Federal Court shoots down payday lender over unconsionable conduct

Following proceedings launched by ASIC against payday lender, The Cash Store, and loan funder, Assistive Finance Australia, the Federal Court has found that both companies breached consumer credit laws and engaged in unconscionable conduct in the sale of insurance.

The Federal Court ruled that TCS and AFA failed to comply with their responsible lending obligations in relation to their customers, the majority of whom were on low incomes or in receipt of Centrelink benefits. Further, the court held that TCS acted unconscionably in selling consumer credit insurance in relation to these loans when it was unlikely that that insurance could ever provide any benefit to their customers.

The decision of the Federal Court makes it clear that to enable a meaningful assessment to be made as to whether a loan is suitable, credit licensees must inquire about the customer’s current income and living expenses along with further information depending on the circumstances of the particular consumer involved.

The Federal Court found there was ‘a systemic failure on the part of TCS’ and AFA to comply with their responsible lending obligations.

TCS was also criticised for its role in actively encouraging staff to sell consumer credit insurance that was almost invariably inappropriate to offer to payday lending customers’ and which was useless for unemployed customers – a fact that ‘must have been known to TCS’.

Deputy Chairman Peter Kell said, ‘This is a landmark case for the consumer credit regime. It is essential reading for all credit licensees as it sets out how the responsible lending obligations work in practice.

‘ASIC also welcomes the court’s findings about unconscionable conduct by TCS, which occurred on a systemic scale, in the sale of inappropriate add-on insurance products. In more than 182,000 consumer credit insurance policies sold by TCS, there were only 43 consumers who received a payout.

‘This confirms that a finding of unconscionable conduct and associated remedies are available for this sort of systemic mis-selling and helps clear the way for ASIC to take further actions of this type in relation to inappropriate add-on insurance’.

The maximum penalty for a corporation for breaching responsible lending and credit guide laws is $1.1 million for each contravention. The Federal Court found that TCS and AFA each breached seven separate provisions of the National Consumer Credit Protection Act 2009 (National Credit Act) in respect of a very high proportion of loan contracts they entered into.

The matter will be listed for a further hearing in relation to the civil penalties payable by TCS and AFA after 17 November 2014.