The Federal Court has found that payday lenders, Fast Access Finance Pty Ltd, Fast Access Finance (Beenleigh) Pty Ltd and Fast Access Finance (Burleigh Heads) Pty Ltd (the FAF companies) breached consumer credit laws by engaging in credit activities without holding an Australian credit licence.
ASIC claimed that the FAF companies constructed a business model which was deliberately designed to avoid the protections offered to consumers by the National Consumer Credit Protection Act 2009 (National Credit Act), including the cap on interest charges. Consumers who were seeking small value loans (of amounts generally ranging from $500 to $2,000) entered into contracts that purported to be for the purchase and sale of diamonds in order to obtain a loan. Consumers in ASIC's case were completely unaware of the actual nature of the contracts into which they were entering and assumed that they were obtaining a traditional loan.
The Federal Court found that the true purpose of the contracts was to satisfy the consumer's need for cash and the FAF companies' desire to make a profit from meeting such a need. The provisions in the contracts for the sale and resale of diamonds added nothing to the transaction. The effect of these contracts was to charge interest well in excess of the 48% interest rate cap that should have applied to these types of loans. In some cases interest of over 1000% was charged.
The Court also found that the FAF companies intended to conceal the true nature of the transaction from those responsible for enforcing the interest rate cap.
Deputy Chairman Peter Kell said, 'Consumers seeking small amounts of credit are often desperate for money, making them vulnerable to manipulation by those who seek to operate outside the law.'
'Safeguards exist under the law to ensure people are not exploited. ASIC will act against companies which deliberately disregard their obligations under the National Credit Act.'
The matter will be listed for a further hearing, on a date to be set, in relation to the declarations sought by ASIC, civil penalties and compensation payable by the FAF companies. The maximum penalty payable by the FAF companies for engaging in credit activities without a credit licence is $1.1 million for each contravention.
Read and download the judgment here.
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.
Recent amendments to the National Credit Act introduced additional provisions for small amount loans to address concerns about the use of payday and small amount loans, particularly the risk of consumers falling into a debt spiral (i.e. multiple small amount loans, refinancing an existing loan before it is paid out, or increasing the credit limit). A small amount loan, in general terms, is a loan where the amount borrowed is $2000 or less and the term is between 16 days and one year. From 1 July 2013, only the following fees can be charged on small amount loans:
a monthly fee of 4% of the amount lent
an establishment fee of 20% of the amount lent
Government fees or charges
enforcement expenses, and
default fees (the lender cannot recover more than 200% of the amount lent).
The penalty hearing has been set down for 15 March 2016.
Editor's note 2:
On 16 November 2015, the Court made declarations and ordered the FAF companies to pay compensation, amounting to approximately $17,000, to 5 consumers that gave evidence at the trial of the proceeding, by 14 December 2015.
The FAF companies have not paid this compensation as they state that they are impecunious.
On 15 March 2016, the penalty hearing proceeded before Justice Dowsett in the Federal Court in Brisbane. Further short submissions will be made by the parties.