ASIC has taken legal action against what it claims is an elaborate diamond trading scheme designed to avoid the operation of the consumer credit laws.

Proceedings have been filed in the Federal Court of Australia in Brisbane against Fast Access Finance Pty Ltd, Fast Access Finance (Beenleigh) Pty Ltd and Fast Access Finance (Burleigh Heads) Pty Ltd.

ASIC alleges the Fast Access Finance (FAF) companies engaged in unlicensed credit activities and has sought civil penalties orders against the companies, as well as compensation for six consumers.

The FAF companies operated under a business model where consumers seeking small value loans (of amounts generally ranging from $500 to $2,000) were required to sign documents which purported to be for the purchase and sale of diamonds in order to obtain a loan.

ASIC alleges in its claim that the purchase and sale of diamonds was a pretence as there were no diamonds involved in the transaction and consumers had no intention of buying or selling diamonds. Rather, the diamond purchase and sale contracts were designed to camouflage what, in reality, were loan transactions to which the National Consumer Credit Protection Act 2009 (National Credit Act) applied.

ASIC claims the diamond contracts were devised with the intention of avoiding consumer credit legislation, in particular the 48% per annum interest rate cap that previously applied in Queensland.

By operating in this manner after the July 2010 commencement of the national consumer credit laws, ASIC claims the FAF companies were seeking to avoid the requirement to hold a licence for their lending activities.

Deputy Chairman Peter Kell said, ‘When ASIC identifies business models or schemes that are intended to avoid obligations imposed by the consumer credit legislation, we will take action.'

‘ASIC is committed to maintaining the integrity of the credit industry and the licensing system by ensuring businesses conduct themselves within the confines of the laws, which are intended to protect consumers. Payday and small amount lenders can expect ASIC to take action where they engage in this type of avoidance behaviour’, Mr Kell said.

The Fast Access Finance proceedings are listed for a directions hearing in the Federal Court in Brisbane on 20 September 2013.

ASIC's MoneySmart website has more information on payday loans.

Background

ASIC alleges the FAF companies engaged in unlicensed credit activities in contravention of section 29 of the National Credit Act. The court may impose a penalty of up to $1.1 million for each contravention of section 29.

Under the diamond purchase contract model used by the FAF companies, a consumer wanting to borrow, for example, $500 would 'purchase' 4 diamonds at a price of $250 per diamond from an FAF company, with payment of the $1,000 purchase price being deferred and paid in a number of future instalments. Under the diamond sale contract, signed at the same time as the diamond purchase contract, the consumer would 'sell' the same diamonds at a price of $125 per diamond and would receive the $500 proceeds of the sale. The practical effect of the contracts was that the consumer would receive $500 but would incur a $1,000 debt to the FAF company and therefore pay an additional charge of one dollar for every dollar borrowed.

ASIC became the national regulator of consumer credit in July 2010, with the commencement of the National Credit Act. The National Credit Act requires persons to hold a credit licence to engage in credit activities such as the provision of loans. It also imposes certain obligations on licence holders to improve consumer protection and deter predatory lending practices, such as general conduct obligations, responsible lending obligations and the requirement to have internal and external dispute resolution procedures.

Recent amendments to the National Credit Act have introduced additional provisions for small amount loans to address concerns about the use of payday and small amount loans, particularly the risk of consumers falling into a debt spiral (i.e. multiple small amount loans, refinancing an existing loan before it is paid out, or increasing the credit limit). A small amount loan, in general terms, is a loan where the amount borrowed is $2000 or less and the term is between 16 days and one year. From 1 July 2013, only the following fees can be charged on small amount loans:

• a monthly fee of 4% of the amount lent

• an establishment fee of 20% of the amount lent

• Government fees or charges

• enforcement expenses, and

• default fees (the lender cannot recover more than 200% of the amount lent).

Editor's note 1:

On 15 October 2013 the matter was heard in the Federal Court in Brisbane. It has been adjourned for a further directions hearing on 7 February 2014 when a strike out application from the respondents against ASIC's statement of claim will also be heard. The matter has been listed for 10 day hearing starting on 14 July 2014.

The trial was part heard from 14 July 2014 until 18 July 2014.

Editor's note 2:

On 18 July 2014 the hearing was adjourned until 25 August 2014 when the last witness will provide evidence and final submissions will be made.

Editor's note 3:

On 25 August 2014 the final witness provided his evidence, the parties closed their cases and made their closing submissions. Judgment has been reserved.