The Australian Securities and Investments Commission (ASIC) is consulting on proposals to make two separate product intervention orders - a short term credit product intervention order and a continuing credit contracts product intervention order - to address what it considers to be the likely/actual 'significant consumer detriment' caused by certain lending practices.
The due date for submissions is 21 January 2022.
Why the proposed orders are considered necessary
With respect to the short term credit product intervention order, ASIC raises concerns that if the proposed order is not made, entities may resume or start issuing credit facilities of the type banned by the 2019 order - ASIC Corporations (Product Intervention Order—Short Term Credit) Instrument 2019/917 (summarised) - that expired in March 2021. ASIC observes that two companies registered in March 2021 – BSF Solutions Pty Ltd and Cigno Australia Pty Ltd – may already be issuing short term credit facilities of this kind.
ASIC further observes that providers of the products targeted by the 2019 order, subsequently switched to issuing continuing credit contracts of the type being targeted by the proposed continuing credit contracts product intervention order.
In light of this, ASIC's view is that both orders are
'necessary to stop the likely impact of significant detriment occurring in both the short term credit and continuing credit markets to retail clients'.
The proposed short term product intervention order
The 2019 order targeted a specific lending model which benefitted from the short term credit exemption and which ASIC considered resulted in significant detriment to retail clients.
Broadly, the order banned the charging of collateral fees/charges by short term credit providers and/or their associates, in 'circumstances where the credit fees and charges under the credit contract and the collateral fees and charges under a collateral contract, together, exceed the limits in the short term credit exemption'.
ASIC proposes that the new order would be drafted in similar terms to the 2019 order with some refinements. For example:
- ASIC proposes that the new order will define credit fees and charges and interest charges to make it clear which fees are captured by the conditions
- ASIC also proposes that the new order will specify that the credit fees and charges, interest charges and other fees and charges that are captured are only those that are paid or payable by a retail client.
The full text of the proposed order is here.
The proposed continuing credit contracts order - targeting 'payday loans' marketed to low income/unemployed people
Separately, ASIC also proposes to prohibit the use of certain continuing credit contracts that it also considers cause 'significant consumer detriment' to vulnerable customers.
Broadly, ASIC proposes to impose an industry wide product intervention order that would impose a cost cap on the total fees that can be charged under continuing credit contracts targeted at low income/unemployed retail clients as set out in Consultation Paper 330 Using the product intervention power: Continuing credit contracts (CP 330) (summarised here) and the Addendum to CP 330 on which ASIC previously consulted.
In putting forward its proposal, ASIC makes clear that the proposed order does not seek to prohibit providers of continuing credit contracts from continuing to rely on the continuing credit contracts exemption in s6(5) of the National Credit Code, only that they comply with the conditions in the proposed order.
Proposed drafting changes
Though similar to the proposed order previously consulted on, ASIC's current proposal differs in some respects. For example:
- The definition of buy now pay later arrangements has been amended and the scope of the exemption broadened
- The definition of collateral contract has also been amended to state that it is a 'contract or arrangement (without limitation) for the continuing credit provider or an associate to provide services to the retail client in relation to the continuing credit contract'
- The proposed order now also makes clear that the fees and charges prohibited under the order are only those fees and charges that are paid or payable by a retail client
The full text of the proposed order is here.
ASIC has cautioned that it may take further action if needed
As flagged, ASIC observes that the lending model being targeted by the proposed continuing credit contracts order appears to have been introduced into the market after ASIC made the 2019 order. That is, that the providers appear to have adapted their lending model to circumvent the 2019 order.
ASIC makes clear that it will not hesitate to take further action if (assuming the proposed orders are made), businesses adopt a similar course. ASIC states:
'Given the history of this issue, it is possible that businesses may seek to develop new models to circumvent the operation of the order. For example, businesses may seek to characterise themselves as buy now pay later arrangements but adopt models that have resulted in, or will or are likely to result in, significant detriment to retail clients. If this occurs, ASIC will consider further action as necessary, including amending the order'.
Next steps
The due date for submissions is 21 January 2022.
Subject to feedback on the consultation and subject to the Minister's written approval, ASIC proposes to make the short term credit product intervention order some time between January and March 2022.
Subject to feedback on the consultation, the proposed timeframe for the continuing credit product intervention order is also some time between January and March 2022.
[Sources: ASIC media release 09/12/2021; CP 355 Product intervention orders: Short term credit and continuing credit contracts; Attachment 1 to CP 355; Attachment 2 to CP 355]
