Following proceedings launched by ASIC against payday lender, The Cash Store Pty Ltd (in liquidation) (TCS), and loan funder, Assistive Finance Australia Pty Ltd (AFA), the Federal Court has found that both companies breached consumer credit laws and engaged in unconscionable conduct in the sale of insurance.
The Federal Court ruled that TCS and AFA failed to comply with their responsible lending obligations in relation to their customers, the majority of whom were on low incomes or in receipt of Centrelink benefits. Further, the court held that TCS acted unconscionably in selling consumer credit insurance in relation to these loans when it was unlikely that that insurance could ever provide any benefit to their customers.
The decision of the Federal Court makes it clear that to enable a meaningful assessment to be made as to whether a loan is suitable, credit licensees must inquire about the customer's current income and living expenses along with further information depending on the circumstances of the particular consumer involved.
The Federal Court found there was ‘a systemic failure on the part of TCS’ and AFA to comply with their responsible lending obligations.
TCS was also criticised for its role in actively encouraging staff to sell consumer credit insurance that was almost invariably inappropriate to offer to payday lending customers’ and which was useless for unemployed customers – a fact that ‘must have been known to TCS’.
Deputy Chairman Peter Kell said, 'This is a landmark case for the consumer credit regime. It is essential reading for all credit licensees as it sets out how the responsible lending obligations work in practice.
'ASIC also welcomes the court's findings about unconscionable conduct by TCS, which occurred on a systemic scale, in the sale of inappropriate add-on insurance products. In more than 182,000 consumer credit insurance policies sold by TCS, there were only 43 consumers who received a payout.
'This confirms that a finding of unconscionable conduct and associated remedies are available for this sort of systemic mis-selling and helps clear the way for ASIC to take further actions of this type in relation to inappropriate add-on insurance'.
The maximum penalty for a corporation for breaching responsible lending and credit guide laws is $1.1 million for each contravention. The Federal Court found that TCS and AFA each breached seven separate provisions of the National Consumer Credit Protection Act 2009 (National Credit Act) in respect of a very high proportion of loan contracts they entered into.
The matter will be listed for a further hearing in relation to the civil penalties payable by TCS and AFA after 17 November 2014.
Under the National Credit Act, credit licensees must take certain steps to determine the suitability of the loans they are offering consumers.
ASIC launched proceedings against TCS and AFA in September last year (refer: 13-257MR).
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). TCS charged very high fees and interest on the loans – total fees and charges were approximately 45% of the loan amount.
The 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.
At the hearing, ASIC put into evidence 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 failed to comply with the requirement to make a preliminary assessment in accordance with the National Credit Act. Other provisions, including making reasonable inquiries regarding the customer's financial situation (95% of contracts), and making reasonable inquiries regarding the customer's requirements and objectives (80% of contracts), were also breached.
In total, the court found that TCS and AFA each breached seven separate provisions of the National Credit Act. 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.
In relation to TCS's sale of consumer credit insurance, TCS generally charged its customers 3.8% of the loan amount for the consumer credit insurance.
During the relevant period, TCS sold consumer credit insurance in 182,838 of the 268,903 credit contracts (68%), collecting premiums of approximately $2.27 million, retaining $1.3 million as income while only 43 policies received a settlement claim totalling $25,118.
A further hearing will be held by the Federal Court to determine the total penalties payable by TCS and AFA for these breaches as well as the breaches by TCS of the unconscionable conduct provisions of the Australian Securities and Investments Commission Act 2001 in respect of its sale of consumer credit insurance.
Editor's note 1:
The matter is listed for a penalty hearing on 15 December 2014.
Editor's note 2:
On 15 December 2014 the hearing on penalty was held. A decision has been reserved.