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Up to 40% of the country's 218 3rd tier lenders are breaking the law, Consumer Affairs Minister Simon Power says

Personal Finance
Up to 40% of the country's 218 3rd tier lenders are breaking the law, Consumer Affairs Minister Simon Power says

Consumer Affairs Minister Simon Power says up to 40% of the country's 218 third tier lenders haven't registered as Financial Service Providers as required by law and that there has been an 18% increase in the number of such lenders over the past five years.

Power today released research by the Ministry of Consumer Affairs ahead of a government Financial Summit in Auckland this Thursday, which he says will look into ways of helping vulnerable people trapped in a debt spiral, aim to promote responsible lending and debt management, and investigate how to improve the financial literacy of New Zealanders.

The Ministry's main research identified 218 third-tier lenders operating in New Zealand. The number was up 33, or 18%, from 185 in 2006.

Third tier lenders are defined as finance companies other than those who offer finance exclusively to businesses, pawn brokers and mobile lending trucks that provide consumer credit. It excludes building societies, credit unions and PSIS which are seen as second tier lenders, and banks which are described as first tier lenders.

On top of this there has been a 126, or 60%, increase in the number of third tier lender's outlets in the last 5 years, to 336 from 210. The increase in number of lenders and their outlets comes despite significant turnover in such lenders with about half - 95 - who were in business in 2006 exiting the market and 127 new lenders entering the market.

Power also noted that third tier lenders generally focus on lower income areas with 47 outlets in South Auckland alone.

"Advertising tends to target those without an adequate credit history (such as low income earners, beneficiaries, and young people), emphasises the ease, speed, flexibility, and normality of third-tier loans, often does not disclose borrowing costs, and sometimes includes incentives to refer friends and families to the lender," Power said.

Furthermore he said 35% to 40% of third-tier lenders seem not to have registered as Financial Service Providers, as required by law.

"The Registrar of Financial Service Providers is investigating and will refer non-compliance to his enforcement unit as appropriate," Power said. “I’m disturbed that so many third-tier lenders don’t appear to have fulfilled the most basic requirement to register as a Financial Service Provider."

“Given this, it’s also unlikely that they’ve joined an approved disputes resolution scheme, meaning consumers are being deprived of consumer protection and access to redress when things go wrong."

Power added that the turnover in the third-tier lending market reflected how easy it was to enter the market given just about anyone can become a credit provider because they don’t have to meet any competency or conduct standards.

“The growth in this industry, coupled with advertising targeting the most vulnerable members of our community, highlights the importance of the Financial Summit to tackle the issue of irresponsible lending.”

He expects about 250 people, representing community groups, budgeting services, banks and credit companies, to attend Thursday's summit.

Power has also released research by Colmar Brunton looking at New Zealanders’ use of third-tier lenders, their experiences, and how the third-tier lenders operate, plus background statistics for considering credit issues produced by the Ministry of Consumer Affairs. 

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what does he expect - those that were nbdt have been swamped in regulation to the point they are no longer viable.

The business of lending hasn't changed but the form of investment has. Those that invest privately have lower costs and aren't subjected to Powers influence. 

Power has been poorly advised from the outset. He would have been better to foster the nbdt sector, encourage consolidation by reducing stupid and ineffectual compliance so that the State could maintain some control. As it is he has driven the market underground and has almost no ability to influence it.

This result was predictable and the worst possible outcome.