One of the biggest cash lender in Australia was accused of charging higher interest rate and brokerage fees on short-term loans offered to borrowers. They were liable of breaching the responsible lending practice and did not comply with the legislation. Cash converter has transformed their business model in light of changing legislation. The new business model made the borrowers pay high amount of brokerage fees despite the laws of Queensland government of capping interest rate of personal loans at 48%. Such amount included upfront and brokerage fees. Customers Cash converter was alleged of charging extortionate fees and interest rates on the amount of loan provided to its clients. Customers of Queensland had to appoint broker for in order to access credit cash from lenders of the organizations. In year 2008, lending laws in Queensland changed and the organization contrived to avoid interest cap. This comprised of brokerage fees and the borrowers were required to pay additional interest rate of 35% on total amount of loan borrowed. Charging high amount of brokerage fees was unconscionable.
Lending practice adopted by Cash converter resulted vulnerable people in incurring massive amount of interest and additional fees. This was in contravention with the laws that were designed to lower down the cost of credit. The lending strategy was intended to force the borrowers to borrow repeatedly in light of excessive interest rate and fees. Brokerage fees were the main agenda of the loan proceedings and franchisee were mainly responsible for charging the fees and it was against the service that introduced the customers to their subsidiary. However, it was mentioned by company that brokerage fees charged were not against the legislation. Settlement of class action was done by Federal court and they were required to pay $23 million as principal settlement and this was reached on behalf of 37500 customers.
All the charges were recorded in the financial statements of the company but some were omitted and other was not mentioned under appropriate headings. Such incomes were recoded as income generated from advances made from short-term loans in the profit and loss statement. There was no separate mentioning of such income that needs to be shown separately and appear under the heading income generated from services. The higher interest rate along with upfront and brokerage fees charged by Cash converter was accounted in the annual report of company as interest income. There was no mention of brokerage fees in the annual report as there was need to mention about the income from such services. Brokerage fees would have been mentioned as income generated from services of franchise. Financial working of organization has been overstated by mentioning and charging the exorbitant interest rate on short-term advances by 633%.
The company introduced a method where the Cash converter asked its customers to sign a number of documents and this included an early repayment election. Borrowers were asked to pay a high amount of interest rate of 145% on personal loans and 633% on cash loans (Leeks and Luck 2016). Cash converter duped and took advantage of vulnerable customers who could not afford to repay back the loan amount. Therefore, the lending practice of Cash converter is regarded as unethical as borrowers have been deceived by charging interest rate beyond capping limit set out by laws and deliberately circumvent the laws.
Now, there are two ethical theories that would be used to discuss whether lending practice of the Cash converter is ethical or unethical. In this context, the two theories to be used are justice ethical theory and deontological theories.
It is stated in the justice ethical principle that in order to incorporate justice ethical practice into the activities of organization, the decision makers should focus on actions that are considered fair for people who are involved in it. Unless it is possible to justify the extenuating circumstances, ethical theory should be consistent with ethical decisions. However, inconsistent decisions needs to be justified (Melden 2013). The lending practice adopted by Cash converter is regarded as unethical because it deliberately duped the customers and took advantage of vulnerable people by making them pay higher or unreasonable interest rate along with brokerage and upfront fees. Cash converter made profits by breaching the legislations and did not employ ethical practice in carrying out its business activities. Hence, lending business practice is considered as unjustifiable and unethical (Oosterveer 2015).
It is stated in the deontological class of ethical theories that organizations when engaging in decision-making process should adhere to duties and obligations. According to this theory, upholding duty of an individual is considered as ethically right as it is regarded that an individual would follow his or her obligations to another society or individual. An organization would produce consistent decisions if it adheres to deontological theory as it will be based on set obligations (Ho 2015). According to this particular ethical theory, it is evident that Cash converter did not adhere and complied with established legislation and laws. Organizations are considered responsible under penalty threat if it did not adhere to responsible lending practice. The lending practice of Cash converter was in response to changed legislation that intended to take advantage of vulnerable borrowers. Moreover, organization did not practiced due care and diligence in advancing loan to customers. They did not enquire into the suitability criteria of loans depending upon type of borrowers (Montiel and Delgado 2014). Therefore, it can be concluded that they practiced lending system that was not in financial interest of customers.
Cash converter experienced regressive business growth after they practiced the lending system of charging higher interest rate. Organization failed to make reasonable enquiries into the expenses and income of customers. This was done mainly in the situation when the small amount of loan was considered unsuitable by credit legislation. An internally generated assumed benchmark was that had no relation with the real expenses of customers was applied by cash converter rather than assessing real expenses recorded in the bank statement of customers. According to circumstances of customers, small amounts of loan are considered unsuitable as they fail to assess the loan for particular customers and it was entered into breach of credit legislation subsequently (Hahn and Kühnen 2013).
In lieu of the class action launched by the federal court against the Cash converter, they have paid the total penalties amounting to $ 1.35 million and this was done following the infringement notices. Cash converter is required to refund of amount $ 10.8 million as fees to eligible consumers. Companies has incurred expenditure of $ 20 million by way of legal and repayment costs that would be capped at $ 3 million. In year 2013, the share price of Cash converter rose by 2.2 percent after the announcement that pay lender can make use of strategies for making profit despite the constraint imposed by legislation of customer protection laws (Banks et al. 2015).
