Company Background
Question:
Discuss about the Cash Converters Class Action Analysis.
Financial Institutions plays a very important role in the success of every individual and every organization. They provide the funds through which any individual can fulfill his or her needs and any organization will be able to achieve its organizational goals. Through this report, the working of the company namely Cash Converters International Limited has been discussed keeping in consideration the business practice followed by the company over the years and the situations that have led to the movement of thousands of their customers before the court for justice. The aim of the study is to ascertain whether the practice that has been followed by the company is ethical, what are the financial impacts that the class action have made over the company and lastly what are the social responsibilities of the company and how the company would sustain in the market. Thereafter, the report has been ended with the conclusion.
Cash Converters International Limited was incorporated in the year 1984 and has the registered office in Australia. It’s a listed company having the stocks listed at Australian Stock Exchange. The main business area of the company is of franchising or retail stores. Through the franchising concept the company has not only benefited itself by having the business expanded but also have made the substantial benefit to the franchisee by having the income from the model. Company is the master franchisor who appoints different franchisees all over the world and which in turns appoints sub franchisor to develop each and every place. Through this trusted network the company has been able to develop its retail stores providing loans across the world in United Kingdom, Australia and Others. By having faith in such a trusted and long chain network, the customers have been availing the services since its inception and have started utilizing the facilities in the greater speed.
Cash Converters International Limited in the urge of expanding its business has been opening the retail stores across the world and started advancing the cash loans to the customers. They provide the loans to every eligible individual in cash on the short term basis of not more than twelve months. They require the document including the monthly income statement, bank statement and the Australian resident ship card. Through these documents the company finds the eligibility of an individual and as per the regulatory norms the repayment amount of the loan taken cannot be more than twenty percent of the monthly income of an individual. It is very much implied that an Australian resident only can have the loan from the company. The company charges the establishment fees for providing the loan amounting to twenty percent of loan and the amount of monthly repayment depends upon the monthly income received by the individual. It has also been mentioned in the letter that if borrower makes early payment then no amount shall be deducted on establishment fee or on account of early payment. This is the mode of doing business or the practice which has been adopted by the company for the past so many years.
Cash Loans and Loan Eligibility
This practice led many borrowers to indulge in the practice of gambling. They started borrowing money on shorter term basis as they find it suitable to have ready cash to meet their daily needs and expenses. On the contrary the cash converters started disbursing the cash loans to the borrowers without checking their eligibility of having such a loan amount. Also the company have started the policy of having the document name – “Deferments of Establishment Fee” signed by the borrowers. It means the borrower have to pay the establishment fee along with the month repayment to the company. Therefore, if the borrower applies for $100 then he or she will get $80 in his or her bank account as the loan and $20 will repaid as per the repayment schedule. The repayment may be done fortnightly, weekly or monthly depending upon the income structure of the borrower. Further the company has started avoiding the 48% interest cap as provided by regulatory framework on credit cards and rather have charged interest rate which has gone up to 633 %. Borrowers of the company are the lower class people including pensioners, blue collar staffs of the company and other old people. The company deliberately gets all the documents including the wrong document which made the borrower liable to pay interest signed and also prepares the vague documents to sanction and disburse the higher amount of loans to the borrowers.
This practice has led the borrowers to file a suit as class action against the company. All the borrowers are from Queensland. The main cause of the suit is the interest rate and the fees charged by the company from the borrowers for the period from 30th July of 2009 to 30th of June 2013. On 31st of July 2015, the company was served with the writ from the class of borrowers. The same fact has been reported in the Annual report for the year ending 2015.
Ethics is derived from the Greek word “ethos” which means character or custom or moral code, values, code of conduct. Thus, ethics in business consists of the principles that directs and controls the deployment of the individuals employed in the company. Main motive of every business is to maximize the profits. As per the first norm of ethics, the main motive shall be done keeping in consideration the interest of the stakeholder of the organization.
