Systematic shortcomings in Australia’s payday lending sector were revealed during an ASIC inquiry in November 2016. 118,000 customers were let down by Cash Converters, one of the biggest payday lenders in the nation. The business had to pay $1.35 million in penalties and $10.8 million in refunds.

The enforcement action turned out to be a turning point in Australian consumer credit regulation. Fundamental flaws in the way lenders evaluated borrowers’ capacity to repay were revealed by the case, which led to a number of class actions and legislative changes that still influence the sector today.

Investigation That Revealed Widespread Problems

ASIC’s investigation uncovered extensive failures in Cash Converters’ online lending practices between July 2013 and June 2016. The regulatory review found the company failed to make reasonable inquiries into customers’ actual income and expenses. Instead they relied on internally generated benchmarks unconnected to individual borrowers’ financial circumstances.

This approach violated core principles of responsible lending enshrined in the National Consumer Credit Protection Act. Australian law includes specific protections for vulnerable borrowers. Presumptions exist that a small loan is unsuitable if the consumer already has two or more payday loans in the previous 90 days or if they’re in default on another loan.

Cash Converters’ automated assessment systems failed to identify these red flags in approximately 118,000 loan contracts. The company’s systems used assumed expense figures rather than verifying actual financial circumstances through bank statement analysis. This represented a critical failure in responsible lending protocols.

The enforcement action formed part of ASIC’s broader regulatory focus on payday lending practices. During the same period other lenders including Nimble and Fair Go Finance faced similar scrutiny and enforcement actions for responsible lending violations.

Key Regulatory Violations

The Cash Converters case highlighted several critical failure points in lending assessment processes that have since informed regulatory reforms.

Income and Expense Verification Failures

Responsible lending obligations require lenders to verify what borrowers actually earn and spend. Cash Converters’ use of standardised benchmarks meant loans were approved without proper assessment of individual financial capacity.

Presumption of Unsuitability Breaches

When consumers have multiple payday loans within 90 days, lenders must demonstrate that additional credit won’t cause substantial hardship. The investigation found Cash Converters entered into loans despite triggering these statutory presumptions.

Queensland Brokerage Fee Structure

In Queensland the company faced additional legal challenges over fee structures. Allegations suggested the company’s “brokerage fees” effectively pushed interest rates above 175 per cent annually. This substantially exceeded Queensland’s 48 per cent statutory cap introduced in 2008.

Analysis of affected borrowers revealed significant vulnerability. More than 60 per cent of consumers involved in subsequent class actions reported annual incomes between $12,000 and $35,999. These financial products primarily targeted low-income Australians with limited access to mainstream credit.

Multiple Class Actions and Financial Impact

The ASIC investigation catalysed a series of class action lawsuits that collectively reshaped industry accountability standards.

In 2015 Cash Converters settled a $23 million class action affecting approximately 37,000 NSW customers. Legal proceedings alleged the company dodged state restrictions through complex fee structures that obscured true borrowing costs.

The largest settlement occurred in 2020 when the Federal Court approved a $42.5 million payout to approximately 68,000 Queensland borrowers who obtained consumer credit loans between 2009 and 2013. The proceedings alleged interest rates effectively exceeded permissible statutory limits through supplementary fee arrangements.

The cumulative financial impact proved substantial. Total settlements exceeded $67 million across multiple jurisdictions and affected over 120,000 consumers. Cash Converters’ share price declined significantly following initial enforcement actions and never recovered to pre-investigation levels. The company completed final class action settlement payments in September 2020.

Legislative Reforms: The 2022 Financial Sector Reform Act

The Cash Converters enforcement actions provided empirical evidence supporting consumer advocates’ calls for strengthened regulatory frameworks. Following a 2016 independent review Parliament enacted the Financial Sector Reform Act 2022. This introduced significant new consumer protections.

Key Reform Elements:

• Income-based repayment caps: Regulations cap combined payday lending and consumer lease repayments at 10 per cent of borrower income. This prevents debt spirals where repayments exceed capacity.
• Anti-avoidance provisions: New legislative language targets complex contractual arrangements designed to circumvent consumer protections. This addresses the brokerage fee loopholes exposed in Cash Converters cases.
• Referral prohibitions: Lenders cannot refer declined applicants to other lenders or lead generation services. This prevents vulnerable consumers from accessing multiple unsuitable credit products.
• Consumer lease limits: Maximum charges for consumer leases cannot exceed 1.92 times the base price of leased goods. This addresses another predatory lending model targeting low-income households.

