Ethical Analysis Of The Lending Practices Of Cash Converters

Discussion

Cash converter is Australia’s one of the biggest pay lender that was accused of charging exorbitant interest rate and higher fees on short term loans.  The lending system followed by company as not responsible and it did not comply with the legislation. It was found that Cash converter breached the responsible lending practice with small amount of credit contracts. Despite the laws which made the restriction of interest rate of pay day loans to 48% comprising of the upfront fees, Cash converter was charged with charging an interest rate of .633 % on short-term loans in the year 2015 and fees in excessive amount. The biggest pay lender transformed the business model and it involved an early repayment election where borrowers were asked to sign a number of documents (Aitken 2013). A major class action was launched by federal court against the company

It was emphasized by cash converter that that lending practice followed would come with approach that is more personal and is in response to the changed legislation. A legal class action was charged against the cash converter by federal court because it was alleged of charging substantial higher fees on short-term loans and higher extortionate interest rate on the amount of loan given to the borrower. Organization faced several compliance issues, as the lending system was not aligned to them and the credit contract was of small amount and breaching of the responsible lending practice as disclosed by investigation. A legal fee of $ 3 million was incurred on Cash converter in response to settlement of the class action by the court (Gullifer and Payne 2015). All the charges booked in response to 2015 class action was recorded in the books of account in the year 2016. Charging high amount of brokerage fees was against the legislative principle. There was an overstatement of financial workings and the company agreed to pay another amount of $ 23 million as the proceedings of the settlement of the class action (Hahn and Kühnen 2013).

Discussing the issues faced by the organization relating to the lending practice is discussed using two ethical theories that is deontological class of ethical theories and justice ethical theories. Decision maker should adhere to obligations and duties as per the deontological theories. Ethics plays a very crucial role in the decision making process of the company. One of the thing that is considered ethically correct as per this theory is upholding of one’s duty as the obligations of an individual is followed from one company to another. Organizations, which do not adhere to the lending practice that is considered responsible, are under penalty threat. Cash converter lending practice is regarded as unethical because it has circumvent the law and has deceived the borrower by charging interest rate that are unreasonably higher and against the rule (Leeks and Luck 2016).

Another theory is justice ethical theory that emphasizes on the actions that are considered fair to people who are part of the organizations. As per this theory also, lending practice of cash converted is considered as unethical because it intended to take the advantage of vulnerable customers not having the capacity of making repayment. Company did not incorporate ethical practice in carrying out business and made profits by breaching the framed legislation (Loreggia et al. 2017).  Therefore, Cash lender business practice was regarded unethical and unjustifiable.

Part a)

Cash converter in its financial statements recorded several charges of the company such as upfront, brokerage fees, and other interest income. All such items was recorded in the statement of profit and loss under the heading income from short-term loans. Such entry could have been made under the section income from services, which was not shown separately. The overstatement of the financial working was depicted in the exorbitant interest rate charged on the short-term loans. There was an unethical practice by the company as it took undue advantage of the low-income people. Cash converter was not carrying the business ethically as no proper due diligence was carried out before providing loan to the people. The company from the borrowers did not seek requirement of right amount of loan. There was compliance issues with the credit assessment process and Cash converter was involved in breaching the responsible lending practice (Montiel and Delgado 2014).

Cash converter experienced an increase in the personal loan book of amount 113036461 at June end 2016. There was 34% increase for loan and loan advances. Post the unethical lending practice, cash converter has enough cash provision and the estimated amount was $ 55 million. Cash converter introduced a deferred establishment fees and the percentage charged was outside the interest rate cap. On one-month cash advance, there was an increase in the annual interest rate of 633% and seven-month loan of 145% (Tricker and Tricker 2015). Year 2015 recorded a loss of $ 21.5 million compared to profit of $ 24.2 million in the year 2014. In the year 2015, there was a fall in the value of personal loan book to $ 104.5 million. Post to class action, there was a downtrend in the price of share and this accounted to half the price in the year 2015. Until 2014, the share price of Cash converter traded between $ 0.80 to $ 1.88. However, there was a jump in price of the share of company by the end of year 2016. This would have impact on the cash flow of the company. In the year 2016, share price of company was trading 7.6% higher (Morabito and Ekstein 2016).

