The Federal Court has today awarded record penalties totalling $18.975 million against payday lender, The Cash Store Pty Ltd (in liquidation) (TCS), and loan funder, Assistive Finance Australia Pty Ltd (AFA) for their failure to comply with consumer lending laws.
The Court handed down the penalty following its 26 August 2014 decision in ASIC v The Cash Store (in liquidation) [2014] FCA 926 that TCS and AFA failed to comply with their responsible lending obligations and that TCS had unconscionably sold "useless" consumer credit insurance (CCI) to customers (refer: 14-220MR), the majority of whom were on low incomes or in receipt of Centrelink benefits.
The penalty is the largest civil penalty ever obtained by ASIC. The decision demonstrates the importance of lenders complying strictly with their responsible lending obligations, including making proper inquiries about the consumer's income and living expenses and obtaining all necessary information to enable a meaningful suitability assessment to be made.
ASIC Deputy Chair Peter Kell said, 'This is a landmark case for the consumer credit regime and is essential reading for all credit licensees. The significant size of the penalty imposed shows ASIC and the Court take these obligations very seriously, as must all lenders, no matter how small the loan is.
'ASIC is all about making sure people taking out loans have trust and confidence in the consumer credit sector and that those offering credit obey the law. And those laws have responsible lending provisions that aim to protect consumers of credit services from taking out loans they can’t afford and to stop businesses from taking unfair advantage of vulnerable people.'
'That is why we brought this case and this is what the Federal Court has recognised with this penalty', Mr Kell said.
Background
TCS is a wholly-owned subsidiary of a Canadian company, The Cash Store Australia Holdings Inc, which is listed on the Toronto Stock Exchange. AFA is also a wholly-owned subsidiary of a Canadian company, Assistive Financial Corp.
Until September 2013, TCS operated as a payday lender with all loans being financed by AFA. It had approximately 80 stores throughout Australia and wrote approximately 10,000 loans per month of up to $2,200, each for a short period (usually two weeks or less). Typical of many payday lenders, TCS charged very high fees and interest on the loans – total fees and charges were typically around 45% of the loan amount.
The National Consumer Protection Credit Act 2009 (National Credit Act) requires credit licensees to meet responsible lending conduct obligations. These obligations were designed and implemented to protect all consumers, but particularly those who may be vulnerable to exploitation.
The key responsible lending obligation is that credit licensees or providers must not suggest, assist with or provide a credit product that is unsuitable for a consumer. Before suggesting, assisting with, or providing a new credit contract or lease to a consumer, the credit licensee (or provider) must:
- make reasonable inquiries of the consumer about their requirements and objectives in relation to the credit contract
- take reasonable steps to verify the consumer’s financial situation
- based upon these inquiries, assess whether the credit product is unsuitable for the consumer and only proceed if the credit product is not unsuitable, and
- give the consumer a copy of the assessment if requested.
In addition, the licensee must provide the consumer with a credit guide setting out certain important information about the licensee and the loan product.
The Court found TCS breached a total of seven separate provisions of the Credit Act, and that AFA breached six provisions. TCS was also held liable for the breaches of AFA by reason of its having been knowingly concerned in the breaches by AFA, pursuant to section 169 of the National Credit Act.
The maximum penalty for a corporation for breaching responsible lending and credit guide laws is $1.1million for each contravention.
In respect of the National Credit Act breaches, the Court ordered that TCS and AFA pay penalties of $10.725 million and $7.15 million respectively.
In relation to TCS's sale of CCI, the Court imposed the maximum penalty of $1.1 million following the finding that it had acted unconscionably in selling the product, in breach of section 12CB of the Australian Securities and Investments Commission Act 2001. TCS had retained income of approximately $1.3 million from the sale of the insurance.
The Court also ordered AFA to pay ASIC's costs of the proceeding.