In brief - What this means for credit and financial product issuers developing new products
The Federal Court of Australia has affirmed ASIC's use of its product intervention power to protect consumers from lending products that can result in financial hardship by banning a short-term lending model under which a short-term credit provider charged fees to borrowers via a collateral arrangement with an associated party.
The decision demonstrates ASIC's power and intention to take active steps to address what it considers predatory conduct in relation to a loan product and excessive loan fees and charges, at a time when there is likely to be increased consumer credit activity (and stress), and innovation in financial products and credit products post COVID-19.
Brief overview of the product intervention power
Broadly, the product intervention power permits ASIC to proactively intervene in relation to financial and credit products where ASIC is satisfied that a product or class of products has resulted, or is likely to result, in significant detriment to consumers by making orders to prohibit specified conduct related to the product.
ASIC must consult affected parties before making the intervention orders and must make all orders public.
Our overview of the regime is in our article New Design and Distribution Obligations and Product Intervention Powers for Financial Products.
ASIC's product intervention order and summary of the Federal Court decision
In September 2019, ASIC made a product intervention order by way of legislative instrument which targeted a short-term lending model where a short-term credit provider and its associate charged fees under separate contracts. That is, ASIC determined that "collateral fees" associated with the credit contract were captured within the credit law limit imposed on the fees that could be charged under the model.
This short-term credit model had been used by Cigno Pty Ltd and Gold-Silver Standard Finance Pty Ltd, and more recently by MYFI Australia Pty Ltd and BHF Solutions Pty Ltd.
The fee structure under the lending model arose under two types of contract:
fees under the loan contract with the credit provider, and
fees under a separate management and administrative services contract in relation to the loan with an associate of the credit provider, which included significant upfront and ongoing fees (collateral fees)
According to ASIC, under the lending model:
the short-term credit provider charged costs within the National Consumer Credit Protection Act 2009 (Cth) (NCCP) limitations (see below)
its associate charged significant upfront, ongoing and default related fees under a separate contract for management and administrative services in relation to the loan, and
when combined, the fees could add up to almost 1000% of the loan amount
The credit legislation allows short-term credit providers to remain exempt from credit licensing, conduct and responsible lending obligations under the NCCP, if the loan is up to 62 days and the fees charged for a loan do not exceed 5% of the loan amount and 24% per annum interest.
Immediately after ASIC made the order, Cigno filed an application for judicial review in the Federal Court seeking to challenge ASIC’s order on the grounds, amongst other things, that:
the ASIC delegate did not properly form the requisite "satisfaction" before making the product intervention order, and
in particular, ASIC confined its consideration to the short-term lending model and did not sufficiently inquire into and properly consider the detriment from the "financial product" or "class of financial product"
Justice Stewart dismissed Cigno’s application with costs awarded to ASIC.
In his judgment, Justice Stewart held that ASIC is entitled to consider “detriment caused indirectly by the financial product or a class of financial products in the sense of there being something in the circumstances of the availability of the product or the class of products to retail clients that causes the detriment”. In particular,
“In my view ASIC’s delegate identified the relevant class of financial products as being short term credit or short term credit provided in particular circumstances, namely as part of the short term lending model.”
“…s 1023D(3) provides for the exercise of the product intervention order power on the basis not only of detriment that has actually occurred, but also detriment that ‘will or is likely to’ occur as a result of a class of financial products. Thus, there need be no existing product, let alone more than one, for the power to be able to be exercised.”
In this regard, the following comment on the judgment by ASIC Commissioner Sean Hughes hints at ASIC's current appetite for its use of the power:
“We are pleased today’s judgment [15 April 2020] upheld our intervention order and the consumer protections it is designed to deliver. We will continue our efforts to protect vulnerable consumers, particularly during this time when significant numbers of people are facing uniquely challenging circumstances. We will move swiftly where we see high cost products that seek to exploit the day-to-day immediate needs of financially vulnerable consumers.”
This judgment is likely to bolster ASIC's resolve to exercise its product intervention power in connection with lending products, as well as associated product segments that ASIC considers to be predatory. This will particularly be so as the finance market re-emerges from the COVID-19 period and economic forces may promote an environment in which vulnerable consumers are susceptible to more aggressive short-term (or long) credit and lending product initiatives.
We expect that pay day lending is a particular area of regulatory concern currently following the Senate inquiry into this sector
Other products segments may include derivatives, "buy now pay later" payments and accidental death and funeral insurance
The following are examples of other likely product segments which are susceptible to product intervention by ASIC. Importantly we expect that actions taken internationally by regulatory authorities are also likely to inform ASIC, such as business-to-business payment schemes which have generated recent interest internationally.
Derivatives - binary options and contracts for difference are also likely to be well within the regulator's sight. In August 2019 (comments closed 1 October 2019), ASIC consulted on the exercise of its power to make certain market-wide product intervention orders relating to the issue and distribution of over-the-counter (OTC) binary options and contracts for difference (CFDs) to retail clients. Internationally, product intervention has already occurred for these types of products.
Payments - "Buy Now Pay Later" - the Senate Economics Reference Committee report Credit and financial services targeted at Australians at risk of financial hardship commented on particular credit products for which the regulatory framework should be considered, in particular those in the "buy now pay later" sector (recommendation 9). Business models considered in the report (Chapter 5) in connection with the "buy now pay later" sector included Afterpay, Zip Pay and Flexigroup (Certegy Ezi-Pay), which could form part of future assessment by ASIC (or other regulatory bodies). Note, ASIC's report in 2018 into the "buy now pay later" sector included Afterpay, ZipPay, Certegy Ezi-Pay, Oxipay, BrightePay and Openpay.
Insurance - Accidental Death/Funeral - the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry identified that ASIC has said that it intends to use its product intervention powers to intervene in the sale of accidental death insurance if it remains concerned about consumer outcomes (page 295, Final Report - Volume 1), and ASIC should also consider whether it should intervene in the sale of accidental injury insurance or funeral insurance if it continues to hold concerns about consumer outcomes ((page 295, Final Report - Volume 1).
New products and product innovation
All credit and financial product issuers developing new financial and credit products in the current climate should be cognisant of the regulatory guidance and determinations relating to their product segment, and should include an assessment of the product intervention power and design and distribution obligation in their product development and prototype planning.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2020.