ASIC response: Significance of Cash Store decision for credit industry
The award by the Federal Court on 19 February 2015 of nearly $19 million in penalties against The Cash Store Pty Ltd (in liquidation) (TCS) and Assistive Finance Australia Pty Ltd (AFA) for breaches of the responsible lending provisions, and against TCS for engaging in unconscionable conduct, is a record civil penalty for ASIC.
It is the first case under the new responsible lending provisions. This is therefore an important pronouncement by the Federal Court on the conduct expected of industry participants when engaging in credit activities. It sends a clear message to the entire consumer credit industry about the seriousness of such breaches of the law. It has been welcomed by both industry participants and consumer legal centres that deal with clients affected by predatory lending.
When ASIC commenced its action against TCS in September 2013, it was a large player in the payday lending industry with over 80 stores across Australia. AFA’s role was limited to funding those loans. Its arrangement with TCS had the effect that it took no steps to ensure compliance with its legislative requirements.
Recent media criticism of ASIC for undertaking this action overlooks the fact that it was not until after ASIC brought the action that TCS entered into voluntary administration. In December 2013, ASIC made an application to the Court to continue its case against TCS in liquidation, as it was obliged to do. Having considered the evidence, the Court granted leave to ASIC to proceed. Given the extent of the wholesale failure of the companies to comply with their obligations under national credit law it was appropriate, as the Court’s judgments make plain, for ASIC to prosecute the action.
Although the proceeding against the companies was ultimately uncontested, ASIC had the onus of firstly convincing the Court that both companies breached the law on multiple occasions and then that the extent of the breaches warranted significant penalties. The Court tested the evidence and individually reviewed 281 loan contracts, randomly selected from more than 325,000 contracts entered into during the relevant period. Out of these, the Court held that in respect of 277 contracts (or 99%), TCS and AFA had breached the National Credit Act. It is a detailed judgment that clearly sets a benchmark for responsible lending and systemic unconscionable conduct in financial services.
The Court’s decision to impose such large penalties demonstrates the seriousness of these contraventions and the Court’s strong disapproval of this predatory conduct. This decision and the large penalty is a key precedent on responsible lending obligations for the consumer credit industry as a whole and for payday lenders in particular.
ASIC will continue to focus on cases involving responsible lending and predatory behaviour. Credit industry participants that ignore this case will expose themselves to the risk of significant adverse decisions by the Court and external dispute resolution schemes, and to regulatory action by ASIC.