Following consultation (see: Governance News 10/07/2019), the Australian Securities and Investments Commission (ASIC) has deployed its product intervention power for the first time to ban a specific short term lending model which it considers causes 'significant' consumer detriment to retail clients.

What exactly is being banned?

The model being targeted by the regulator is used by a short term credit provider and its associate — Cigno Pty Ltd and Gold-Silver Standard Finance Pty Ltd and more recently, by MYFI Australia Pty Ltd and BHF Solutions Pty Ltd.

The model operates by:

• offering short term credit to consumers, mostly for small amounts up to $1,000. The application process is advertised as taking about two weeks
• an associate of the short term credit provider offers collateral services under a separate services agreement for a ‘fast track application’ if the consumer wants the money immediately. The fees for the collateral services are very high relative to the amount borrowed — total fees and repayments can amount to up to 990% of the loan amount 
• the money must be repaid within a maximum term of 62 days and sometimes a shorter period of time, increasing the risk of default as repayments are based on the term of the credit rather than being based on capacity to repay

ASIC notes that the model falls under the short term credit exemption and in consequence, consumers do not have a number of rights/protections which they would otherwise have (for example, the right not to be obliged to repay more than double the amount borrowed in the event of a default and the right to rely on the various other protections and provisions of the National Consumer Credit Protection Act and the National Credit Code).

Scope of the banning order

The order — ASIC Corporations (Product Intervention Order—Short Term Credit) Instrument 2019/917 — is an industry wide order made by legislative instrument and will apply to any person that attempts to use this specific short term lending model 'or variations of the model'.

The ban applies in relation to a short term credit facility entered into on or after the commencement of this instrument.

The order does not seek to modify the existing exemption for short term credit 

ASIC states that the order does not seek to modify the existing exemption for short term credit.  Instead it 'ensures that short term credit providers and their associates do not structure their businesses in a manner which allows them to charge fees which exceed the prescribed limits for regulated credit'.

When will it apply and for how long?

The order was registered with the Federal Register of Legislation on 12 September 2019 commencing on 14 September 2019 and remains in force for 18 months unless it is extended or made permanent.  ASIC can extend the order’s duration or make it permanent, but only with Ministerial approval.

Penalties

There are criminal and civil penalties for breaching the product intervention order, including up to 5 years imprisonment and fines of up to $1.26 million per offence.

Response to consultation

ASIC received 20 submissions in response to consultation: 12 submissions from financial counselling services and legal community centres, 6 submissions from industry bodies and participants, and 17 submissions from aggrieved consumers who have been affected by the use of the short term lending model.

According to ASIC, with the exception of submissions provided by current users of the short term lending model, the submissions supported ASIC’s finding of significant detriment caused by the short term lending model, and supported the making of ASIC’s proposed product intervention order.

The submission from the National Credit Providers Association (NCPA) states 'The NCPA commends ASIC for using the product intervention powers and urges the use of intervention in relation to 18(a): an individual product intervention order which applies to a person, or specified persons in relation to a class of products'.

Cash Converters also expressed support for ASIC's proposed approach in its submission. 'The identified model is clearly designed to circumvent responsible lending obligations, which should apply under the National Credit Act. Cash Converters fully support the intervention powers which will allow ASIC to eliminate any avoidance of responsible lending obligations' the submission states.

[Note: ASIC has published a full list of submissions on its website.  These are accessible here.] 

ASIC is 'ready and willing' to use its new powers

In announcing ASIC’s decision Commissioner Sean Hughes said 'ASIC is ready and willing to use the new powers that it has been given. The product intervention power provides ASIC with the power and responsibility to address significant detriment caused by financial products, regardless of whether they are lawfully provided'.

ASIC is also consulting (see: Governance News 28/08/2019) on the proposed use of its product intervention power to address consumer harm to retail clients resulting from over-the-counter binary options and contracts for difference.

Impact for industry?

ASIC's action underlines the shift in the regulatory environment post Hayne and the new tools that are available to ASIC.  In this case, although the model being banned technically fell within the short term credit exemption, the regulator stepped in because it determined that it needed to do so to prevent 'significant detriment' to consumers. 

From a practical perspective, ASIC's action underscores the need for credit and financial service providers to ensure that the products and services they offer are in line not only with letter of the law, but with customer and community needs and expectations that no longer tolerate products or distribution techniques that are harmful to customers, predatory, or which provide little or no benefit to the consumer. 

Products or behaviours that are seen to deliberately avoid substantive consumer protections are particularly at risk.

[Sources: ASIC media release 12/09/2019; ASIC Corporations (Product Intervention Order—Short Term Credit) Instrument 2019/917; Explanatory Statement; Product intervention order notice; CP 316 submissions]

Consultation on draft Design and Distribution Obligations Regulations

Separately, Treasury released draft regulations — Corporations Amendment (Design and Distribution Obligations) Regulations 2019 — for consultation.  

Announcing the consultation, Treasurer Josh Frydenberg noted that the design and distribution (DDO) regime was extended to include a broader range of financial products, including credit products prior to its passage through parliament in April of this year (see: Governance News 05/04/2019; 10/04/2019).  Mr Frydenberg said that the draft regulations reflect both the outcomes of consultation on a previous version of the regulations and the extended scope of the obligations as a result of the Financial Services Royal Commission.

The draft regulations are intended to 'ensure that the obligations operate as intended, both in relation to the range of products covered and the entities that will be subject to the new regime' Mr Frydenberg said.

[Sources: Treasury media release 12/09/2019; Corporations Amendment (Design and Distribution Obligations) Regulations 2019 - Explanatory Statement;  Corporations Amendment (Design and Distribution Obligations) Regulations 2019; Treasurer Josh Frydenberg media release 12/09/2019]