On 15 April 2020, the Federal Court of Australia delivered the outcome of their judicial review into ASIC's first and only use of their new product intervention power under Pt 7.9A of the Corporations Act 2001 (Cth) (the Act).
The central issue before the court was whether ASIC reached the required state of satisfaction that a significant detriment was or was likely to be caused to retail clients in relation to a short-term credit lending model which used collateral contracts to charge excessive fees, above what is allowed by the National Credit Code short-term lending exception (the Lending Model). The Court examined the level of satisfaction required to be reached in order to make a product intervention order.
Justice Stewart concluded that ASIC's power is to be construed broadly, in that the financial product itself or its features do not need to cause the detriment. It can be caused indirectly by something extraneous to the product, such as the circumstances in which the product is made available.
The decision establishes that the extent of ASIC's power reaches beyond product design, to include product distribution and related conduct.
Pt 7.9A of the Act was inserted by the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019 (Cth) and commenced on 6 April 2019.
Section 1023D(3) of the Act provides that if ASIC is satisfied that a class of financial products has resulted in, or will or is likely to result in, significant detriment to retail clients, they may order that a person must not engage in specified conduct in relation to the class of financial products.
ASIC used the power contained in s 1023D(3) to issue ASIC Corporations (Product Intervention Order – Short Term Credit) Instrument 2019/917 (PIO) on 12 September 2019. The first and only use of ASIC's new product intervention power to date.
The PIO provides that a short term credit provider must not provide credit to a retail client under a short term credit facility, except where the total of the amount of credit fees and charges that may be imposed or provided for under the facility, and the amount of collateral fees and charges that may be imposed or provided for under a collateral contract, do not exceed 5% of the amount of credit, with regard to fees. Interest charges are also not to be more than an amount equal to the amount payable if the annual percentage rate is 24%.
Gold-Silver Standard Finance Pty Ltd (GSSF) provided short term credit to retail clients as a short term credit provider between 2016 and September 2019. Cigno Pty Ltd (Cigno) provided services to customers to access GSSF's short term credit facilities under collateral contracts. The PIO had the effect of preventing GSSF and Cigno from providing the Lending Model to retail clients.
Cigno sought judicial review of the PIO, submitting that ASIC did not form the requisite state of satisfaction before making the PIO because they focused specifically on the detriment caused by collateral fees and charges of the Lending Model, rather than any detriment in respect of the short term credit facility, being the financial product. Cigno further submitted that ASIC did not form any state of satisfaction about a 'class' of products, as required under s 1023D(3), but was concerned only with the financial product provided by GSSF in association with Cigno.
Federal Court Decision
Justice Stewart rejected Cigno's submission that the jurisdictional requirement should be constructed narrowly, in that the significant detriment must be caused by the financial product itself, not something extraneous to the product.
Justice Stewart concluded that the significant detriment need not be caused by the product itself or a feature of the product. The power is to be construed broadly and the causal link between the financial product and the significant detriment can be indirect.
In assessing whether ASIC had reached the required state of satisfaction, Justice Stewart reasoned that:
- There is nothing in the wording of s 1023D which suggests that
the power should be construed narrowly. The language of s 1023D
provides that the prohibition or conditions imposed by a product
intervention order need not relate to a feature of the product
itself and supports that the detriment to retail consumers can
arise from the circumstances in which the product or the class of
financial product is issued.
- The Revised Explanatory Memorandum to the Treasury Laws
Amendment (Design and Distribution Obligations and Product
Intervention Powers) Bill 2019(Cth) explains that the power is
indented to be enlivened when significant detriment is caused
directly or indirectly by a financial product or class of financial
- Pt 7.9A is remedial and protectionist legislation, and as such should be construed broadly. Cigno submitted, in relation to this conclusion, such an interpretation imposes on commercial freedom to contract. Justice Stewart accepted this submission, though stated that it is the intention of the legislation, as protectionist, to restrict such a freedom.
Justice Stewart concluded that ASIC did reach the required state of satisfaction. ASIC sufficiently identified the class of financial product and significant detriment caused by the circumstances and conduct in which the class of financial product was made available.
Further, Justice Stewart rejected Cigno's submission that ASIC did not form any state of satisfaction in relation to a 'class' of financial products. His Honour concluded that there is nothing in the word 'class' which would indicate that more than one financial product must exist within a class – an inference consistent with the ordinary meaning of the word 'class'. That is, it is sufficient for only one product to exist within a class.
Justice Stewart also commented on the nature of the meaning of 'financial products' or 'class of financial products' within s 1023D. His Honour recognised that the Lending Model is not itself a financial product, neither is the collateral contract. Although, his Honour concluded that the short term credit provided as part of the Lending Model is a class of financial products.
The Federal Court's decision strengthens ASIC's ability to use its product intervention power. The power extends not only to features of financial products, but the circumstances and conduct which allow the products to be made available.
Cigno v ASIC is significant for financial product providers and distributors, as it suggests their business arrangements in relation to product distribution may be subject to ASIC's product intervention power in a much broader sense than was previously envisaged. Providers and distributors should carefully consider the distribution arrangements they have for their retail clients and the implications of this important early win for ASIC.
ASIC commissioner, Sean Hughes, commented in response to the judgement, saying that ASIC will continue to protect vulnerable customers and move swiftly to prevent exploitation by high cost products.
It is also worth noting that Cigno v ASIC did not comment on what constituted a significant detriment. That remains an open question at this stage and one that is no doubt open to considerable debate.
There are a number of considerations for financial product providers and distributors in relation to ASIC's product intervention power. Our financial services team can assist and answer any questions regarding the impact of ASIC's product intervention power on your business and its products.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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