The Government has vowed to crack down on unscrupulous credit companies that prey on unwary consumers.
Minister of Commerce and Consumers Affairs, Simon Power, made the announcement at the Financial Literacy Summit today, saying that he is organising a summit that will look at ways to tackle the problem.
“It’s time to make changes in the area of consumer credit,” he said.
"There are gaps in the system that allow the unscrupulous to take advantage of the unwary when it comes to access to consumer finance in these tough economic times.”
Mr Power says it is too easy for the unwary to agree to something they don’t fully understand and they become trapped beyond their means.
"We need to do something about that – and we will,” he says.
"The preying on of vulnerable people by loan sharks has to stop.”
Mr Power says his announcement is a signal to the unscrupulous finance companies that “their days are numbered”.
The summit, which will be held in Auckland in August, will include representatives of the financial sector and community groups, which Mr Power hopes will achieve three things:
- An action plan to help vulnerable people who are trapped in a debt spiral caused by lack of financial literacy, consumer choice and high, compounding interest rates
- Send a clear message to all financial sector providers that they need to practice and commit to responsible lending and responsible consumer debt management
- A clear direction about how the Government can best contribute to improving the financial literacy of New Zealanders.
"The Credit Contracts and Consumer Finance Act is the primary law affecting credit provision. Essentially, it provides for disclosure of information to help credit consumers make decisions about loans,” says Mr Power.
"The key question that needs to be asked is whether the Act needs to be amended to provide more protection for consumers – including from irresponsible lending – or whether the same outcomes can be obtained from voluntary industry initiatives."
The announcement comes as Labour asks the Government to put a stop to a new text message loan service.
Finnish finance company Ferratum Group is offering loans of up to $600 – via cellphone.
But Labour says the service exposes vulnerable customers to interest rates of nearly 300 percent.
Speaking on RadioLIVE this morning, Consumer Affairs spokeswoman Carol Beaumont said it’s time for the Government to crack down on such lending.
“The law allows for this service to be put in place with very high interest rates – because we have no limit on what you can charge – and no requirement to lend responsibly. I think the Government has to take responsibility for that.”
The launch of the short-term, high interest has also alarmed the Retirement Commission, who say Kiwis should investigate other options before resorting to the new scheme.
Pre-approved customers send a text message to the company with the amount they want, how many days they need the loan for, and a personal code set up when they register.
Money will then appear in customers’ accounts – in as little as four minutes.
Director and country manager of Ferratum New Zealand Richard Yoon says access to emergency cash has been “hugely beneficial” to European customers.
“If you were in a supermarket with a trolley full of groceries and your EFTPOS card was declined, literally within a couple of minutes of sending us a text you could have available funds to complete the purchase,” he says.
However the Retirement Commission, who run financial education website Sorted, say the short-term loans are concerning and New Zealanders should check out their other options.
The interest rate – in the fine print – is 292 percent per annum plus an established fee of $28, and the Retirement Commission is advising consumers to shop around for a lower interest rate, rather than relying on the convenience of the new scheme.
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