It’s easy to dismiss the large penalty against The Cash Store for contravening the consumer credit law as a warning for payday lenders only.
ASIC does not see it that way. Responding to the case, ASIC (the Australian Securities and Investments Commission) has issued this warning to the whole consumer credit industry:
It is the first case under the new responsible lending provisions [of the National Credit Act] ... It sends a clear message to the entire consumer credit industry ... [the] detailed judgment sets a benchmark for responsible lending and systemic unconscionable conduct in financial services ... Credit industry participants that ignore this case will expose themselves to the risk of significant adverse decisions by the court and external dispute resolution schemes, and to regulatory action by ASIC.
The case has two parts – (1) the liability decision - ASIC v Cash Store Pty Ltd (in liquidation) [2014] FCA 926; and (2) the penalty decision - ASIC v The Cash Store Pty Ltd (in liquidation) (No 2) [2015] FCA 93. Both decisions were by Justice Davies of the Federal Court of Australia.
Why was The Cash Store prosecuted under the National Credit Act?
The Cash Store, and its loan funder Assistive Finance Australia Pty Ltd (AFA), were major players in the payday lending industry. The Cash Store’s role was similar to that of ‘mortgage manager who originates and manages loans for an arm’s length funder’.
The Cash Store had approximately 80 stores throughout Australia. It wrote 10,000 loans per month of up to $2,200 each. The payday loans were usually 2 weeks or less, to match the payday cycle. The loans carried very high fees and interest, of around 45% of the loan amount. In addition, 3.38% of the loan amount was charged for its ‘payment protection plan’. It had about 52,000 customers.
The National Credit Act requires credit licensees to observe responsible lending conduct obligations, so that the credit contract is not unsuitable for the customer.
The Cash Store contravened five classes of obligations under the National Credit Act, namely:
- the failure to make reasonable inquiries about a customer’s requirements and objectives
- the failure to make reasonable inquiries about a customer’s financial situation
- the failure to take reasonable steps to verify the customer’s financial situation
- the failure to make a preliminary assessment
- the failure to provide the lender’s credit guides to customers
How did The Cash Store contravene its responsible lending conduct obligations?
The Federal Court examined 281 randomly selected credit contracts, out of a total of 325,756 credit contracts that The Cash Store had arranged in the period from 1 July 2010 until 24 September 2012. Only 4 contracts did not have a contravention.
The Court: found systemic and gross failures by The Cash Store and AFA to comply with legislative requirements and a wholesale failure in process.
Specifically, they failed to:
- make reasonable inquiries about a customer’s requirements and objectives In most contract files, the loan purpose was not filled in. Where it was, the description was too general, such as personal, living expenses, shortfall and travel.
- make reasonable inquiries about a customer’s financial situation The Court said that It is axiomatic that “reasonable enquiries” about a customer’s financial situation must include inquiries about the customer’s current income and living expenses ... the extent ... will be a matter of degree in each particular case. In most contract files, the information about the customer’s expenses was incomplete and deficient.
- take reasonable steps to verify the customer’s financial situation The Court said that at a minimum, the customer’s income and rent and mortgage payments need to be verified. The form of verification could be a payslip, a rent statement, a bank account statement.
- make a preliminary assessment This comes after the enquiries and verification. The credit contract must be assessed as ‘not unsuitable’ for the customer to comply with their loan obligations without substantial hardship, and the loan must meet their requirements. In this case, many of the preliminary assessments were inadequate. Some were not carried out at all.
- provide the lender’s credit guides These must be provided as soon as it was likely that a credit assistance would be provided. In many cases, credit guides were not provided.
In addition, The Cash Store had engaged in unconscionable conduct by exploiting financially vulnerable consumers, many of whom were on Centrelink benefits, by selling unsuitable consumer credit insurance (CCI).[13] The Cash Store sold 182,838 CCI policies. The insurance was unsuitable because it covered mainly disablement and involuntary unemployment, the likelihood of which was very low in the short period of the loan.
The penalties
The proceedings were civil penalty proceedings. The Federal Court assessed the penalties for the credit assistance contraventions at the maximum of $1.1 million per class, for each of the 5 classes of contravention for what it called the first period; and 30% of the maximum of $1.1 million per class for the second period. In addition, penalties of half these amounts were imposed for providing unsuitable credit contracts. Note the penalties were lower for the second period because The Cash Store improved its responsible lending practices (after ASIC started making enquiries).
The Cash Store was ordered to pay a total of $10,725,000 for National Credit Act contraventions, plus $1,100,000 for the unconscionable conduct contraventions. In addition, the funder AFA was ordered to pay $7,150,000 for National Credit Act contraventions.
ASIC’s media release was headed ‘Federal Court orders record penalty’. ASIC says that it is the largest civil penalty ever obtained by ASIC.
Although The Cash Store and AFA did not contest the proceedings, the Court reached its own conclusions on ASIC’s submissions.
ASIC has been criticised for maintaining the proceedings after The Cash Store went into voluntary administration (then liquidation). The Court supported ASIC and said:
The liquidation of TCS ... does not mean that an order for a pecuniary penalty should not be made. It is still appropriate to make an order that TCS pay penalties for its contraventions as a measure of the Court’s disapproval of its conduct, and as a measure of the seriousness with which the Court regards the contraventions.
Conclusion
ASIC has a Regulatory Guide 209 – Credit licensing: Responsible lending conduct. ASIC RG 209 has been updated in the light of The Cash Store decision.
Prudent lenders and brokers should review their practices in the light of ASIC RG 209. Credit assessment requires very good systems to prepare a preliminary assessment. The section in ASIC RG 209 on ‘What enquiries should you make?’ contains an excellent list and commentary on what is required for responsible lending, above and beyond the benchmarks in the loan serviceability calculators.
It is not only ASIC that is taking an interest. The failure to observe responsible lending obligations may expose the loan transaction to be re-opened under s 76(1) of the National Credit Code, if the Court is satisfied it was unjust at the time it was entered into. This possibility was raised in the Karamihos case, but was not taken further as the transaction pre-dated the National Credit Code.