. The combination of changes in income, production and relative prices has meant large changes in the composition of economic activity. While mining, construction and importing industries have boomed, agriculture, manufacturing and other trade-exposed services have declined relative to their expected paths in the absence of the boom. Households that own mining shares (including through superannuation) or real estate have done well, while renters and those who work in import-competing industries have done less well.

OECD Says Raise GST, Change Taxes, Use Macroprudential

The OECD survey of Australia, just released, makes a number of important observations and recommendations about how the quality of life experienced can be sustained as the mining boom ebbs. Here are the main findings:

Australia’s material living standards and well-being compare well internationally, reflecting a well-managed and successful economy. The economy is slowing as the prolonged mining boom recedes. Output growth of about 3% is expected for 2014 and 2.5% in 2015. Macroeconomic policies are appropriate for the current conjuncture while long term prosperity depends on ensuring that structural settings help all forms of economic activity and promote broad-based productivity growth.

Ensuring price and financial stability. Inflationary pressure is contained. Low interest rates are supporting activity and the rebalancing of growth. House prices have grown by about 10% over the past year, prompting construction activity but also attracting some speculative demand. Strong prudential regulation and a concentrated financial sector have supported financial stability, but the latter has also created concerns about competition and credit supply in some segments.

Pursuing fiscal consolidation and ensuring efficient tax and public spending. Gross public debt has risen from below 20% of GDP to over 30% since the global financial crisis. The budget faces significant volatility from movements in global prices for natural resources, and past spending commitments have created a medium-term structural fiscal challenge. Australia’s heavy reliance on inbound investment and exposure to resource market fluctuations provide strong arguments for fiscal discipline and low public indebtedness. The country has a comparatively light tax burden overall, but the heavy reliance on direct taxation is not ideal. Public-spending efficiency in some services is adversely affected by overlapping responsibilities and complex funding arrangements between federal and state governments.

Improving framework conditions for business. Improvements in productivity growth will require reforms across a wide range of structural policy areas including taxation, competition and deregulation. Government plans to ramp up infrastructure investment make sense, but only if funds are spent efficiently. Targeted business support needs to be judicious as it can be a short step from value-for-money subsidy to outlays on corporate welfare.

Encouraging employment, deepening skill, and addressing inequality. The importance of raising participation, combined with budgetary concerns, means effective welfare-to-work policies remain a priority. The government plans to incentivise unemployed youth, including lengthening the benefit waiting period. A proposed liberalisation of higher education tuition fees and reforms to student support aim to improve competition, access and choice. It will be important to monitor the impact of these reforms, particularly for students from disadvantaged backgrounds.

Tackling environmental challenges. The government is fundamentally changing Australia’s environmental policy, replacing a carbon tax with a suite of planned new measures, including a mechanism to provide incentives to businesses for reducing emissions. Ramping up road building provides opportunities to extend road pricing. Ensuring efficient supply chains for water is important.

Key recommendations

Ensuring price and financial stability
● Continue intensive monitoring of the housing market; maintain deep micro-prudential oversight and consider using macro-prudential tools to bolster credit safeguards and signal concern.
● Examine credit and competition issues in the financial sector; consider reducing banks’ implicit guarantees, tackling risk-weighting advantages in mortgage lending, improving credit databases.

Pursuing fiscal consolidation and ensuring efficient tax and public spending
● Prioritise medium-term fiscal consolidation to rebuild fiscal buffers in light of Australia’s exposure to external risk and consider establishing a stabilisation fund.
● Rebalance the tax mix; shift away from income and transaction taxes, make greater use of efficient tax bases such as the Goods and Services Tax and land tax.
● Reform federal-state financial relations; reduce grant conditionality further, instigate state-level tax reforms to enhance funding autonomy, and increase state-level responsibilities and accountabilities.
● Address federal-state shared responsibilities to improve efficiency; improve co-ordination and co-operation and in some cases, health care in particular, consider a reallocation of responsibilities.
● Strengthen capacity for assessing and comparing state-level public services; further develop performance indicators; and continue enhancing the availability and quality of data.

