In 2019, ASIC received a new product intervention power as part of the Federal Government's response to the Financial System Inquiry. This power allows ASIC to intervene, including to ban or set restrictions on financial and credit products in the interest of consumer protection. This applies even if there is no demonstrated or suspected breach of any law, allowing ASIC to address apparent deficiencies in the statutory law, in the interest of protecting consumers.
It didn't take long for ASIC to put its new power to use against unlicensed lenders who sought to circumvent the National Credit Code on the basis of a technicality.
In September 2019, ASIC targeted an unlicensed lender offering short term loans which met the Code exemption criteria, but which were coupled with separate side agreements from a related entity that provided for the of balance fees and charges as services from the related entity. Now in August 2020, ASIC again proposes to use the same power against the same lender to ban certain continuing credit contracts structured in the same manner.
ASIC Commissioner Sean Hughes said in 2019: "ASIC is ready and willing to use the new powers that it has been given. The product intervention power provides ASIC with the power and responsibility to address significant detriment caused by financial products, regardless of whether they are lawfully provided."
ASIC was unsuccessful in civil proceedings in the Federal Court in 2014 to ban the same side agreement short term lending model used by other lenders at that time. This was on the basis that the Code had not been breached and the Court noted that it was a matter for Parliament to modify the Code to correct any loopholes that might exist. Well, the Federal Government wasn't going to have any of that.
What happened this time?
Subsection 6(5) of the National Credit Code exempts from the application of the Code continuing credit contracts (eg. credit cards and overdrafts) if the total charged for providing the credit:
- is a periodic or fixed charge that does not vary according to the amount of credit provided; and
- does not exceed the amount prescribed by regulation, which is currently $200 for the first year and $125 for each subsequent year.
This means that a lender offering a facility of this kind to a consumer does not need to comply with the Code and does not need to be licensed and have a membership with AFCA.
An unlicensed lender sought to take advantage of this exemption by offering a continuing credit facility that meets the low fee pre-requisites, coupled with a side service agreement from a related entity under which the customer is charged fees for services such as processing drawdowns or fast-tracking advances.
These additional fees are not minimal amounts. ASIC identified that in certain cases, consumers would pay some 220% to 490% of the loan amount in total fees and charges.
To make matters worse, ASIC states these facilities are targeted at vulnerable consumers and advertised as 'payday loans', 'Centrelink loans', 'bad credit loans', 'emergency' or 'fast cash' facilities. They appear to incentivise the customer to choose higher fee options for a faster advance. They have uncapped default fees and direct debit arrangements which may result in additional overdraw fees and charges to the customer's account.
AFCA is rightly concerned that it has no jurisdiction in these facilities if not covered by the Code, and that consumers entering into these arrangements will have no recourse to AFCA's external dispute resolution and determination process. It strongly supports ASIC's use of product intervention power to ban this product offering.
Lessons to be learned
ASIC's product intervention power is found in Part 7.9A of the Corporations Act 2001 and Part 6-7A of the National Consumer Credit Protection Act 2009 and allows ASIC to intervene in exactly this type of case, where no law has technically been breached.
ASIC's proposed order, in this case, will confirm that lenders cannot hope to circumvent the National Credit Code with side services agreements and will prohibit continuing credit contracts in circumstances where the total of fees and charges charged by the lender, together with any other party under any collateral contract or arrangement, exceed the maximum charge stipulated by the Code.
The use of ASIC's product intervention power, in this case, highlights that lenders can no longer hope to get by based purely on the letter of the law. Lenders, including unlicensed lenders, will need to consider the intent of the Credit Code and the effect of their products and services on consumers, in light of the possibility that their products and services could be banned or restricted, irrespective of their apparent legitimacy.
ASIC's product intervention power is not limited to credit products but includes other financial services. ASIC's Regulatory Guide RG272 provides more details on when and how ASIC will exercise its product intervention power and is recommended reading for all lenders and financial services providers.
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