The Australian Securities and Investments Commission (ASIC) has released a consultation paper setting out its proposal for using its product intervention power under Pt 7.9A of the Corporations Act 2001 (Cth) to address the significant consumer detriment caused by specific short term lending models.

ASIC proposes to target a specific short term lending model

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. 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 week
• 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

Significant consumer detriment?

The product intervention power allows ASIC to intervene where financial and credit products have resulted in or are likely to result in, significant consumer detriment.

The model being targeted falls under the credit exemption

ASIC notes the short term credit/collateral services provided by both entities fall 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 Credit Act and Code among others).

ASIC considers that the model does cause significant consumer detriment

ASIC considers that the model, which is designed to provide short term credit at high cost to vulnerable consumers eg those on low incomes/in financial difficulty 'can and, on the evidence available to ASIC, does cause significant consumer detriment' because:

• it targets vulnerable consumers: the target market is consumers in urgent need of relatively small amounts of money, indicating the vulnerability of the target market
• costs are uncapped:the total cost payable under the credit contract and services agreement is significantly higher than the maximum charges permitted by the National Credit Act, which imposes caps on costs payable for short term and small amount lending
• there is no adequate assessment of a consumer’s capacity to meet repayments and defaulters are charged high fees: ASIC cites as an example, the fact that both GSSF/Cigno have provided credit to many consumers who were likely to default. Consumers who default are charged high fees, in excess of the maximum amount that can be charged for loans regulated by the National Credit Act
• there are high levels of repeat use, so that some consumers who use the short term lending model end up in a high cost debt spiral.

The consultation paper includes a number of case studies, based on real examples of consumers who have obtained credit and show the detriment they have suffered in consequence.

ASIC Commissioner Sean Hughes said that ASIC have 'already seen too many examples of significant harm affecting particularly vulnerable members of our community through the use of this short term lending model. Consumers and their representatives have brought many instances of the impacts of this type of lending model to us. Given we only recently received this additional power, then it is both timely and vital that we consult on our use of this tool to protect consumers from significant harms which arise from this type of product.'

ASIC's preferred action: an industry wide ban

The consultation paper outlines three proposals: 1) Prohibiting specific short term lending models which benefit from the short term credit exemption (ASIC's preferred option); 2) Encouraging the use of alternative products or action through warning messages; or 3) No change.

ASIC's preferred option is to make an industry-wide product intervention order by legislative instrument prohibiting credit providers and their associates from providing short term credit and collateral services except in accordance with a condition which limits the total fees that can be charged.In addition, should a new model emerge which seeks to circumvent the industry-wide product intervention order, ASIC will amend the existing order or introduce a new order to address the new model. Thedraft instrument is available on the ASIC website.

ASIC considers that this approach will produce the best outcomes for consumers on the basis that it will both prohibit the use of short term lending models which allow credit providers and their associates to charge fees or other charges in excess of the cost restrictions under the short term credit exemption and protect vulnerable consumers from the significant detriment caused from the use of the short term lending model.

Timeframe?

• ASIC seeks the public’s input on the proposed intervention order by 30 July 2019.
• ASIC anticipates making a decision on whether to make a product intervention order in relation to short term credit during the course of August 2019.

[Note: On 26 June, ASIC released a consultation paper outlining its proposed approach to administering its new product intervention powers: CP 313 Product intervention power. The consultation will end on 7 August.]

'Well overdue'?

In a statement, The Australian Financial Rights Legal Centre welcomed ASIC's proposed action stating that it considers that it is 'well overdue'.

'We regularly see shocking examples of people who have used these services being charged ridiculous fees. We have seen examples where these companies have demanded between 146% and 952% of the original amount borrowed. A large proportion of our clients owe 400% of the amount they originally borrowed or more. A small loan of $150 turns into hundreds of dollars within a very short time. This exploitation is way outside of the boundaries of acceptable behaviour. Many of the people we speak to end up being directed to these pay day lenders because they are struggling with other debts (like electricity or phone bills) and are unable to access credit from mainstream sources. A significant proportion are referred to these lenders after being rejected for other pay day loans because it is clear they cannot afford to repay them. Many of our clients have illnesses, disabilities or addictions. These business models blatantly exploit vulnerability and financial hardship for profit' the statement reads.