Lawyers question the impact of ASIC's landmark payday lending case

The Australian Securities and Investments Commission's victory in its case against two payday lenders may be of limited value as precedent because the matter was uncontested. Lawyers analysing the case say its findings may be difficult to apply to other lenders because of this.

They are also uncertain about the applicability of rulings concerning a payday lender to bigger lenders.

The combined penalty of A$18.9 million against two Canadian-linked firms, the Cash Store and loan funder Assistive Finance Australia, was described by ASIC as a "landmark" victory for the regulator. ASIC deputy chairman Peter Kell said the Federal Court's decision constituted "essential reading" for all credit licensees who wanted to understand their responsible lending obligations.



On face value, the judgment in ASIC v The Cash Store (in liquidation) is undoubtedly a significant win for ASIC. The regulator managed to establish, among other things, that the defendants failed to make "reasonable enquiries" about their customers' objectives and requirements. In a sample of contracts considered by the court it was also established that the credit providers failed to take reasonable steps to verify the customers' financial situation.



These matters are fundamental to the National Consumer Credit Protection Act and credit licensees can undoubtedly benefit from some case law surrounding what constitutes "reasonable enquiries" and "reasonable steps." 



Justice Davies noted that assessing whether there was a real chance of a person being able to comply with one's financial obligations under a credit contract required, at the very least, a sufficient understanding of the person's income and expenditure.



"It is axiomatic that reasonable enquiries about a customer's financial situation must include enquiries about the customer's current income and living expenses. The extent to which further information and additional enquiries may be needed will be a matter of degree in each particular case," the judgment said.


However, lawyers specialising in consumer credit said that it would be difficult to apply the decision to lenders that lend larger sums of money. Compliance resources at a large-scale lender are completely different to those of a payday lender, which may only stand to make hundreds of dollars on an individual credit contract, they said.



In addition, the fact that the matter was not contested throws into doubt its validity as a precedent, as a contested case may have led to a better outcome for the defendants. Lawyers also said the $18.9 million penalty may have been smaller, or reduced on appeal, had the defendants chosen to challenge ASIC's action and appear in court.



Jon Denovan, partner at Gadens in Sydney, said the "general industry opinion" was that the decision would have been different and any penalties would have been reduced had the matter been defended.



"As the company [Cash Store] is in voluntary liquidation or may by now be liquidated, the penalty order seems to be a pointless exercise. It has the industry confused as to why ASIC spent the money on seeking penalty orders," Denovan said.



David Jacobson, principal at Bright Law, echoed these sentiments and said it was difficult to assess the benefit that ASIC had secured in pursuing the action.



"The first observation has to be that Cash Store is in liquidation and unlikely to pay its penalty. Secondly, neither Cash Store nor the other defendant Assistive Finance Australia actually defended ASIC's case. Having said that, Judge Davies did test ASIC's evidence and in some cases did not agree with it," Jacobson said.



"The case is also notable for the findings on mis-selling of consumer credit insurance and ASIC will also pursue this area," Jacobson said.



Denovan said the case was further evidence that ASIC had increased its surveillance work in the area of responsible lending. In particular, he said, the regulator wanted to see evidence that compliance processes were in place to ensure that credit contracts met the borrower's "requirements and objectives" and that the lender made appropriate enquiries into what constitutes "household living expenses" for individual borrowers.



In the case of the Cash Store and AFA, it is highly unlikely that the penalties will be paid. The Cash Store is a wholly-owned subsidiary of a Canadian company, The Cash Store Australia Holdings, which is listed on the Toronto Stock Exchange. AFA is also a wholly-owned subsidiary of a Canadian company, Assistive Financial Corporation.



Until September 2013, Cash Store was operating as a payday lender with all of its loans being financed by AFA. Cash Store had around 80 stores across Australia and wrote an estimated 10,000 loans per month. The typical loan was for less than $2,200 and was for a short period — usually two weeks or less. According to ASIC the typical fees, charges and interest on these loans amounted to around 45 per cent of the loan amount.



The Cash Store was also mis-selling consumer credit insurance policies known as the "Cash Store Australian Payment Protection Plan". In many cases, the lender's customers were on Centrelink benefits and had very little ability to repay without suffering hardship. They also stood to gain little from CCI policies, which protected clients in the event of a job loss.



According to the judgment, Cash Store charged its customers a premium of 3.38 per cent for the CCI cover. "TCS collected over $2 million from customers in insurance premiums during the period when it sold CCI and paid out claims worth about $25,000," the judge noted. "The average ratio of claims to premiums for the TCS policy was 1.1 per cent compared to an industry average of 20.7 per cent. The value of the CCI policy sold by TCS as measured by the average return to the customer was 1/19th of the CCI industry average."



ASIC said in a statement following the judgment that the NCCP Act requires credit licensees to meet responsible lending conduct obligations. It said these obligations were designed and implemented to protect all consumers — but particularly those who may be vulnerable to exploitation.



"The key responsible lending obligation is that credit licensees or providers must not suggest, assist with or provide a credit product that is unsuitable for a consumer," ASIC said. 



Before suggesting, assisting with, or providing a new credit contract or lease to a consumer, the credit licensee or credit provider must: make reasonable enquiries of the consumer about their requirements and objectives in relation to the credit contract; take reasonable steps to verify the consumer's financial situation; based upon these enquiries, assess whether the credit product is unsuitable for the consumer and only proceed if the credit product is not unsuitable; and give the consumer a copy of the assessment if requested.

In the case of Cash Store, it was found to have breached seven separate provisions of the NCCP Act, while AFA breached six. In addition, Cash Store was held liable for the breaches of AFA for being "knowingly concerned in the breaches by AFA", pursuant to section 169 of the NCCP Act.

Despite the detailed findings in ASIC v The Cash Store, lawyers have observed that the case does little to help resolve the question of what constitutes "reasonable enquiries and verifications" on any specific transaction.

Nathan Lynch is the head regulatory analyst, Australia and New Zealand, for Thomson Reuters