George (not his real name), a single dad in Melbourne, says things had gotten "bloody hard" when he decided to use a pawnbroker to get help with a bill. He borrowed $300 using his $2000 Tag Heuer watch.
The watch was pawned at a monthly interest rate of 40%. That's equal to a 480% annual interest rate – 10 times higher than the 48% limit set out in the Consumer Credit (Victoria) Act 1995.
When George went to pay off his loan and get his watch back, the store was closed. The business had been operating without a licence and had suddenly shut, with all its customers' goods still inside. George was going to give the watch to his son as a 21st birthday present.
George says he isn't surprised that his pawnbroking experience turned sour. He believes the industry should be regulated to stop people like him being ripped off.
"If it was the politicians' goods that were in there all hell would break loose," he says.
Pawnbroking is under regulated and underreported
The National Consumer Credit Protection Act 2009 says the code "does not apply to the provision of credit on the security of pawned or pledged goods by a pawnbroker in the ordinary course of a pawnbroker's business".
Effectively, that means that pawnbrokers are largely exempt from the Act's protections, and are instead primarily governed by the states.
This is an "anomaly", according to Dr Lucinda O'Brien, a researcher at The University of Melbourne's Centre for Commercial Law. She says it is odd that "this industry is still regulated at the state level when all other similar forms of short-term credit are regulated at the federal level".
But O'Brien says a lack of information and data on pawnbroking in Australia makes it hard to say what should be done and what needs to change.
Credit provided for pawned goods is largely exempt from the protections that other short term loans must provide.
What don't we know?
The US and the UK both have industry bodies that govern the pawnbroking industry (also known as the pawn lending industry) and there is public data in both jurisdictions that shows the size of the industries and records how they change over time.
We don't have those insights here in Australia, but given the cost-of-living crisis and the increasing financial stress people are under, it is reasonable to wonder if the use of pawnbrokers is on the rise in Australia. O'Brien says that in the US and the UK, pawn lending has become more prevalent.
"We know that for a fact, and I think it would be highly likely that if we collected similar data here in Australia, it would show the same thing," she says.
Given the cost-of-living crisis and the increasing financial stress people are under, it is reasonable to wonder if the use of pawnbrokers is on the rise Australia
But without data, researchers can't say for sure. What we can look at though is the annual reports from Australia's largest pawn lending business. Over the past year, revenues at Cash Converters increased by 26%.
"It makes sense that this is a response to the increasingly extreme levels of hardship that we've seen in this country in the last year or so," says O'Brien.
Cash Converters did not reply to our request for comment.
O'Brien recently co-authored a study on pawnbroking in Australia that called for the government to start gathering and publishing data on what she describes as an "opaque industry".
"At the moment, we're forced to go back to reports by consumer advocates published in 1997 and 2000."
First Nations consumers feeling the pain
A recent report from the Consumer Action Law Centre, Money Yarns, Stronger Futures, found First Nations people are increasingly turning to the "friendly people" at their local pawnbrokers for quick loans against their valued possessions.
The report's author, Shelly Hartle, says pawnbrokers can have good reputations in local communities. "They're locals and they're friendly, and they're well trained in customer service," she says.
"They're the people who will give the money when no one else will, so they're seen as 'my mates' because the buy now, pay later [BNPL] mob or the bank said no."
When a person is in that paycheck-to-paycheck lifestyle, that ability to see the big picture is reduced
Shelly Hartle, Consumer Action Law Centre
The Consumer Action policy officer says that the people she spoke to reported good experiences, such as being offered 12-month extensions on their pawn loans. "That sounds really positive and I'm sure it feels really positive to the individual. When you look at it in terms of credit, that's just keeping them in the debt cycle and never getting out."
One person Hartle spoke to had pawned their iPad for less than $500. They made a monthly interest payment of $90 over the next two years. In total, they would have paid between two and four times the value of the original loan in interest alone.
"When a person is in that paycheck-to-paycheck lifestyle, that ability to see the big picture is reduced," says Hartle.
Work needs to be done with community to get the best outcome
Like Melbourne University's Dr O'Brien, Hartle believes we need to understand more about the market before any reform takes place.
"How do we find the balance of protecting consumers and making this unregulated form of credit safer … whilst also ensuring people aren't caused additional harm because they no longer have access to ready cash?"
Hartle says that more work needs to be done to understand who's accessing the market, and why. Then work can be done with affected communities to develop the reform that is needed.
"Any changes to legislation or reform for First Nations people, it has to be done with First Nations people," she says.
Regulation of BNPL loans may translate to an increase in business for Cash Converters and other pawnbrokers.
Regulation of BNPL may drive more people to pawnbrokers
The government has introduced new legislation that would regulate BNPL providers like Afterpay, Zip and Humm. CHOICE has welcomed intervention in this space, but remains cautious about some of the reform's shortcomings.
One risk is that the regulation sends consumers to other, less regulated, forms of credit – like pawnbroking.
Vulnerable consumers who are already familiar with pawn lending may increase their reliance on it, while reducing their usage of more regulated services
In an August 2022 investor presentation Cash Converters said, "Regulation risk for unregulated lending sectors (e.g. BNPL) presents opportunities". In other words, they think they will benefit from the regulation of BNPL products.
"It's an ongoing challenge for regulators and it's something that we've seen again and again," says O'Brien.
"When a new form of regulation is brought in or regulations are amended, the industry evolves.
"There is a risk if you tighten up regulation in one part of the industry, it's going to push the most vulnerable people into another area of the industry."
This can be particularly risky with pawn lending, O'Brien says, because there is overlap in consumers using BNPL products, payday loans, and pawn lending. She adds that vulnerable consumers who are already familiar with pawn lending may increase their reliance on it, while reducing their usage of more regulated services.
So, what can we do?
To help in the short-term, O'Brien suggests users of pawn loans could be given access to the Australian Financial Complaints Authority (AFCA). Currently, pawn users have to go to court if something goes wrong. O'Brien thinks that can be intimidating for lots of consumers, and is not viable for what can be quite a small amount of money.
She says being able to access AFCA "would give them access to some form of redress if the pawn lender they were dealing with did the wrong thing".
Currently, pawn users have to go to court if something goes wrong
Hartle also says a public inquiry is needed. Her report recommended an independent public inquiry "to examine and assess the current size, operation, business models, conduct and consumer outcomes and the impact that the industry is having, specifically, on the lives of First Nations people and communities".
Pawnbroking can have a "devastating impact"
Pawnbroking is a uniquely personal form of credit. While the size of the loan might not be huge, people pawn items that can have enormous personal value: guitars, jewellery, watches.
"If you're a musician and you pawn your instrument, it might not have a high resale value, but without it, you can't do your job, you can't do the thing that you enjoy doing most in your spare time," says O'Brien.
"It could have a devastating impact on a person, well beyond the financial impact."
The pawnbroker George accessed has since re-registered and resumed trading. But George hasn't got his watch back. He says, "I used to love the bloody thing. I haven't been able to wear it for a year. I haven't even been able to see it."
He says he won't use pawnbroking again. "Honestly, I wouldn't go near one ever again. Even if I was struggling that bad, I just, I'd hold off."
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