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17-060MR Payday lenders fined $730,000 for diamond trading 'sham'
Following ASIC action, the Federal Court has today fined payday lenders Fast Access Finance Pty Ltd, Fast Access Finance (Beenleigh) Pty Ltd and Fast Access Finance (Burleigh Heads) Pty Ltd (the FAF Companies) a total of $730,000 for breaching consumer credit laws by engaging in credit activities without holding an Australian credit licence.
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 alleged in its claim that the purchase and sale of diamonds was a pretence, because 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.
The Court handed down today's penalty following its decision on 30 September 2015 that the arrangements for the sale of diamonds 'comprised a pretence or sham, brought into existence as a mere piece of machinery, to conceal the true nature of the transaction, which was the provision of credit. Neither side intended that the Sales Agreement should create the relationship of vendor and purchaser….'
The Court also found that that the FAF Companies 'intended to conceal the true nature of the transaction from those responsible for enforcing the interest cap' (refer: 15-278MR).
In handing down the penalty, the Federal Court stated that 'Although the excessive interest paid by each customer may not have been large in absolute terms and by some standards, it was no doubt substantial for the customer in question. Such customers have little chance of recovering anything from any of the respondents. The most heinous aspect of the case is the deliberate and pre-meditated exploitation of these vulnerable people.'
In determining the appropriate penalties, the court took into account that:
- the diamond model was designed to conceal the true nature of money-lending transactions. The underlying reason for such concealment was to circumvent the limit upon the rate of interest which was 48%.
- FAF, and its controlling officers must have had at least a strong suspicion that the diamond model was contrary to the relevant legislation.
- There had been little or no cooperation with ASIC.
- As between FAF Beenleigh and FAF Burleigh Heads, any difference in penalty should reflect the small number of transactions which have been proven against FAF Beenleigh as compared to the number proven against FAF Burleigh Heads. FAF was the designer of the diamond model and encouraged its use by its franchisees. It must be seen as being more culpable for each of the contraventions in which it was involved, than was either FAF Beenleigh or FAF Burleigh Heads.
Deputy Chairman Peter Kell said, 'ASIC will continue to crack down on lenders who use avoidance models in an attempt to deprive consumers of these important protections.'
ASIC commenced proceedings against the FAF Companies in 2013 (refer: 13-205MR) where it alleged that the FAF Companies engaged in unlicensed credit activities and sought civil penalties orders against the companies, as well as compensation for five consumers.
ASIC became the national regulator of consumer credit on 1 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.
ASIC’s payday lending work
ASIC has had a particular focus on the payday lending sector in recent years, including taking action to address avoidance models. Some outcomes are listed below:
- Cash Converters (16-380MR)
- Nimble (16-089MR)
- Fair Go Finance Pty Ltd (16-027MR)
- PAID International (formerly First Stop Money) (15-262MR)
- Money3 (15-168MR)
- Cash Store (15-032MR)
- Fast Easy Loans (refer: 14-328MR)
- Cash Loan Money Centres and Sunshine Loans (refer: 14-278MR)
- Cash Stop Financial Services (refer: 14-035MR)