Human Services Minister Senator Marise Payne has dropped her strongest hint yet that a loophole that lets consumer leasing companies who market washing machines and big TVs directly to welfare recipients at effective interest rates as high as 70 per cent-a-year will be tightened as part of a clean-up of the government’s Centrepay facility.
Potential regulatory changes could hit the consumer leasing sector hard after it was revealed that market leader Radio Rentals derives close to half of its revenue via automatic deduction payments channeled through Centrepay, a recurrent payments facility operated by Centrelink.
It’s a $200 million-a-year niche according to investment bank Credit Suisse, courtesy of some 120,000 Centrepay customers that have signed up for ‘leasing’ deals that grew 12 per cent from 2012 to 2013 and at 16 per cent “in the first 8 months of FY13.”
The respected investment bank reckons that “only court fines and electricity had higher numbers of deductions.”
But the meal ticket for shareholders dining out on welfare cheques might soon be over.
According to Senator Payne’s Office, a meeting between the Minister for Human Services and the Assistant Treasurer Josh Frydenberg on 17th March looked at “ways to utilise existing mechanisms to strengthen regulation and accountability of unregulated lease providers approved for use of Centrepay.”
“The government will improve customer protection, and identify and promote alternative credit options,” Senator Payne told Government News.
“The Australian Government is concerned that some more vulnerable consumers are disadvantaged by the use of unregulated consumer leases, which are not accompanied by the full gamut of consumer protections.”
The rapid growth of the consumer leasing sector — which is essentially a low income niche which operates underneath the sub-prime lending market and flourishes through ‘regulatory arbitrage’ — has been causing reflux for social security and welfare organisations saddled with mopping-up the fallout of poorly informed customers signing-up for onerous multi-year contractual lock-ins.
Labor Senator and Human Services shadow Doug Cameron has also conspicuously attacked ministerial inaction on the issue.
A report to clients issued by Credit Suisse in March estimated that around half of Radio Rentals’ revenue came from repayments made via Human Services’ Centrepay facility.
Of that amount, it is estimated that “entertainment and technology items” make up for around half of the leases taken using Centrepay’s repayment facility according to Credit Suisse.
That observation, based on research from company accounts filed with Australian Securities Exchange (ASX) and information provided to investors, paints an unflattering ethical picture.
The bottom line is that several millions of dollars in taxpayer-funded welfare benefits are increasingly being hoovered up by a new breed of predictably rapacious lenders of last resort.
Radio Rentals, part of ASX listed company Thorn Group Limited (ASX:TGA) is one company in the spotlight.
“TGA’s Radio Rentals business (86 per cent of TGA’s EBITDA) obtains ~50 per cent of its revenue from Centrepay customers, with about 50 per cent of that estimated to be for entertainment and technology items,” Credit Suisse said.
Part of the problem for both the Human Services Minister and Centrelink, which operates Centrepay, is that the consumer leasing sector has managed to carve out a business model which feeds on welfare dependency and people who otherwise cannot access credit.
While some regulatory efforts have been made to rein-in the unscrupulous practices of the so-called payday lending and higher risk credit market, consumer leasing operators still manage to get around mainstream lending regulations because they are, at least on paper, effectively hiring goods rather than selling credit products.
But the problem consumer and welfare advocates have to confront through that model is that the poorest and most vulnerable sections of society get hit paying between twice and five times as much as an outright price for goods ranging from fridges and washing machines to flat screen televisions — essentially through a lack of options.
A major element of the ‘regulatory arbitrage’ outlined by Credit Suisse is that the effective interest rates and prices for consumer leasing still don’t have to be disclosed in full in the same obvious way that the total cost of mobile phone plans are.
Another vexing issue is that while consumer leasing, especially to Centrepay customers, is arguably highly exploitative by nature, it still gives people access to essential domestic goods like fridges and washing machines in the absence of other mechanisms.
Some welfare workers have privately told Government News that obviously imperfect access to ‘basic’ whitegoods is better than no access at all. But they still loathe it.
Senator Payne is similarly frank in her assessment.
“As many welfare recipients are often unable to access most forms of credit, for some individuals consumer leasing is an important way of obtaining essential household goods,” Senator Payne said.
She added that both herself and Mr Frydenberg wanted to be satisfied that any changes they make “do not exacerbate problems of access to purchasing goods for customers, whilst ensuring customers are protected as far as possible.”
Even with the best of intentions, the profile of customers using the government’s Centrepay facility to obtain goods through the likes of Radio Rentals or ‘Rent the Roo’ isn’t likely to provide much ministerial comfort.
The Credit Suisse report notes that the biggest proportion of Centrepay users “are on the Disability Pension (30 per cent), NewStart Allowance (20 per cent) and Parenting Payments (16 per cent).”
“These groups are over-represented as Centrepay users compared with their proportion of Centrelink payments,” the Credit Suisse report said.
“Aged pensioners are under-represented in Centrepay users at 14 per cent despite being 39 per cent of Centrelink customers. As an aside, Centrepay has identified that Disability Support Pensioners were disproportionally represented in payday lending, and Centrelink Advance Payments and Urgent Payments.”
Senator Payne insists things are moving.
“The Department of Human Services is also implementing a number of financial, policy and operational enhancements aimed at improving the Centrepay service and strengthening its role in assisting customers to meet their long-term financial commitments,” the Human Services minister said.
Thorn Group Limited’s next annual general meeting should be interesting for shareholders, the government and renters alike.