Short-term lenders Cigno Pty Ltd and associate BHF Solutions, which lost a court battle with the Australian Securities and Investment Commission last year over the regulator’s use of its product intervention power, are in ASIC’s sights again.
ASIC has released a consultation paper, setting out a proposal to use the product intervention power to impose a cost cap on the total fees that can be charged in relation to a class of financial products it refers to as “continuing credit contracts”.
According to the consultation paper, BHF Solutions provides loans under a continuing credit contract and charges a fixed fee for each advance of funds under the contract.
An associate of BHF, Cigno, enters into a service agreement with retail clients and charges various fees services, including but not limited to:• fast-track processing of the BHF loan and transfer of funds to the client;• collection of payments from clients, including repayment due to BHF;• forwarding loan payments to BHF; and• ongoing management of the contract.
ASIC says neither company has a credit licence and credit contracts are issued in such a way that the client does not have access to external dispute resolution, there is no assessment of whether the client can afford the repayments and there are high fees payable on default.
ASIC says the product has resulted, will result or is likely to result in significant detriment.
The regulator is proposing to make an industry-wide product intervention order to prohibit credit providers and their associates from issuing continuing credit contracts in circumstances where total fees exceed the maximum permitted under the continuing credit exemption and regulation 51 of the National Credit Regulations.
The maximum charge would be A$200 for the initial 12-month period after the contract is entered into and $125 for any subsequent period of 12 months.
ASIC first used the product intervention power last September, when it stopped a group of short-term lenders using a loan structure where the credit provider’s charges were within the limits set under the Credit Act but an associate charged upfront, ongoing and default related fees under a separate contract for management of the loan.
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.
ASIC said that when all charges were combined the cost was almost 1000 per cent of the loan amount.
Cigno took the matter to court, arguing that ASIC’s use of its power was too broad, but its case was rejected.