The Australian Securities and Investments Commission has launched an appeal against last month’s Federal Court judgment which dismissed an application by the regulator alleging breaches of consumer credit provisions by Cigno Pty Ltd and BHF Solutions.
BHF Solutions offers consumer credit and has an arrangement with Cigno to provide “loan management facilitation”. Cigno’s fees for such services as assisting with loan applications and arranging for a customer’s account to be debited can be very high relative to the size of a typical loan.
ASIC alleged that Cigno and BHF Solutions breached the National Credit Act by engaging in credit activity without holding a credit licence.
BHF and Cigno argued that their business model falls within an exemption to the application of the National Credit Code and the court agreed.
ASIC commissioner Sean Hughes said in a statement yesterday: “We have appealed this decision because we are concerned its effect will be to limit the application of the credit legislation, potentially denying vulnerable consumers the protection afforded by the National Credit Act and the National Credit Code.”
In the example explored in the case (the Morrow loans), A$200 was advanced to the borrower, who ended up paying $177.75 in fees to BHF and Cigno for a loan that was repaid over two months. The borrower went on to borrow a further $300 several months later and then another $300 a few months after that, paying fees each time.
The National Credit Code does not apply to short term credit, where the provision of credit does not exceed 62 days, credit fees and charges do not exceed 5 per cent of the amount of credit and the maximum amount of interest does not exceed an annual percentage rate of 24 per cent.
ASIC argued that the relationships between the borrower and BHF, the borrower and Cigno and between BHF and Cigno gave rise to a combination of contracts and arrangements that could be combined into a single continuing credit contract by reason of the definition of a contract in the National Credit Code. As a continuing credit contract it would be covered by regulation.
The court ruled that ASIC did not establish the existence of an ongoing (“composite”) credit contract.
ASIC also argued that Cigno was BHF’s agent, while Cigno said its business was as a “facilitator for and on behalf of the borrower”.
The court ruled that “at all relevant times Cigno was acting as the agent of Ms Morrow or on its own behalf.”
Finally, ASIC argued that Cigno’s charges were for the provision of loans by BHF and therefore covered by the code, describing them as an “essential quid pro quo for the provision of the credit” and “an essential precondition of the loan in the present case.”
Cigno and BHF argued this was not the case because the borrower had the choice of proceeding with Cigno or directly with BHF.
The court accepted that the fees charged by Cigno were in exchange for providing services pursuant to the borrower’s service agreement and not for the purpose of credit.