Financial Rights Legal Centre (Financial Rights), Consumer Action Law Centre (Consumer Action) and Financial Counselling Australia (FCA) have welcomed the Australian Securities and Investment Commission’s (ASIC’s) announcement that it will consult on using new Product Intervention Powers to intervene in the short term credit industry.
The new product intervention power allows ASIC to intervene where financial and credit products have resulted in or are likely to result in, significant consumer detriment.
Businesses such as Cigno Pty Ltd facilitate access to predatory and unregulated payday loans by exploiting loopholes in the law. Cigno is not bound by the credit laws because of its unusual structure, which splits its brokering arm from its lending arm. In this way the company is able to charge fees far higher than those allowed by the legislation regulating other short-term lenders. Cigno acts as an agent for a separate company called Gold-Silver Standard Finance.
One of the options proposed by ASIC is to limit the fees that can be charged by certain short-term lending business models to the level that may be charged under the ‘short term credit exemption’* that exists in existing national credit laws. This would prevent arrangements where businesses separate to the lender charge significant additional fees and charges related to the loan, without any requirement to ensure affordability.
FCA has been documenting the harm caused by this lending and have compiled a number of case studies – available here.
The case studies provided to FCA by financial counsellors include the following issues:
- loans given to people whose accounts showed they were already overdrawn;
- loans given to people whose bank statements showed numerous gambling transactions;
- refusals to provide financial counsellors with the bank statements or the loan approval information used to assess clients’ suitability for a loan and ability to repay loans;
- a loan given to a woman fleeing family violence who told staff she couldn’t afford to feed her family so it was obvious she wouldn’t be able to make any repayments; and
- loans given to people who already had other payday loans and were experiencing financial hardship.
Case study after case study documents the exorbitant cost of these loans and how a small loan quickly escalates, especially when the borrower misses a payment. For example, a $350 Cigno loan escalated to $889.45 in 11 weeks. First there were the regular charges, with a financial supply fee ($262.50); a lender fee ($17.50); a priority transfer fee ($16); 11 weekly account fees ($65.45); and a change of payment amount fee ($20). Because the client was fleeing family violence she couldn’t maintain the repayments so then the missed payment fees escalated, with two dishonour fees ($98); and fees of $30 each for two dishonour letters ($60).
FCA Australia will be arguing strongly for ASIC to use its new powers against companies such as Cigno that structure their business model to avoid consumer credit laws.
Consumer Action CEO Gerard Brody also welcomed the move, saying he is glad to see that ASIC now has Cigno in its crosshairs.
“Since 2015, Consumer Action’s legal practice has provided legal advice in relation to Cigno 117 times, including 37 times since the start of the year”, he says. “Many of the people contacting us, including financial counsellors supporting vulnerable clients, complain about unaffordable and exploitative loans facilitated by Cigno”.
“It is very welcome that ASIC is using its new powers here. The message for Cigno and similar business models is time is up: you can no longer use tricky business models to avoid the law.”
According to Karen Cox, CEO of Financial Rights, “the business models of pay day lenders like Cigno and Gold-Silver standard are designed to avoid the law and exploit the most financially vulnerable people in Australia.”
“We regularly see shocking examples of people who have used these services being charged ridiculous fees. We have seen examples where these companies have demanded between 146% and 952% of the original amount borrowed. A large proportion of our clients owe 400% of the amount they originally borrowed or more. A small loan of $150 turns into hundreds of dollars within a very short time. This exploitation is way outside of the boundaries of acceptable behaviour.”
“Intervention in this space is well overdue and we are pleased to see ASIC proposing to take action here and particularly pleased to see ASIC take on this business model which targets some of the most vulnerable people in Australia as their very first use of the product intervention powers.”
* The ‘short term credit exemption’ provides that national credit laws do not apply for credit contracts less than 62 days, where the maximum credit charge does not exceed 5% of the amount of credit and the maximum amount of interest does not exceed an annual percentage rate of 24%. In the case of Cigno and GSSF, consumers pay much, much more than these limits.