Cash converter share price:

(Source: created by author)

Welfare of the economy is a part of the social responsibility of financial institutions. In order for the financial institutions to achieve lasting value for investor and making sustainable competitive practice, there is a need to incorporate sustainability practice in carrying out business activities. It is attempted by some of the organizations to devote the resources in making the sustainability issues aware with the shareholders and for purpose of research. Provision of financial capital and management of risks concerning the products offered by financial institution is regarded as the practice of sustainable finance. In the recent years, there is an increase in the awareness of the sustainability practice and contribution to social responsibility as a part of business practice of the financial institution. A fast growing and crucial demand for financial functioning instruments is created by sustainable development of economy and society (Oosterveer 2015). This is one of the vital area that applied to the financial market policy. It is the responsibility of the financial sector to ensure satisfaction to the customers by way of protecting their financial interest.

Part b)

A financial institution would be able to improve its image and reputation by embedding sustainability and social practice in its business activities. Some of the potential business opportunities that is being recognized in this area are clean production, good corporate governance and sustainable energy. Financial institutions are able to start the process of sustainability by value creation in the social and environmental spheres for economic wealth of stakeholders and by being profitable. There are some of the voluntary global standards such as equator principle and principle of responsible investment. Development of sustainability management and reporting framework would prove profitable to financial institution, as they would carry their business activities accordingly and maintaining their reputation (Schøyen and Sow 2015).

The lending practice of Cash converter was regarded as unethical as charging interest rate buoying the fair and prescribed limit posed a threat to economic well-being of people and society. Hence, the responsibility of Cash converter to carry out its business activities that are in the financial interest of customers. It should not indulge in any such practice that would hamper its reputation in the market and this is so because it would influence the overall business growth and financial position (Wee et al. 2013). It is quite essential for organization like Cash converter to have set criteria for screening their investments using the method of development and integrating the practice of social responsibility in the system of risk management. The objective of maximizing the profits of the company should be aligned with the ethical principle and practice. Value of shareholders should not be maximized by duping the customers and not carrying due diligence in providing loans. The overall performance of business also results from sustainability practice that is considered as business opportunity (Slade 2015).

Conclusion:

It can be concluded from the above discussion of the case of Cash converter that the lending practice followed by the financial institution was unethical. Business model transformation against the changed legislation measures was against the financial interest of its clients. The reputation of cash converter would be severely damaged due to unscrupulous lending practice and poor customer service. In response to the class action by federal court against the company, Cash converter is required to incorporate sustainability practice for economic well-being of communities and society. Transformation of the business model should be done so that the sustainability social challenges are addressed.  

Reference:

Aitken, R., 2013. Finding the Edges of Payday Lending. Perspectives on Global Development and Technology, 12(3), pp.377-409.

Gullifer, L. and Payne, J., 2015. Corporate finance law: principles and policy. Bloomsbury Publishing.

Hahn, R. and Kühnen, M., 2013. Determinants of sustainability reporting: a review of results, trends, theory, and opportunities in an expanding field of research. Journal of Cleaner Production, 59, pp.5-21.

Leeks, A. and Luck, K., 2016. Queensland set for class actions: Practical issues and implications. Proctor, The, 36(10), p.16.

Loreggia, A., Rossi, F. and Venable, K.B., 2017. Modelling Ethical Theories Compactly.

Montiel, I. and Delgado-Ceballos, J., 2014. Defining and measuring corporate sustainability: Are we there yet?. Organization & Environment, 27(2), pp.113-139.

Morabito, V. and Ekstein, J., 2016. Class Actions Filed for the Benefit of Vulnerable Persons–An Australian Study.

Oosterveer, P., 2015. Promoting sustainable palm oil: viewed from a global networks and flows perspective. Journal of Cleaner Production, 107, pp.146-153.

Schøyen, H. and Sow, H., 2015. A decision making tool concerning retrofit of shaft generator frequency converter. Ocean Engineering, 109, pp.103-112.

Slade, B., 2015. The social value of class actions. Precedent (Sydney, NSW), (129), p.4.

Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.

Wee, V., Bert, W. and Roeser, S., 2013. Ethical Theories and the Cost–Benefit Analysis-Based Ex Ante Evaluation of. Transport Reviews, 33(1).