The unethical lending practices of Cash Converters
Cash lender is one of the biggest pay lender of Australia having a diverse base of revenue that comprised from a broad range of service offerings. Over the last few years, the organization has experienced significant growth having $ 80 million of debt from single lender management. The company was launched with the class action of charging higher rate of interest on cycle of debt and fees in excessive amount on short-term loans. Cash converter used a method under which people were asked to sign a number of documents and this involved an early repayment election. Federal court launched major class action against the company and it was alleged of breaching the consumer law of Queensland by making the borrowers to pat hefty brokerage fees on short-term loans (Bodie, 2013).
Cash converter has cash advance online lending through online lending and web shop. In the annual report, the documentation of lending practice was presented as responsible and in compliance with the regulation and the financial product offered is pursuant to national consumer protection act. Nature of personal loan products is reviewed by taking steps of financial services operations. Organization has commended trailing new type of loans that was aligned with the new possible requirement of lending for meeting ever-growing demand of customers. Cash converter has emphasized its commitment toward responsible lending through a more personal approach (Carrol & Buchholtz, 2014). Company would be returning to business as usual due to uncertainty surrounding around short-term lending legislations. Cash converter in response to legislative changes has introduced a new business model and this model was designed to get access to credit. Borrowers of Queensland were forced to appoint a broker and were compelled to pay huge substantial brokerage fees. Required brokerage fees were under the consumer credit laws that was used to calculate real rate of interest. For instance, according to business model a loan of amount $ 600 would charge brokerage fees of $ 210. However, the real rate of interest was 160%. The things documented and portrayed in the annual report was not in reality as many customers were duped with charging exorbitant interest rate and higher fees on its credit facilities (Gullifer & Payne, 2015). Credit assessment process of cash converter suffered from compliance issues and the investigation reveals that the company has breached the responsible lending issues with small amount credit contracts.
As per the justice ethical theories, decision makers should focus on actions that are fair to people involved. Cash lender does not have justice ethical practice. The lending practice of cash converter was unethical, as they have been taking the advantage of large number of customers who may not have the capacity to repay the loan amount. It did not enquire into the requirement of loan or right amount of loan sought by consumers (Sheffet et al., 2014).
Financial impacts of Cash Converters’ lending practices
As per the deontological class of ethical theories, decision-making should be done by adhering to duties and obligations. Organization did not adhere to responsible lending practice under threat of legal penalty. Hence, they have not adhered to legislations and practices. Cash converter has deceived customers for buying the loan at an unreasonable exorbitant interest rate and excessive fees and this is considered as ethical problems. The way organization has intended to circumvent the law and charge vulnerable people with extortionate interest rate (Moffett et al., 2014).
There was a fall in the personal book loan from $ 119448669 in the year 2015 to $ 113036461 at June end 2016. Online loan advances increased and the amount of loan was increased by 34% value. The key principal indictor for cash advances in Australia are average loan amount, total amount of principal advanced and total number of customers seeking loans. Financial matters of the organization has enough flexibility, the group has enough provision of cash flow, and it is estimated to be at $55 million as was forecasted for the year 2016. As on 31st December 2015, group hold material cash on the balance sheet (Zilgalvis, 2014). The Cash Converter introduced a deferred establishment fee and this fell outside the interest cap rate of 49%. Fee has an impact on one month and seven-month cash advance loan. Annual interest rate of seven-month cash advance loan was up to 145% and 633% of interest rate on one-month cash advance. Compared to financial year 2014 profit of $ 24.2 million, there was a loss of $ 21.5 million in the year 2015. Due to bank covenants and loss in the year 2015, organization was not able to declare dividend and an impairment charge of $ 7.6 million was recognized as a legislative and economic factor. The value of personal loan book fell to $ 104.5 million in the year 2015 (cashconverters.com, 2017).
The settlement of class action incurred a legal fees amounting to $ 3 million. It also require to $ 20 million into a special fund and all these amount will be funded from existing resources. Total amount is deductible for purpose of tax and are expenses in the current financial year. $ 23 million hit did not affect the bottom line of cash converter. After the class action was over, the price of share jumped. All the charges that was imposed on cash converter was booked in the account of 2016 and the profit of the current year and there will be impact in cash flow of the company. The share of cash converter were trading 7.6% higher in the year 2016 (Epstein & Buhovac, 2014).
