An ASIC review reveals that some lenders who provide small amount credit contracts may be attempting to move vulnerable consumers into contracts with fewer protections.

Report 805 Falling short: Compliance with the small amount credit contract obligations (REP 805) sets out ASIC’s observations from its recent review into lenders, following changes to laws governing small amount credit contracts in 2022 and 2023 under the Financial Service Reform Act 2022 (FSR Act).

The FSR Act aims to minimise financial harms to consumers, to discourage lenders from avoiding regulatory obligations and to provide the most vulnerable consumers with the greatest level of protections.

Based on our review of changes in the sector, we are concerned that some small and medium amount credit contract providers may be falling short of their obligations by:

• entering into unsuitable contracts with consumers, or
• failing to identify an appropriate target market and distribute their products accordingly.

We will also be concerned about any signs of business models that may be attempting to avoid the additional consumer protections imposed on small amount credit contracts.

Lenders who have changed their product offerings following the FSR Act reforms need to consider their regulatory obligations, in particular the obligation to consider a consumer’s requirements and objectives before entering into a credit contract.

Lenders should also set appropriate review triggers in their target market determinations to adequately monitor the risk of distribution of products outside of their target market.

‘Consumers who access these products are often financially vulnerable. That’s why people who use small amount credit contracts are subject to additional protections,’ said ASIC Commissioner Alan Kirkland.

‘ASIC has a strong record of taking enforcement action in response to lending practices that cause harm to vulnerable consumers. Lenders are on notice that if we detect serious breaches of the law, we will consider taking further action.

‘We were disappointed to uncover that some lenders may be seeking to shift consumers into other forms of credit, some of which involve greater risk.’

Recent action taken by ASIC in the small credit sector includes:

• current civil penalty proceedings against Ausfinancial Pty Ltd, trading as Swoosh Finance, for alleged breaches of its responsible lending obligations and alleged contraventions of certain design and distribution obligations,
• securing of $16 million in penalties against Ferratum Australia Pty Ltd (in liquidation) for a number of contraventions of the National Credit Act including entering contracts which imposed prohibited fees, and
• Federal Court action against Sunshine Loans Pty Ltd for charging an amendment or rescheduling fee that ASIC argued was not permitted by the National Credit Code. This matter is subject to an appeal from Sunshine Loans.

ASIC continues to investigate business models designed to avoid consumer credit protections as part of our enforcement priorities and will consider enforcement action in relation to the conduct of lenders in the small amount credit contract sector.

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REP 805 Falling short: Compliance with the small amount credit contract obligations

Background

REP 805 summarises findings and observations from data ASIC collected on small and medium amount credit contracts from December 2022 to August 2024.

The focus of ASIC’s review was the small amount credit contract provisions relating to proscribed referrals, unsolicited contact and avoidance coupled with consideration of the existing regulatory obligations that apply to Australian Credit Licensees such as the responsible lending obligations.

In our review, we identified:

• a reduction in the number of small amount credit contracts provided
• an increase in the number of medium amount credit contracts provided, and
• an increase in the total number of missed repayments for medium amount credit contracts, but a decline in the total number of missed repayments for small amount credit contracts.

The reforms commenced in late 2022 and 2023.

In addition to the small amount credit contract sector, ASIC is also focused on other products that provide small amounts of credit to consumers and have the potential to cause consumer harm.

ASIC’s Moneysmart website has information for consumers on the real costs of a payday loan and alternative options available for consumers. Financial counselling is available for consumers who need additional support with their money. Call the free National Debt Helpline on 1800 007 007 or use their live online chat option.