Plenty of lessons from the Cash Store case

The lessons that lenders need to learn from the Australian Securities and Investments Commission's big win against the payday lender Cash Store include the need to do more to oversee the activities of their credit representatives, and that  more detailed information needs to be gathered about the purpose of a loan as well as about the applicant's income and expenses.

Speakers on a panel at ASIC's annual forum discussing the implications of the regulator's big win dismissed suggestions that the ruling in the case would have limited value as precedent.

Several lawyers analysing the case have argued that ASIC's win may be limited as a precedent because the matter was uncontested; if it had been contested the outcome might have been significantly different.

They have also suggested that rulings concerning a payday lender have doubtful application to bigger lenders.


In the first court ruling on the responsible lending rules of the National Consumer Credit Protection Act, the Federal Court awarded penalties totalling A$18.9 million against payday lender The Cash Store (in liquidation), and loan funder Assistive Finance Australia for their failure to comply with consumer lending laws.

The penalty is the largest civil penalty ever obtained by ASIC, and follows on from the Court's decision on 26 August last year.

Speaking at the annual forum yesterday, the lead banking ombudsman at the Financial Ombudsman Service, Philip Field, said the court's ruling had wide relevance.

Field said: "It would have been useful to have a defence but I don't think it made much difference. The judge did not accept everything in ASIC's case."

"The ruling will apply to more than payday lending, especially the guidance on reasonable inquiries, verification and purpose testing," he said.


Credit Corp chief executive Thomas Beregi said: "I do find the judgment to be of some utility, particularly in terms of what constitutes reasonable inquiry. Some of the comments in the judgment are at odds with what lenders are doing today."

One issue examined in the case was the way Assistive Finance (the lender) effectively outsourced its credit functions to Cash Store (its credit representative). The court said it could not be absolved of its responsibilities by doing that.

The senior manager of legal and compliance at the Customer Owned Banking Association, Michael Funston, said one lesson from the case was that lenders must do more to oversee their distribution chain, such as re-verifying customer information, checking compliance and conducting due diligence on credit representatives' systems.

Beregi said one surprising aspect of the judgment was that Cash Store was held accountable for some of the failings of the lender.

"It went both ways. That could be a substantial liability for small credit representatives," he said.

Speakers agreed that the judgment imposed a tougher standard for making reasonable inquiries. Lenders must know what the specific purpose of a loan was. Vague reasons, such as "personal", "living expenses" and "household expenses" would probably not be enough.

Funston said he thought this was a weak part of the judgment. "You would think a fairly generic description of the objective would be OK. What consumer benefit is achieved by having to specify that the loan will be used to pay an electricity bill?"

On the question of what the judgment says about reasonable inquiries about expenses, Beregi said his reading was that lenders would need to go to a greater level of detail than was current practice.

Funston agreed, saying the court appeared to be asking for a lot more information to be collected than was currently the case. He said he was not sure the same would hold for a mainstream lender.

Field disagreed, saying the current focus on the more significant expense items was still appropriate.

Field said the court emphasised the need to verify the income of the applicant. This would make it difficult for a lender to rely on an automated decisioning system to come up with a probability.

The others agreed that there was no alternative but to get direct evidence of income.