Social responsibility and sustainability of financial institutions
Embedding sustainable business practices by the financial institutions as a part of ethical approach in conducting the business is utmost important. Sustainable fin ace in the financial institution can be defined as provision of risk management product and services and financial capital in such a way that it contributes to well-being and economic prosperity of community. Some of the best-practiced financial institution makes the devotion of resources for research purpose and rising the awareness of the sustainability issues with their stakeholders. Social responsibility enables the financial organizations in establishing the goals that is in the long-term development and financial interest of the society (Jancauskas, 2015).
Involvement of company in the social development is done using few set of principles. Reputation and image of financial institution can be improved with the help of corporate social responsibility and sustainability. In relation to financial sector, corporate social responsibility is socially constructed. Good corporate governance, clean production and sustainable energy in financial institutions are being increasingly recognized as potential business opportunities. Sustainability initiates by being profitable and creating value in the environmental and social spheres for economic wealth and for stakeholders (Tricker & Tricker, 2015).
Sustainability is incorporated in the financial institutions by embedding the concept in the core process of business that is decision making and risk management and supporting clean technologies. Environmental conservatism and initiatives taken for betterment of community are implemented by most of financial institution. Under a broad corporate structure of an entity, a separate organization is entrusted with the social and corporate social responsibility (Carroll & Buchholtz, 2014). Sustainability calls for financial institution to adhere to voluntary global standards such as principle of responsible investment and Equator Principle. Global Reporting Initiative is the widely used framework for reporting in sustainability and a sector supplement focuses on financial services sector. Developing reporting framework and sustainability management would prove beneficial to financial institutions.
Being socially responsible will help the financial institutions in contributing to the long-term value to the shareholders. Mission and vision of the financial companies should also be built upon the Sustainability values. They should be fundamentally committed for using the resources to contribute to environmental and economic progress.
An excellent franchisee opportunity is offered by Cash converter and pioneers into selling and buying of exceptional franchise model. There is a secured money lending as a part of financial services. For embedding social responsibility into the operations, many of the financial institutions are setting up management and governance system. Organization such as Cash converter are required to integrate social responsibility into their risk management system and screening their investments against the set criteria by development of methods. The complex sustainability challenge faced by financial institutions can be solved by robust stakeholder’s engagement in such matters. Sustainability is regarded as business opportunity and strategy and target would be set up for overall performance of business (Leeks & Luck, 2016).
Conclusion:
From the above discussion it can be concluded the Cash converter lending practice was not ethical and transformation of business model as not in the interest of its customers. Cash converter brand would be severely damaged resulting from poor customer service and unscrupulous lending practice. There is disparity between what is actually happening and management expectation of franchise operators. There is a need on part of Cash converter to practice some form of sustainability and social practice that would contribute to wellbeing of societies and communities. The business model should be transformed in such a way that it helps in addressing social and sustainability challenge.
Reference:
Annual Reports. (2017). Cashconverters.com. Retrieved 8 April 2017, from https://www.cashconverters.com/Investors/AnnualReports
Bodie, Z. (2013). Investments. McGraw-Hill.
Brigham, E. F., & Ehrhardt, M. C. (2013). Financial management: Theory & practice. Cengage Learning.
Carroll, A., & Buchholtz, A. (2014). Business and society: Ethics, sustainability, and stakeholder management. Nelson Education.
Epstein, M. J., & Buhovac, A. R. (2014). Making sustainability work: Best practices in managing and measuring corporate social, environmental, and economic impacts. Berrett-Koehler Publishers.
Gullifer, L., & Payne, J. (2015). Corporate finance law: principles and policy. Bloomsbury Publishing.
Jancauskas, R. (2015). Product liability class actions in Australia. Precedent (Sydney, NSW), (129), 23.
Lasher, W. R. (2013). Practical financial management. Nelson Education.
Leeks, A., & Luck, K. (2016). Queensland set for class actions: Practical issues and implications. Proctor, The, 36(10), 16.
Moffett, M. H., Stonehill, A. I., & Eiteman, D. K. (2014). Fundamentals of multinational finance. Pearson.
Sheffet, A. J., Flaxman, L., Tom, M., Hughes, S. E., Longbottom, M. E., Howard, V. J., … & Brott, T. G. (2014). Financial management of a large multisite randomized clinical trial. International Journal of Stroke, 9(6), 811-813.
Tricker, R. B., & Tricker, R. I. (2015). Corporate governance: Principles, policies, and practices. Oxford University Press, USA.
Zilgalvis, P. (2014). The Need for an Innovation Principle in Regulatory Impact Assessment: The Case of Finance and Innovation in Europe. Policy & Internet, 4(6), 377-392.
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