Ombudsman calls for greater clarity on fintech loan terms

Speaking to Mortgage Business, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), Kate Carnell, stated her concern that fintechs, including Prospa, are making their interest rates “really hard to understand”.

The small business lender, which postponed its public listing this week, reportedly has an average annual interest rate north of 40 per cent. However, while Ms Carnell did not suggest the interest rate was inappropriate, she did question the transparency around the actual rate itself.

“If somebody wants to pay a 40 per cent [annual percentage rate], that’s absolutely fine,” Ms Carnell told Mortgage Business.

“For particular sorts of loans that could have high levels of risk, that’s an absolutely reasonable thing to do.

“The problem is that, currently, the fintech industry — and Prospa, for that matter — don’t like quoting [annual percentage rates]. They want to quote factor rates. [Many] people don’t understand what a factor rate is.”

She continued: “The dilemma with the current way that Prospa and others reflect the cost of loans is not transparent. If people want to pay high interest rates, that’s absolutely their call as long as it’s really clear what the cost of the loan is.”

According to the ASBFEO, there needs to be greater transparency (among all fintech lenders) around establishment fees and direct transfer fees.

“The sort of loans that are given here are loans that are paid back daily… which means there’s a direct transfer fee every day. It might be a couple of bucks, but [it’s] every day, so that adds to the cost of a loan,” Ms Carnell said.

“I’m not suggesting that the way the loans are structured is a bad way to structure them. I’m just saying that the transparency of the cost needs some work.”

Prospa deferred its listing on the Australian Securities Exchange (ASX), which was scheduled to start trading on the exchange at midday on Wednesday (6 June).

The reason for the 48-hour postponement, the small business lender told the ASX on Wednesday, was to “clarify queries raised by ASIC [on Tuesday] in relation to Prospa’s small business loan terms”.

The announcement came after reports of the ASBFEO calling for greater transparency around Prospa’s loan terms and after communications with ASIC about such terms.

The financial services regulator cautioned in March that it would monitor the big four banks’ implementation of reforms to small business loan contracts in order to be compliant with the amended Australian Consumer Law, and investigate unfair contract terms issued by other banks and non-bank lenders.

Speaking to Mortgage Business on Wednesday (6 June), a spokesperson from ASIC said that the regulator had sent communications to a wide range of bank and non-bank lenders in April and May as part of its efforts to ensure the industry is compliant with amendments to the Australian Consumer Law, which extended consumer protections to small business loan contracts of up to $1 million in November 2016.

The spokesperson further noted that ASIC has been in contact with Prospa in recent days and clarified that there was no push on the regulator’s part to defer the public listing.

Similarly, the ASBFEO clarified that there was no pressure from her either.

Ms Carnell said that if Prospa’s prospectus did not adequately reflect how its contracts are compliant with the amended consumer law, then delaying the listing makes sense, as it’s legally important that the document is accurate prior to being admitted to the ASX.

“Prospa has said in the prospectus and other places that they have looked at their contracts. They didn’t go on to say, ‘And we believe the contracts are totally compliant’,” the ASBFEO said.

“There [are] pretty strong laws around prospectuses being reflective of the current situation and also potential future situations.”

 [Related: Prospa delays listing to answer ASIC]