Consumers remain front and centre in credit enforcement
By Deputy Chair Sarah Court
Australians have experienced a range of financial pressures in recent years, from the uncertainty of the COVID-19 pandemic to the increased costs of living spurred by rising inflation and interest rates.
Indeed, our research shows that between April and June this year, 12 per cent of those we surveyed reported experiencing financial stress in the last 12 months.
While nearly 80 per cent of Australians hold at least one credit product, and more than 40 per cent already hold two or more, current economic conditions suggest that consumer demand for credit products such as credit cards, personal loans and short-term credit arrangements are likely to increase. The kinds of credit products available to consumers continues to evolve, and new products are emerging all the time.
Consumer protection against poor product design and distribution and exploitation of consumers, particularly during periods of financial vulnerability, is at the forefront of ASIC’s work in consumer credit. We have identified the protection of financially vulnerable consumers who may be impacted by predatory lending practices or high-cost credit as an enforcement priority.
ASIC has a range of regulatory and enforcement tools available to assist us respond to misconduct. In addition to court-based outcomes, we can issue stop orders, product intervention orders or intervene using the new design and distribution obligations regime. These new obligations place the onus on a product issuer or distributor to ensure that a credit product is designed for and distributed to an appropriate target market.
As we look toward 2023 and consider the rising cost of living and pressures on household budgets, ASIC’s work to protect consumers when they access credit becomes even more important. This work centres around a fair, strong and efficient financial system for all Australians. Some of our recent surveillance and enforcement work in this area is outlined below.
Protecting vulnerable consumers
We are concerned by business models that we consider have been structured to circumvent important consumer protection provisions in the Credit Act.
In two sets of recent proceedings, against companies Rent4Keeps and Layaway Depot, we have alleged that certain arrangements with consumers are credit contracts which properly fall within the auspices of the credit protection legislation. In particular, we are concerned that amounts charged to financially vulnerable consumers under arrangements with these providers exceeded the 48 per cent annual cost rate cap that applies to credit contracts under the Credit Act.
The effect of this alleged conduct means Rent4Keeps and Layaway Depot customers, who are often on low incomes or Centrelink benefits, pay significantly more for electronics and whitegoods than they lawfully should. For example, one consumer on Centrelink benefits paid almost $2,500 for a fridge which retailed at $365, another paid $1,200 for a mobile phone which retailed for just $249.
Rent4Keeps and Layaway Depot deny ASIC’s allegations and both proceedings are being defended.
These enforcement actions are part of our work to protect vulnerable consumers and to make sure consumer protections, as part of the Credit Act, are effective.
In 2020, ASIC undertook a review of the ‘small amount credit contract’ market and its participants. These businesses offer credit contracts to consumers up to $2000 and often are easy to access online. Our review examined the fees charged in association with these small loans and whether the fees were permitted under the Credit Act. This project was especially important during the COVID-19 pandemic, noting the high cost of these loans and the financial vulnerability of consumers that need them.
ASIC launched civil penalty proceedings against Ferratum Australia Pty Ltd in 2021 for allegedly charging prohibited fees and overcharging consumers who paid off their loans early. We allege this was in breach of the Credit Act. We were particularly concerned that the alleged conduct harmed consumers with low incomes and low bank account balances.
Earlier this year we took further enforcement action resulting from the review, with civil penalty action against Sunshine Loans Pty Ltd. We allege Sunshine Loans collected over $320,000 in fees it was prohibited from charging, such as fees when consumers sought to reschedule or amend the payments of their contracts.
We took on both cases to ensure that credit providers comply with the Credit Act and we will be seeking Court orders and penalties if successful in the proceedings. Both sets of proceedings are being defended.
Product intervention powers
We have also taken significant steps recently in the use of our product intervention powers. These powers enable ASIC to temporarily intervene in a range of ways, including to ban credit products where there is a risk of significant consumer detriment. In July, we reinforced consumer protections by prohibiting the provision of unlicensed short-term credit and continuing credit contracts which involved unreasonably high fees charged to retail clients, in excess of the cost caps in the Credit Act.
This latest product intervention follows a series of proceedings between ASIC, Cigno and BHF Solutions Pty Ltd. In September 2020, ASIC commenced proceedings against Cigno and BHF Solutions seeking declarations and injunctions alleging that both the companies had engaged in unlicensed credit activities in contravention of the Credit Act in relation to their continuing credit product. In June 2022, ASIC was successful in its appeal before the Full Federal Court, which reversed Cigno and BHF Solutions’ appeal to the Federal Court in June 2021.
ASIC continues to monitor the short-term credit and continuing credit contracts markets and will take further regulatory and enforcement action, as necessary, to address the risk of significant detriment and harm arising from the design and operation of these or similar products.
Design and distribution obligations
The design and distribution obligations, or DDO, are important reforms that took effect in October 2021. They require firms to design financial products that meet the needs of consumers and to distribute their products in a targeted manner. Through our surveillance work we collect data and information from credit providers, including information about poor consumer outcomes, and use the design and distribution obligations to seek product, or product governance, changes to address these issues.
ASIC considers the DDO regime to be a gamechanger for the regulation of financial product design and distribution. In the credit area, we will shortly be conducting surveillance of product governance arrangements in the small amount credit and buy now pay later sectors and expect regulatory outcomes will result.
Consumer credit insurance
Many credit products are sold with add-on consumer credit insurance. The selling, or mis-selling, of consumer credit insurance as an add-on insurance product has been an area of concern for ASIC for some time. ASIC surveillance and reports in 2011 and 2019 revealed that consumers were being let down by the design and sale of consumer credit insurance. We found the insurance was poor value, was being sold in a harmful way, and that many consumers were either being charged for something they were not aware of or did not need. Others did not meet the eligibility criteria at the time of sale to be able to claim on the policy at all.
Our industry wide review in 2019, and evidence of poor consumer outcomes, showed that changes needed to be made to ensure Australians stopped being sold consumer credit insurance they did not want or could not use. ASIC went on to secure over $270 million in remediation across the sector for over 630,000 customers harmed by the mis-selling and banned the unsolicited ‘cold call’ telephone sales of CCI. In addition to the review, remediation and ban, we took enforcement action against both Westpac and the Commonwealth Bank.
In April this year, the Federal Court ordered Westpac Banking Corporation pay a $1.5 million penalty for mis-selling consumer credit insurance with its credit cards and Flexi Loans to customers. The Court found that even though customers had not requested the product, a Westpac letter to customers asserted the right to payment of insurance premiums and then went on to debit payments from their credit cards. This Court outcome was important to demonstrate that Westpac had no right to these payments and customers did not have to pay them.
ASIC has also pursued the mis-selling of consumer credit insurance criminally, with the Commonwealth Bank facing 30 criminal charges of making false or misleading representations to 165 customers when selling consumer credit insurance. This matter is still before the Court.
Consumer credit insurance misconduct has declined in recent years, with reforms to defer the sale of add-on insurance, which introduced a mandatory four-day pause between the sale of a principal product or service and the sale of add-on insurance, and reforms to the anti-hawking regime. The implementation of DDO, and improvements to product design, sales systems and practices, and monitoring and oversight, are also expected to result in better outcomes for consumers.
This article was first published in The Law Society of South Australia's The Bulletin magazine in October 2022.