ASIC product intervention power upheld
The Federal Court has rejected a narrow interpretation of ASIC's new product intervention power, saying that detriment caused by a product can be "indirect".
A lender, Cigno, had made an application to the court to have a product intervention order quashed on the basis that ASIC was acting on something "extraneous" to the product.
In September last year, ASIC stopped a group of short-term lenders using a loan structure that it found caused significant consumer detriment.
The lenders were Cigno Pty Ltd, Gold-Silver Standard Finance Pty Ltd, MYFI Australia Pty Ltd and BHF Solutions Pty Ltd.
Under the Credit Act, a short-term credit provider is exempt from credit licensing and responsible lending obligations if the fees charged for a loan of up to 62 days do not exceed 5 per cent of the loan amount and 24 per cent per annum interest.
Under the loan structure in this case, the credit provider's charges were within these limits but an associate charged upfront, ongoing and default related fees under a separate contract for management of the loan.
ASIC said that when all charges were combined the cost was almost 1000 per cent of the loan amount.
The product intervention power allows ASIC to make individual and market-wide product intervention orders where there is a risk of significant consumer detriment. It can take a range of temporary actions including stop orders, banning a product or product feature, imposing sale restrictions and amending product information.
A stop order applies to any person attempting to use the structure in question.
In its application, Cigno argued that ASIC must be satisfied that detriment is caused by the financial product and not by "something extraneous to the product", such as the collateral contracts that included the extra fees and charges.
In a ruling handed down yesterday, the court ruled that this view of the product intervention power was too narrow.
The court said: "There are a number of indications that it need not be a financial product or a class of financial products that 'itself' directly causes the detriment, and that detriment caused indirectly by the financial product or 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."
It also said: "The product intervention power contemplates that a financial product or class of financial products might be likely to cause significant detriment because of the particular circumstances in which it is issued or offered, and not because of something inherent in the product or the products in the class of product concerned.
"Significant detriment indirectly caused by the product or the class of product is sufficient to enliven the power."
The court also ruled ASIC could exercise the power on the basis that detriment "will or is likely" to occur and not only that it has occurred.