A reflexive approach to consumer credit regulation Paper presented by Therese Wilson to the Emerging Scholars colloquium 2 July 2010

Overview The problem- lack of access to safe and affordable small amount credit for low income Australians The ‘roles’ currently being played and that could be played by banks, credit unions, not for profits and fringe credit providers The goals of the proposed regulatory regime Responsiveness to current conduct and initiatives The new regulatory framework Critiquing the solution using a systems theory approach

The problem A market that operates unfairly by excluding people from access to credit on the grounds of income alone; Low interest loans and no interest loans offered on a small scale- voluntary CSR activities of banks are unlikely to meet demand and need; Credit unions have been forced to behave as quasi- banks due to ‘one size fits all regulation’; Community development finance institutions and community sector organisations are not well supported in this work; Fringe credit providers offer a product that may involve harmful features.

Key considerations Banks not comfortable lending directly into the low income market; Small community based credit unions have been nearly regulated out of existence; Community sector organisations rely on banks for financial skills but suffer from banks’ ‘cost-shifting’ strategy; Both CDFIs and community sector organisations lack funding and regulatory support for microfinance activities cf U.S. & U.K.; Fringe credit providers subject to interest rate caps and forthcoming responsible lending requirements, but this will not necessarily lead to responsibly structured products being available.

The goals of the proposed regulatory regime In a nutshell: “The provision of safe and affordable small amount credit (c $800-$3000) to those low income Australians who have capacity to repay the loan in question without undue hardship, in circumstances where their capacity to repay is assessed in accordance with a realistic, flexible and appropriate credit assessment model, and where the loan repayments are structured so as to maximise the possibility that the loan in question can be repaid by the borrower without undue hardship.”

Responsiveness to current conduct and initiatives Banks undertaking voluntary activities- increase contributions through making regulatory objective clear (“imagined future state activity”/ regulatory risk management/ voluntary disclosure regime), benefit of performance based regulatory model after engaging banks in the ‘regulatory conversation’.

…responsiveness Small community based credit unions and CDFIs regard themselves as having a role to play in addressing financial exclusion but lack support- require government and industry support. Fringe credit providers – transformation unlikely given focus on running highly profitable businesses.

The new regulatory framework Regulatory exemptions from onerous regulations that inhibit the start up and growth of small community based credit unions and CDFIs; Government funding to support microfinance activities of small community based credit unions, CDFIs and community sector organisations; Tax incentives to encourage investment in small community based credit unions, CDFIs and community sector organisations; CRA-like ratings system to encourage bank investment in small community based credit unions, CDFIs and community sector organisations; Well monitored and enforced responsible lending requirement, but where it is made clear that the assessment of a low income borrowers’ capacity to repay a loan needs to be undertaken on an individual basis and not subject to an arbitrary formula which automatically excludes that borrower on ground of income.

Reflexiveness of the regulatory proposal Establishes structures and mechanisms that address a problem, rather than seeking to interfere in the operations of systems or organisations causing or involved in the problem themselves (e.g. don’t require banks to lend directly); Provides Dunsire’s ‘subsidisation’/ energy inputs to allow small community based credit unions, CDFIs and community sector organisations undertaking microfinance activities, to survive; Note importance of funding not being ‘conditional’; Enforcing responsible lending requirements compatible with all regulatees with possible exception of the fringe sector- may be ineffective against fringe lenders or may destroy them- in either event the answer is to provide alternatives.

Conclusion The time has come to create a fair market place free of economic discrimination, where it is not simply accepted that the poor pay more and endure exploitative conditions in order to access credit.