Overview
The Australian Securities and Investments Commission (ASIC) has released a consultation paper - ASIC consultation paper 330 Using the product intervention power: Continuing credit contracts (CP 330) - setting out its proposal for using its product intervention power under Pt 7.9A of the Corporations Act 2001 (Cth) to address what it considers to be the significant consumer detriment resulting from the circumstances in which certain continuing credit contracts are marketed to vulnerable consumers.
Targeting 'payday loans' marketed to low income/unemployed people
ASIC proposes to use its product intervention power (PIP) to impose a cost cap on the total fees that can be charged under certain continuing credit contracts targeted at low income/unemployed retail clients. The proposed cost cap is intended to address what ASIC considers to be the significant consumer detriment resulting from the very high fees/charges for services attached to loans (under continuing credit contracts and accompanying service agreements) marketed to consumers on Cigno Pty Ltd’s (Cigno) website as 'payday loans', 'centrelink loans', 'bad-credit loans', 'no credit loans', 'loans for unemployed people', ‘emergency loans’ and ‘fast cash loans’.
To access these loans, customers enter into a continuing credit contract with BHF Solutions Pty Ltd (BHFS) under which they agree to pay a fixed fee for every advance of funds under the contract up to a maximum of $120 in any twelve month period.They also enter into a services agreement with Cigno, under which they pay Cigno for various services.
Combined, the fees and charges imposed under the continuing credit contract and services agreement exceed the maximum charges prescribed by the continuing credit exemption and reg 51 of the National Credit Regulations. They often exceed the total loan amount by a significant degree. In the four examples included in the consultation paper, the fees and charges to clients exceeded the original loan amounts by between 220% and 490%.
Significant consumer detriment
ASIC says that the very high cost of the loans can result in significant consumer detriment eg by impacting borrowers' ability to meet basic living expenses over an extended period; and/or 'exacerbating' existing financial stress and/or adding to financial exclusion.
ASIC considers these impacts may be 'further exacerbated' by the impact of the COVID-19 pandemic given the projected uptick in the unemployment rate.
ASIC's proposed order
ASIC proposes to make an industry-wide product intervention order banning credit providers and their associates (including directors of such entities) from 'issuing continuing credit contracts in circumstances where total fees exceed the maximum permitted under the continuing credit exemption and reg 51 of the National Credit Regulations'.
ASIC's proposed order is here.
Timeline: The due date for submission is 6 August 2020.
Initial response: CALC has welcomed ASIC's proposed use of the PIP
In a statement welcoming ASIC's proposed action, Consumer Action Law Centre CEO Gerard Brody said 'The short-term lending market is desperately in need of additional consumer protections. The evasive business model being used by Cigno to avoid responsible lending laws is yet another clear example of short-term lenders causing significant harm'.
Mr Brody went on call for the government to prioritise implementation of the Small Amount Credit Contract Bill as a means of permanently strengthening consumer protections. Mr Brody said,
'This industry is in desperate need of an overhaul to protect consumers. The only long-term answer is legislative reform that addresses this behaviour and the Federal Government needs to deliver on its commitment to the reforms recommended by the 2016 Small Amount Credit Contract Review. Over 1,300 days have passed since the Government accepted the recommendations of the review, which included a broad anti-avoidance provision. The Small Amount Credit Contract Bill, if passed, would have prevented both of these harmful lending models. It needs to be passed as a matter of priority'
[Note: The Bill referred to is the National Consumer Credit Protection Amendment (Small Amount Credit Contract and Consumer Lease Reforms) Bill 2019 (No. 2) which was introduced into the Senate by Labor Senator Jenny McAllister and Centre Alliance Senator Stirling Griff on 2 December 2019. The explanatory memorandum states that the 'Bill replicates word for word the Government’s Exposure Draft legislation, released on 23 October 2017'. The Bill was referred to the Senate Standing Economics Committee which is due to report by 21 September 2020.]
Background
- In September 2019, the Australia Securities and Investments Commission (ASIC) deployed its new product intervention power for the first time to target a specific short term lending model, used by Cigno Pty Ltd (Cigno) and Gold-Silver Standard Finance Pty Ltd, MYFI Australia Pty Ltd and BHF Solutions Pty Ltd (BHFS), that it considered caused 'significant consumer detriment' to vulnerable customers.
- Cigno subsequently applied to the Federal Court for judicial review of the product intervention order, but the order was upheld (Cigno Pty Ltd v Australian Securities and Investments Commission [2020] FCA 479). Cigno filed an appeal on 13 May 2020.
- ASIC has subsequently issued final guidance - RG 272 Product intervention power - outlining how it will use its product intervention power. The guidance makes clear that 'significant consumer detriment' may arise as a result of a product's inherent design features and/or consistent with the decision in Cigno Pty Ltd v Australian Securities and Investments Commission [2020] FCA 479, as a result of the circumstances in which the product is offered (eg marketed or targeted at) consumers.
[Sources: ASIC Media release 09/07/2020; ASIC consultation paper 330 Using the product intervention power: Continuing credit contracts (CP 330); Draft instrument; Consumer Action Law Centre 09/07/2020]
