In order to protect borrowers, regulatory control is becoming more stringent, and small loans are being subject to more stringent target market regulations. Stopping improper lending practices and ensuring that lenders judge suitability correctly are the goals of the measures.
In March 2025, following a comprehensive review of the small amount credit contract business, the Australian Securities and Investments Commission issued a strong warning to payday lenders. In a market worth $1.3 billion annually, the study identified multiple compliance issues, raising questions about whether lenders were truly protecting consumers. With civil penalties and hefty fines now looming for non-compliant providers, ASIC’s Report 805 signaled a shift from education toward enforcement and exposed systematic flaws in determining borrower eligibility.
Understanding Target Market Determinations in Consumer Lending
Target market determinations (TMDs) represent a fundamental shift in how financial products are designed and distributed in Australia. These mandatory public documents require lenders to specify precisely which consumers their products are intended to serve.
The mandate is based on the Design and Distribution Obligations (DDO), which were enacted in October 2021. According to this approach, lenders are required to show that their offerings address actual customer demands as opposed to just increasing profit margins.
A properly constructed TMD outlines specific borrower characteristics. These include income levels and employment stability. It must also identify situations where the product would be unsuitable. Examples include people whose income is below protected thresholds or those who are already dealing with a number of debts.
Additional protections were added in 2022 and 2023 by the Financial Sector Reform Act. Particularly, small amount credit contracts (SACCs) were the focus of these measures. For loans up to $2,000 with periods ranging from 16 days to 12 months, stricter conditions are now in place. Regulators are aware that borrowers who use these products frequently have serious financial vulnerabilities.
Regulatory Review Exposes Industry Shortcomings
Significant shortcomings in lender compliance on several fronts were found during ASIC’s inquiry. The data indicates that certain suppliers either purposefully avoid consumer protections or have a basic misunderstanding of their responsibilities.
Unsuitable Lending Practices
Investigators documented instances of lenders offering alternative products to consumers who failed to qualify for small amount credit contracts. Some lenders urged consumers to take on more credit than they had originally asked for. This begs the question of whether these offerings actually benefited the interests of the customers.
Templated assessments are widely used, according to the review. These failed to account for individual borrower circumstances. This standardised approach contradicts the core principle of responsible lending.
Strategic Product Repositioning
Analysis revealed a concerning trend of lenders shifting borrowers from small loans covered by strict consumer protections into medium amount credit contracts (MACCs). These carry fewer safeguards. The data demonstrates a clear pattern: small amount credit contracts declined from 80% of total loans in December 2022 to below 60% by August 2023.
This shift coincided with a notable spike in missed repayments for medium amount credit contracts. Defaults on small amount credit contracts decreased during the same period. The timing suggests lenders may be restructuring their product offerings to avoid regulatory requirements.
Deficient Target Market Documentation
Examination of lender TMDs revealed documents that failed to meet basic regulatory standards. Many simply reproduced legislative definitions without describing actual product features or identifying genuine target customers.
Consumer descriptions lacked meaningful detail. They often encompassed such broad categories that they provided no practical guidance. Review triggers were frequently too vague to prompt corrective action.
Consumer Protections Under Strengthened Regulations
For borrowers who are having financial troubles, the improved regulatory system offers multiple levels of protection. Customers can spot instances where loan practices violate the law by being aware of these protections.
According to recent changes, some needy borrowers’ total repayments cannot be greater than 10% of their income. This particularly applies to those receiving Centrelink payments. This income protection mechanism aims to prevent consumers from accepting loans that inevitably lead to financial hardship.
Fee caps receive stricter enforcement under the current regime. Lenders face limits of 20% establishment fees plus 4% monthly fees. Total charges cannot exceed 48% of the principal amount over 12 months. ASIC has demonstrated willingness to pursue substantial penalties for fee violations. The $16 million judgment against Ferratum Australia evidences this commitment.