In the given case, company has been following the concepts of ethic in the true spirit since its formation that’s why it has been regarded as the number one international franchisor. But as the company starts growing, it forgets to follow the duties towards the borrowers who are the main stakeholder of the company. As per the Teleological philosophy of ethics, the consequences of an act or doing will determine whether the act or doing is an ethical practice or not. It therefore means this theory takes into account all the stakeholders in any business decision or working like staff, customers, shareholders, country, banks, etc. As the company has deceitful done all the acts or things, the practice is totally unethical and that’s why the fact of class action has been very well mentioned in the Annual Report for the year ending 2015.
Unethical Practice of Providing Loans
The unethical practice followed by the company have led the company under many grounds including defamation, loss of revenue, loss of customers and loss of faith of other stake holders including bank and other financial institutions. The major loss that the company has faced has been in terms of the revenue and in the terms of profitability. These have discussed point wise:
- Profitability – The profit of the company has been decreased by 188% from the year ending 2014 to the year ending 2015. The major decrease in the profit is due to the provision made for settlement of the class action case amounting to $23 million. As the event of settlement has been the significant event that has occurred after the balance sheet date but the effect of the same have been taken in the financial statements. On one hand the provision has been made under the head current liabilities and on the other the amount has been charged as an expense in the statement of profit and loss. Thus, in this way the profitability of the company have been decreased.
- Share Price – Share price is the price of the share of the company prevailing in the market. Share price is calculated after obtaining the net profit after tax. As the profitability of the company has been decreased drastically by 188% the share price have also been decreased. It has shown that due to unethical practice the company’s financial statement has been bad presentation of the affairs of the company.
- Stop Practice – The consequences of the bad practice followed by the company and the liabilities that the company has suffered has enabled the company to stop the practice of charging the excess brokerage fees from the customers by the franchisees and also by charging the higher interest. These practices have further been stopped due to stoppage of credit facilities enjoyed by company from Westpac Banking Corporation. The stoppage has been made due to the strict regulatory framework and the unethical practice employed by the company.
- Profit – The Net profit of the company has been decreased from $24192335 in the year 2014 to $21483718 in the year 2015. The Net profit is lower only because of the settlement cost of $23 million. Earnings before Interest, Tax and Depreciation have been decreased by 81.9% from $51602406 in the year 2014 to $9323921 in the year 2015.
- Pay Interest – Interest cost has been increased from $ 8577184 in the year 2014 to $9072074 in the year 2015. The same has been increased by 5.8%.
- Cash Flow – The cash flow for the year ending 2015 states that the liquidity position of the company sounds good. Cash flows from operating activities, investing activities and financing activities have been increased during the year at an increasing rate as compared to the previous year. As per the cash flow statement net increase in cash or cash equivalents has been increased from $3093085 in the year 2014 to $21003234 in the year 2015. It exhibits that due to the unethical practice of the company, the cash position or liquidity has not been hampered rather it has been improved.
- People Pay – As per the class action, the company is required to pay $23 million as refund to the borrowers.
Social responsibility is the areas which have been closely and deeply related with the concept of the sustainability. Both of the concepts define the ways for the achievement of the pre defined organizational goals keeping in view the interest of the society and the stakeholders of the organization so as to confirm the longevity and continuity of the organization. Social Responsibility is the area which is considered by the company apart from earning the profits or incomes. This area includes the responsibility towards the society, environment and the other stake holders. The importance of this concept is realized when the size of the organization become large. On the other hand, sustainability is the situation where the balance is maintained between the need for having the growth in economic terms and the needs for having protection for environment and need for having social equity. Both the concepts are voluntarily in nature and if adopted by any organization then the development rate would be much higher.
In the success of every organization the two concepts plays a very important role. In the case of banking and financial institutions like Westpac the concept has transformed the business and has made the business sustained in the market for the last 184 years. Due to its effectiveness in fulfilling the social responsibility the Westpac bank has been able to achieve the top position for performing as per the benchmark of Dow Jones Sustainability Index. Financial Institutions plays a very vital role in the development of economy. It induces the entrepreneurs to invest the money as saved by different individuals so as to increase the industrial growth and which in turn increases the employment opportunities and thus increase the rate of growth and development of economy.