In the year 2016, there was an increase in the personal loan book of amount $ 113036461 as compared to the loan book of $ $ 119448669 in the year 2015. Loan advances increased by 34% and the organization has enough provision of cash and the estimated amount was standing at $ 5 million. Increase in the annual interest rate on short-term loan and seven month loan advances. Profit generation in financial year 2014 was recorded at $ 24.2 million as against the loss that resulted post the class action in the year 2015 and the amount stood at $ 21.5 million. The value of personal loan book fell to $ 104.5 million in the year 2015 (Slade 2015). There was a downtrend in the share price of Cash converter post the class action. Share price of organization was trading in range of $ 0.80 to $ 1.88 in the financial year 2014. The share price experienced a jump in the year 2016 as it was trading higher at 7.6% as compared to previous year. The graph below depicts share price of cash converter for a period of five years.
Share price of cash converter for five years
Source: created by author
After the multimillion losses in the previous years, cash converter was able to generate profit due to a boom in online payday lending and due to this, there was a jump in online cash loan advance to 62% in six month and the amount stood at $ 8.2 million. The value of personal loan grew back to 42% and the amount stood at $ 44.6 million. There was a lift in the revenue of the company to $ 8,6 million as compared to $ 1.6 million in the year 2015. For the first half of financial year, cash converter reported a profit of $ 15.9 million compared to a loss generated of amount $ 5.3 million in the financial year 2014 (Cashconverters.com 2017).
Embedding sustainability practices in conducting the business activities is very essential for financial institutions. Sustainability practice and Social responsibility in the financial institutions makes the provision of risk management services and financial capital that would help the organization in contributing to well-being and economic prosperity of the community or their clients. There have been an increase in the social responsibility contribution and sustainable practice in the business activities of financial institution in recent years (Eccles et al. 2014). Financial institution needs to closely identify the possible vulnerabilities for obtaining the social security. Sustainable development and special responsibility intends to determine company for establishing the goals for the long-term development of the society and their on financial interest (Bebbington et al. 2014). Social responsibility is the ethical management. It is required by financial institution to incorporate environmental and social concerns in the interaction with the stakeholders and their business operations. Sustainable development of economy and society helps in creating a crucial and fast growing for financial functioning instruments. Protecting the financial interest of the customers is the responsibility of financial institutions and this should be in aligned with the sustainable and social responsibility (Blewitt 2014).
Social responsibility of cash converter is identical to any other financial institutions. The lending practice adopted by Cash converter was not ethical and hence not socially responsible as it deliberately took the advantage of vulnerable class of people without carrying out due diligence in the advances of loan. The business model adopted by company was not in the financial interest of customers as it made them pay exorbitant interest rate and substantially higher amount of brokerage fees on their loan amount. Responsible steps were not taken by the organization to make the verification of the income and expenses of the customers in accordance with the responsible lending obligations. Therefore, Cash converted needs to transform the business model that is in the best interest of their customers and should not force them to buy such financial products that is not suitable for them. Borrowers of loan have been posed to threat as due to charging of higher interest rate above the cap set by legislation. Incorporation of unethical practices would hamper the growth and financial position of the company. Maximization of profits and delivering the value to shareholders should not be at the cost of their customers and it should be done by keeping the customers as their priority. Sustainability practice in financial institution is considered as business opportunity as it considered as the driver of improving the overall performance of the organization (Axelrod et al. 2014).
Cash converter was alleged by the federal court of Australia of circumventing the legislation that set a limit of interest rate to be charged on loan advances. Due to below standard services to customers and unscrupulous lending practice, the reputation cash converter, as one of the biggest lender in Australia would be damaged. For the hampered community, it is essential for Cash converter to imbibe social responsibility and sustainability practice for economic well-being of society and communities. Addressing the sustainability challenge has become very complex in the current era and therefore, financial institutions needs to make the transformation of business model that helps in addressing them. It is necessary for organization such as Cash Converter to avoid indulging in such lending practice that would hamper and damage its reputation.
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Blewitt, J., 2014. Understanding sustainable development. Routledge.Cashconverters.com. (2017). Annual Reports. [online] Available at: https://www.cashconverters.com/Investors/AnnualReports [Accessed 13 Apr. 2017].
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Ho, D., 2015. Making Ethical Progress without Ethical Theories. AMA journal of ethics, 17(4), p.289.
Leeks, A. and Luck, K., 2016. Queensland set for class actions: Practical issues and implications. Proctor, The, 36(10), p.16.
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Montiel, I. and Delgado-Ceballos, J., 2014. Defining and measuring corporate sustainability: Are we there yet?. Organization & Environment, 27(2), pp.113-139.
Oosterveer, P., 2015. Promoting sustainable palm oil: viewed from a global networks and flows perspective. Journal of Cleaner Production, 107, pp.146-153.
Slade, B., 2015. The social value of class actions. Precedent (Sydney, NSW), (129), p.4.
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