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15-044MR Allianz agrees to refund $400K in 'useless' payday insurance premiums
Following concerns raised by the Australian Securities and Investments Commission (ASIC) Allianz Australia Insurance Ltd (Allianz) has agreed to refund consumers $400,016 in insurance premiums. The insurance was sold by The Cash Store Pty Ltd (in liquidation) (TCS) alongside payday loans issued to the consumers.
The agreement follows earlier court action by ASIC against TCS, in which the Federal Court found that TCS had acted unconscionably in selling a consumer credit insurance (CCI) product. The insurance covered consumers against the risk of becoming unemployed, sick or dying during the period of the payday loans, which could be as short as one day.
Between August 2010 and March 2012:
- TCS sold CCI to 182,838 customers
- these customers paid $2,278,404 in premiums for cover, and
- only 43 claims were paid to consumers, totalling only $25,118.
Her Honour Justice Davies concluded, at paragraph  of her judgment, that:
I accept ASIC’s submission that CCI was unlikely to be of any use to customers for a payday loan and certainly useless for those who were unemployed, a fact that must have been known to TCS … The CCI was almost invariably inappropriate to offer to payday lending customers because it was very unlikely to be of any use to them.
The Federal Court imposed the maximum penalty, of $1.1 million, on TCS for engaging in unconscionable conduct in breach of section 12CB of the Australian Securities and Investments Commission Act 2001. The total penalty on TCS and the loan funder (Assistive Finance Australia Pty Ltd) was $18.975 million, which included penalties for systemic breaches of the responsible lending requirements under the National Consumer Credit Protection Act 2009.
Deputy Chairman Peter Kell said, 'The sale of payday loans and insurance by TCS was targeted at low-income consumers. This included sales to vulnerable consumers who were not working and were therefore unable to claim under the unemployment cover. ASIC will not hesitate to take action where there is systemic unconscionable conduct such as this.'
Allianz was the insurer for the CCI product between August 2010 and March 2011. During this period, TCS collected $400,016 in premiums. Allianz has agreed to refund these amounts to consumers, together with interest, even though it received a lesser amount from its underwriting agent at the time.
Allianz has also agreed to appoint an independent external firm to review its supervision of third parties to address the risk of this type of conduct occurring again.
Deputy Chairman Peter Kell also said, 'Allianz has acknowledged that the terms of the insurance, and the way in which the insurance was sold by TCS, were not acceptable. Allianz has cooperated with ASIC to resolve our concerns quickly, and provide refunds to consumers.'
ASIC's inquiries into the sale of CCI by TCS and the role of other entities is ongoing.
See ASIC's Media Releases on the Federal Court decision:
14-220MR Payday lender engages in unconscionable conduct and breaches consumer credit laws
15-032MR Federal Court orders record penalty
TCS was a wholly-owned subsidiary of a Canadian company, The Cash Store Australia Holdings Inc, listed on the Toronto Stock Exchange. Assistive Finance Australia Pty Ltd (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).
During the period from August 2010 to March 2012 TCS sold CCI in connection with 182,838 of the total 268,903 credit contracts entered into in this period (or 68% of these contracts). The CCI was developed and distributed by a third party under an underwriting agency agreement with Allianz (up until March 2011). Another insurer replaced Allianz from March 2011 until March 2012.
TCS generally charged its customers 3.8% of the loan amount for the CCI. It collected premiums of approximately $2.27 million, retaining $1.3 million as income.
Her Honour Justice Davies referred, at paragraph  of her judgment, to the findings in an expert’s report provided by Martin Fry, an actuary, including that:
- the combined result of TCS’s high expenses and lower claims rates is that the average ratio of claims to premiums for the TCS policy was 1.1% compared to an industry average of 20.7%. The value of the CCI policy sold by TCS as measured by the average return to the customer was 1/19th of the CCI industry average, and
- the claim rate for Centrelink customers was even lower than for employed customers, reflecting the fact that Centrelink customers were unable to avail themselves of the main coverages (disablement and voluntary unemployment) under the TCS policy.
The National Credit Act requires credit licensees to meet responsible lending conduct obligations. Justice Davies found that TCS and AFA had breached these obligations by:
- failing to make reasonable inquiries about the consumer's financial situation
- not taking reasonable steps to verify the consumer’s income and expenses
- failing to make reasonable inquiries of the consumer about their requirements and objectives in relation to the credit contract, and
- failing to document whether there had been an assessment to determine if the credit product is unsuitable for the consumer and only proceed if the credit product is not unsuitable.
The court found that TCS and AFA each breached seven separate provisions of the National Credit Act on multiple occasions. On 19 February 2015 the Federal Court awarded record penalties of $18.975 million against TCS and AFA.