In the case of Cash Converters International Limited, being incorporated in 1984 has also paved ways for the development of the economy. For the development any policy there should be clear cut objectives of the organization. Like the company has clear vision of becoming one of the best franchisor in the industry and in actual has become. It’s because the company has clear vision since the incorporation of the company. And for implementation of the social responsibility policy, the first step is to have clear focus. Then only the implementation can be done. Similar will happen in case of developing the sustainability reporting policies. There are four basic fundamentals of sustainable reporting – principle of intergenerational equity, sustainable use, equitable use and integration. All the four principles lay down the foundation for having the sustainable development. The company has followed all the four principles. But during the year from 2009 to 2013 the company has violated the principle of integration. The principle lay down that all the resources shall be integrated so as to ensure that the outcome will be best for the society as well as the future. But during the period from 2009 to 2013, the company has not been able to make all the resources in harmony and has resulted in the practice which has been entered in the records of the financial markets as the unethical practice. Secondly, The company has not given due significance to their borrowers and has instead started charging interest at higher rates, getting the vague documents signed, making vague calculations for loan disbursement and most importantly converted the business of financing as means of gambling for the borrowers. The changes that have been encountered over the period demonstrate that the company objective of having going concern business has been diluted and instead the company has started having emphasis on short term profits.
But after the settlement of class action suit, the company has lowered down the interest rates and has again focused on the interest of their stakeholders.
Conclusion
Cash Converters International Limited is very well known company since the year 1984 for the franchising model of its business. The class action in the year 2015 has not only impacted the financial position of the organization but also the reputation and standing of the organization in the market. Since July 2013, they have started following the regulatory framework and have avoided getting engage in any wrong practices. Through this the company has been able to maintain its social responsibility combined with the sustainable development. Thus, in order to conclude the company has been able to perform well and maintain its worth after 2013.
References
Cash Converters Official Website, (2016), “Annual Reports” available on https://www.cashconverters.com/Investors/AnnualReports accessed on 06/04/2017.
Westpac Official Website, (2012), “Corporate Responsibility and Our Business”, available at https://www.westpac.com.au/docs/pdf/aw/Corporate_Responsibility03.pdf accessed on 05/04/2017.
Westpac Official Website, (2015), “Sustainability Review 2015”, available at https://www.westpac.co.nz/assets/Who-we-are/Sustainability-and-Community/2015/Westpac-Sustainability-Review-2015.pdf accessed on 06/04/2017.
Knaus C, (2017), “Cash Converters Profits Dive after move to stamp out high – fee pay day loans”, available at https://www.theguardian.com/australia-news/2017/mar/08/cash-converters-profits-dive-after-move-to-stamp-out-high-fee-payday-loans accessed on 06/04/2017.
Mauris, (2017), “Cash Converters Class Action in Queensland”, available on https://www.mauriceblackburn.com.au/current-class-actions/cash-converters-class-action-in-queensland/ accessed on 06/04/2017.
Chettle N, (2015), “Cash Converters to refund thousands of people for charging up to 633% interest in loans”, available on https://www.abc.net.au/news/2015-06-18/cash-converters-reach-settlement-partial-refund-loans/6556018 accessed on 07/04/2017.
Atfield C, (2016),”Cash Converters faces $17 million Queensland Class Action Lawsuit”, available on https://www.smh.com.au/business/banking-and-finance/cash-converters-faces-17-million-queensland-class-action-lawsuit-20160427-gogdb8.html accessed on 07/04/2017.
Stolz G, (2016), “Cash Converters faces Class Action from 20000 Queenslanders”, available on https://www.news.com.au/finance/business/other-industries/cash-converters-face-class-action-from-20000-queenslanders/news-story/c7bb2633caeae32adfc086bf5f3cc966 accessed on 07/04/2017.
Darus F, (2015), “Ethical and Social Responsibility of Financial Institutions : Influence of Internal and External Pressure”, available on https://www.sciencedirect.com/science/article/pii/S2212567115010990 accessed on 07/04/2017.
Cocris V, (2010), “Corporate Social Responsibility and Sustainability in Romanian Commercial Banks”, available on https://anale.feaa.uaic.ro/anale/resurse/fin4cocris.pdf accessed on 07/04/2017.
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