The reforms represented six years of advocacy by the Stop the Debt Trap Alliance. This coalition of consumer advocacy organisations documented the harm caused by high-cost credit products.

Current Regulatory Landscape and Ongoing Challenges

Implementation of 2022 reforms has produced mixed results. In March 2025 ASIC issued Report 805 warning that some lenders may be breaching consumer protection laws despite new regulatory frameworks.

The regulator’s review identified a concerning trend. Lenders are shifting borrowers from small loans ($700 to $2,000) to medium-sized loans ($2,000 to $5,000). This shift matters significantly because medium amount credit contracts don’t attract the same enhanced protections as small amount credit contracts under current legislation.

Data analysis reveals the scale of this market evolution. Small loan contracts declined from 80 per cent of all loans in the December 2022 quarter to less than 60 per cent by August 2023. This suggests some lenders are restructuring products to operate outside enhanced regulatory frameworks.

The Australian payday lending market remains substantial. In 2023-24 the total value of small and medium loans provided to consumers reached $1.3 billion. This indicates continued demand for short-term credit products among financially stressed households.

ASIC maintains active enforcement. Recent actions include Ferratum Australia paying $16 million in penalties for charging prohibited fees before entering liquidation. This demonstrates regulators’ continued focus on compliance.

Practical Implications for Borrowers

The reforms have created tangible protections for Australians considering short-term credit. Current regulations limit combined payday lending and consumer lease repayments to 10 per cent of income. This prevents situations where borrowers face multiple simultaneous high-cost obligations.

However, consumers must remain vigilant. Warning signs of problematic lending practices include insufficient income and expense verification during application processes and loan approval despite existing obligations. Unclear fee structures that obscure true borrowing costs should raise concerns. Repayment schedules exceeding 10 per cent of income and pressure to accept larger loan amounts than requested are also red flags.

Alternative financial services have emerged offering more transparent products. Providers such as CashPal have entered the market with alternative lending models. Traditional options including no-interest loan schemes (NILS) and community finance organisations provide lower-cost alternatives for consumers facing temporary financial pressure.

Support Resources and Consumer Rights

Australians experiencing financial hardship have access to free support services. The National Debt Helpline (1800 007 007) provides professional financial counseling to help negotiate with creditors and establish sustainable repayment plans.

Financial counselors are independent professionals regulated under national standards. They provide advice free from commercial conflicts. Services are available across all states and territories through Financial Counselling Australia’s network.

Consumers who believe lenders have breached responsible lending obligations can lodge complaints with the Australian Financial Complaints Authority (AFCA). This organisation handles disputes between consumers and financial services providers. AFCA provides free dispute resolution services with binding outcomes for financial service providers.

ASIC’s MoneySmart website offers educational resources covering alternatives to short-term loans and budgeting strategies alongside information about consumer rights under credit legislation.

Industry Evolution and Future Regulatory Directions

The sector continues evolving in response to regulatory pressure. Cash Converters announced in May 2025 it would discontinue Small Amount Credit Contracts entirely effective September 2025. This strategic shift reflects sustained regulatory scrutiny and changing market dynamics.

Regulatory attention is expanding to adjacent markets. Buy Now Pay Later services face new licensing requirements effective June 2025. This extends responsible lending obligations to previously unregulated consumer credit products. The expansion addresses concerns that consumers are accessing substitute products operating outside traditional credit regulation.

The emergence of alternative lenders like CashPal reflects market evolution toward more transparent lending models. All providers remain subject to responsible lending obligations regardless of business model or technology platform.

Lasting Impact of the Settlement

The 2016 ASIC investigation and subsequent enforcement actions demonstrated that regulatory intervention can produce meaningful industry change. The $12 million penalty and refund program established clear accountability for responsible lending failures. Subsequent class actions totaling over $67 million reinforced financial consequences for non-compliance.

The case established important precedents that continue informing regulatory policy and enforcement priorities. ASIC’s 2025 warnings demonstrate however ongoing vigilance remains necessary. This ensures lenders comply with both the letter and spirit of consumer protection laws designed to prevent exploitation of financially vulnerable Australians.