Designing good regulation is difficult. When the Queensland government was concerned about payday lending, it decided to cap the annual interest rate that such lenders could offer at 48%. But as a story on this morning’s ABC radio illustrates, capping interest rates is easier said than done.
Apparently a Queensland payday lender was getting around the interest rate cap by a series of contracts that supposedly related to diamond purchases and sales. To put it simply, the borrower agrees to buy $2000 worth of diamonds from the lender (presumably with the payment due in the future) and simultaneously agrees to sell those same diamonds back to the lender for $1000 (with immediate payment). The borrower walks away with $1000 but has a $2000 debt, payable at a future date. As this is a diamond transaction, not a financial transaction, the payday lender was hoping to avoid the relevant legislation. The matter is currently before the courts.
The lesson here is a common one. Businesses have strong incentives to get around regulations that limit their profit. Well-meaning regulation that is not fully thought through will, at best, be benign and, at worst, will harm those people it is meant to protect.