Consumers retain rights to challenge unsuitable lending decisions through financial counselling services and dispute resolution mechanisms. Financial counsellors can advocate for borrowers who believe they received inappropriate loan products.
Industry Compliance Requirements
ASIC has articulated clear expectations for lenders operating in this sector. Providers must substantially revise target market determinations to include meaningful product descriptions and specific consumer characteristics.
Target market definitions require narrowing beyond generic categories. Lenders must specify income ranges and employment types. Financial circumstances must genuinely align with product features and risk profiles.
Monitoring systems must capture early warning signals. These include complaint rates and default trends. Distribution patterns outside defined target markets should also trigger investigation. These mechanisms should prompt immediate corrective action when problems emerge.
Through Federal Court proceedings, the agency is still pursuing enforcement procedures against a number of lenders. These instances demonstrate ASIC’s dedication to holding suppliers responsible for noncompliance that harms consumers who are at risk.
Alternative Credit Options for Financial Emergencies
Borrowers facing urgent financial needs can access several alternatives to high-cost short-term credit. Understanding these options enables more informed decision-making during financial stress.
Government and Community Programs:
- For necessities, the No Interest Loan Scheme (NILS) offers loans up to $1,500 with no fees or interest.
- Advance payments are available to eligible Centerlink recipients to help with urgent costs.
- Most utility providers operate hardship programs offering payment plans and bill relief
- Community organisations deliver emergency assistance for specific needs
Traditional Financial Products:
Compared to payday lenders, credit unions and community banks provide small personal loans at far lower rates. A lot of organisations offer hardship items made especially for members who are momentarily struggling financially.
Demand for emergency credit is often driven by budgetary difficulties. Conventional budgeting models, such as the 50-30-20 rule, often do not take entry-level salary realities into account. According to Loan Owl data, this economic climate may encourage borrowers to choose expensive loan options.
Support Resources:
- Free financial counseling is available at the National Debt Helpline, 1800 007 007
- ASIC’s MoneySmart website: Alternatives and Loan Cost Calculators
- Financial Counseling Australia: Find nearby providers
- Consumer Action Law Centre: Legal support for credit matters
Broader Implications for Consumer Credit Regulation
These changes in regulations point to a major change in Australian consumer credit laws. Regulations for “buy now, pay later” products will also take effect in June 2025. Consumer outcomes are being prioritised by regulators over industry convenience.
Instead of focusing on procedural compliance, the new approach prioritises substantive protection. Lenders have an obligation to prove that their goods actually help customers. Meeting technical paperwork requirements alone no longer suffices.
ASIC’s 2026 surveillance priorities include monitoring lender responses to these requirements and identifying new avoidance strategies. The regulator has committed resources to ongoing review of the small amount credit sector.
International regulatory trends support this direction. Jurisdictions including the United Kingdom and New Zealand have implemented similar restrictions on high-cost short-term credit following evidence of consumer harm.
Regulatory Outlook
The cleanup of Australia’s small loans market represents a critical evolution in consumer credit regulation. Reputable short-term credit meets real demands. But delivery must put the needs of the borrower ahead of the interests of the lender.
Rather than experiencing sporadic crises, many consumers who apply for modest loans struggle with ongoing financial limitations. Restricting access to credit may not be as successful as addressing underlying financial stress through financial capacity and income assistance programs.
The regulatory reaction is still changing as ASIC keeps an eye on industry adaptability and compliance. Lenders who show a sincere interest in customer outcomes ought to succeed in this setting. Reputational harm and increased enforcement action await those who persist in inappropriate lending practices.
Borrowers are better protected against predatory lending when there is more regulatory oversight. Better financial decisions can be made during difficult circumstances when one is aware of these protections and the options that are accessible.
Loan Owl highlights that coordinated policy solutions are necessary for real change. Both financial literacy and adequate income must be covered by this. For Australian consumers to be protected, access to reasonably priced lending options is still crucial.
