Cash Converters tanks

The class action lawsuit that sent the payday lender's share price tumbling in today's trade once again illustrates the legal and regulatory threats to the business.

Australia’s largest pawn shop and payday lending chain suffered its biggest sell-off in four months after it was blind-sighted by a class action lawsuit launched in New South Wales.

The stock crashed close to 6% to $1.18 this afternoon when Cash Converters International (CCV) said it would defend itself against the lawsuit that is spearheaded by Maurice Blackburn on behalf of an “unnamed group” of borrowers alleging that the deferred establishment fee charged on loans made by the company were illegal.

This isn’t the first legal/regulatory threat that has rocked Cash Converters share price. The previous government’s efforts to tighten the rules around payday lending have weighed on the stock a number of times since 2011.

Interestingly, management have provided plenty of testimonials from happy payday borrowers to dissuade the then Labor federal government from putting too many conditions on the industry.

Cash Converters must have missed out this unhappy group in NSW, and in many respects, the company faces similar issues to salary packaging company McMillan Shakespeare (MMS).

The payday lending rules uncertainty has been settled as the legislation was announced earlier this year, and tax changes for work vehicles have been scrapped by the new government.

However, these are industries that are very prone to future changes to the legislative and regulatory environment. As such, investors should be wary of paying a premium for such stocks, despite the very good track record of the management teams of both Uncapped 100 companies.

Cash Converters is the second worse performing stock on the Uncapped 100 today.  

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