Pawnshop and payday lending business Cash Converters International Ltd (ASX: CCV) requested that its shares be placed in a trading halt last week and it was later revealed to be related to a class action being filed against it. The shares have been smashed today as a result.
The class action, which is reportedly seeking to recover $30 million for the affected customers, relates to personal loans issued by the company's subsidiaries in Queensland during the period of 30 July 2009 to 30 June 2013.
It is alleged that in an effort to sidestep the northern state's laws capping interest rates for personal loans at 48% per annum, Cash Converters began charging exorbitant "brokerage fees" which it did not charge in any other state.
The company noted that the brokerage fee system has not been used since 30 June 2013 and that the authorities were fully aware of the system in place, raising no objection either at the time it was introduced or at any other time during its use. It said: "The Company is satisfied that the brokerage fee is not contrary to any Commonwealth or Queensland legislation. It was a system commonly used by the financial services industry in Queensland."
As such, it is confident that the class action being lodged against it has "no prospects of success", stating that it will 'vigorously' defend the action.
Management's confidence didn't translate to the rest of the market however which absolutely hammered the stock upon its return to normal trade. In fact, the shares fell as much as 18.6% to a fresh three-year low of just 57 cents, representing a fall of more than 51% since its February peak.
Regardless of whether or not the class action actually succeeds, investors are becoming increasingly anxious about their exposure to the payday lending industry. Indeed, the industry has been subject to plenty of controversy in recent times while it is also subject to intense regulation which could potentially hinder the future prospects of payday lenders. Notably, Money3 Corporation Limited (ASX: MNY) has also fallen 36% over the last six months although its shares have remained flat today.
Although Cash Converters could be a good pick-up at today's discounted price, investors with a low appetite for risk may want to avoid the stock, for now.