Improving framework conditions for business
● Ensure infrastructure delivers value for money through robust and transparent cost benefit analysis both to ensure economic use of the existing stock and appropriate selection of new infrastructure projects.
● Concentrate on broad support for business; prioritise corporate-tax rate cuts, reduce regulatory burdens and continue to be tough on corporate welfare and tax avoidance.
● Strengthen competition; continue adjusting network-industry regulation and improve the competitive environment more generally in light of the review currently underway.

Encouraging employment, deepening skills and addressing inequality
● Monitor the proposed welfare reforms to ensure they raise work-force participation cost effectively without adverse social outcomes. Better target superannuation (pension) tax concessions.
● Monitor the proposed higher education reforms to ensure that choice and quality is enhanced and access is not compromised.

Tackling environmental challenges
● Achieve greenhouse-gas emission targets; ensure the proposed Emission Reduction Fund is efficient through: i) robust measurement and verification methods; and ii) implementation of a safeguard mechanism that prevents offsetting emissions elsewhere in the economy.
● Make transport policy greener; enact the proposal to index excise duty on retail fuel, expand other use-based vehicle charges and extend public transport.
● Continue strong commitment to water reform including the Murray-Darling Plan.

ASIC On Payday Lenders Again

ASIC crackdown stops another payday lender from overcharging consumers.

Fast Easy Loans Pty Ltd has agreed to refund more than 2,000 consumers a total of $477,900 following ASIC’s concerns that it charged consumers a brokerage fee where it was prohibited from doing so.

From September 2010 to June 2013, Fast Easy Loans Pty Ltd (Fast Easy) acted as the broker for a related lender, Easy Finance Loans Pty Ltd (Easy Finance), and unlawfully charged consumers a brokerage fee in excess of certain state and territory interest rate caps. In charging a brokerage fee, Fast Easy engaged in credit activities without a credit licence.

Fast Easy and Easy Finance operated under a previously commonly promoted business model where consumers dealt with both a broker and a payday lender at the same time, with the entities having the same directors and owners and operating out of the same premises. One reason for using this model was to provide a means (via the broker entity) to charge consumers an amount in excess of state and territory interest rate caps.

Commonwealth legislation introduced a cap on payday loans in July 2013 which supersedes the state and territory-based interest rate caps, and together with further Regulations in June 2014, make it clear that broker costs do not sit outside the small amount loan cap.

Deputy Chairman Peter Kell said, ‘ASIC will act to prevent payday lenders structuring their business to improperly impose fees and charges on consumers.

‘Our message to the industry and those who advise payday lenders is clear; if you set up business models to avoid the small amount loan cap, ASIC will take action’, Mr Kell said.

In response to ASIC’s concerns, Fast Easy has agreed to refund all affected consumers in Queensland, New South Wales and the Australian Capital Territory any amounts paid in brokerage fees above the state-based interest rate caps of 48% by November 2014.

Although the brokerage fee did not exceed any applicable interest rate caps in other states, Fast Easy has also put in place steps to notify consumers in Northern Territory, Western Australia, South Australia, Victoria and Tasmania (where the same 48% state interest rate cap law did not apply) that they can claim a refund for the brokerage fee that was charged.

Easy Finance has also engaged an external legal firm to conduct a compliance review on their current business model to ensure it meets the requirements of the National Consumer Credit Protection Act 2009.

ASIC’s action against Fast Easy means that since 2010, close to $2 million dollars has been paid in refunds to over 10,000 consumers who have been overcharged when taking out a payday loan. Further, payday lenders have been issued with just under $120,000  in fines in response to  ASIC concerns about their compliance with the credit laws.

Background

Under the National Consumer Credit Protection Act 2009 (National Credit Act), individuals or businesses who engage in credit activities are required to hold an Australian credit licence.

Any person who does engage in credit activities (such as acting as a broker) without the appropriate licence must not demand or receive any fees or charges from a consumer (s32 National Credit Act)

Prior to July 2013, some States and Territories held laws capping the cost of credit for small amount loans. These laws were superseded by the Commonwealth cap which was introduced in July last year.

A small amount loan, in general terms, is a loan where the amount borrowed is $2000 or less and the term is between 16 days and one year. From 1 July 2013, only the following fees can be charged on small amount loans:

  • a monthly fee of 4% of the amount lent
  • an establishment fee of 20% of the amount lent
  • Government fees or charges
  • enforcement expenses, and
  • default fees (the lender cannot recover more than 200% of the amount lent).