Pyrmonter: Usury and financial regulation, a case study.

As a law clerk, Pyrmonter was assigned a research assignment by the elderly senior partner in his employers’ firm which turned out to be a wild goose-chase.  The goal was simple: find ‘the latest Moneylenders Act’.

Pyrmonter, a fairly good student of commercial law, was fairly sure there was no such Act; and that the client (a friend of the senior partner, who had contracted a private loan for commercial purposes requiring payment of interest at 23%pa for on unsecured terms ) would have to pay what he’d bargained for.  And, at least so far as the law went, Pyrmonter was right: the Act sought had been repealed more than 20 years earlier (he left the firm before learning the ultimate fate of the client).

But the basis for the research assignment was not without foundation: until its repeal (and part-replacement for consumer credit) the state had had a Money-lenders Act, mirroring legislation elsewhere in the country.  The particular example he was supposed to have found is this.  That legislation, as well as licensing lenders, barred compound interest and capped interest rates at 12% (other states were lower).

The dangers of such legislation – the creation of ‘black’ markets and the use of ‘informal’ collection methods are obvious.  So also is the unfairness on debtors able to master their own affairs and discharge short term loans contracted outside the terms of the legislation (older Cats will recall that by the late 1990s, inflation exceeded 12% and the rate of interest on bank lending reached into the high 20s).  Wisely, at least so Pyrmonter thought, such legislation had been repealed or, at least, superseded across the Anglosphere in the wake of both high inflation and the wave of deregulation that began in the 70s and did for most price controls.

But, not so fast.

Parallel to the repeal of regimes such as the Moneylenders Acts has been a growth in both ‘consumer’ credit control, the latest form of which is the National Credit Code, as well as ‘financial product’ regulation, undertaken by ASIC: currently under the model introduced under Howard and Costello, revolving around Financial Services Licensing for everything from unit trusts to insurance brokers.  Both have been keenly supported by (taxpayer funded) activist Community Legal Centres, and quietly also by lawyers who can charge more for compliance work.  And, of course, the wholly disinterested regulator.

As enacted, the Code was limited in its application: it doesn’t (yet) apply to wholly commercial lending (though it does to personal guarantees); or to short term lending; or to non-interest bearing loans (such as After-pay).  Or so it was until yesterday.  ASIC has power to proscribe financial products: which is what it has now done.  Short term loans to consumers have now been brought within the scope of the Code, something Parliament presumably thought unnecessary.

In one sense, this is of course unremarkable: ASIC plays around with the meaning of its legislation all the time: the purpose of its power to issue ‘Class Orders’ is to allow it to act as legislator.  And in so acting, it acts fairly; accords ‘stakeholders’ rights to make representations and so forth.  But then, who makes representations?  And on what motive does ASIC act?

Well, if its Media Release is to be believed, it is the ‘1,000% interest rate’ (treating establishment fees and the like as ‘interest’, because under the Code, anything other than repayment is ‘interest’ – evidence, no doubt of ‘predation’ and ‘imbalances of market power’, and not, say, such matters as the actual cost of establishing a loan) oh, and a chorus of support from the Community Legal Centres.  Did it consider the impact its prohibition will have on the ability of vulnerable consumer borrowers’ ability to access funds on short notice?  The prospect of more ‘informal’ debt collection?  The effect prohibition of short term lending will have on entry into the market and competition?  Whether the problem it sought to address, if it is one, would better be sorted out by encouraging the entry of low cost providers?  Well, if it did, it hasn’t said so.  Helpfully however, it has assured us that this intervention in the market in that must fundamental of human actions, the taking of credit, does ‘not engage any of the applicable rights or freedoms’ referred to in the Human Rights (Parliamentary Scrutiny) Act 2011.  Well, it doesn’t, until the pensioners and students, the ‘vulnerable borrowers’ take up the offers of the informal sector, well known for its respect for human rights.

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One Response to Pyrmonter: Usury and financial regulation, a case study.

  1. Dragnet

    Good post! Always the law of unintended consequences.
    I remember the NSW Moneylenders Act as back in the ’80’s I was the Licencing Clerk at a suburban Court and we had several moneylenders in the district who were required to renew annually. From memory we would obtain Police reports and perform a bit of an audit of their books and have them rollover bond noney they were required to lodge with the Court as a conditi65 of grant.

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