ASIC is revisiting its highly contested product intervention power for the first time since the law was amended to clear up ambiguity in the intervention provisions in the Corporations Act and the National Consumer Credit Protection Act.
The regulator has issued a consultation paper (CP 355) seeking feedback on a proposal to make product intervention orders covering short-term credit contracts and continuing credit contracts.
The product intervention power was introduced in 2019, allowing 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.
It first used the power in September of that year, when it stopped a group of short-term lenders using a loan structure that it found caused significant consumer detriment. The lenders and associated entities were Cigno Pty Ltd, Gold-Silver Standard Finance Pty Ltd, MYFI Australia Pty Ltd and BHF Solutions Pty Ltd.
Under the National 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. It identified a number of examples of detriment, including clients who were left with no money to pay for food and rent, and others who filed for bankruptcy and suffered from anxiety.
Cigno and its associates decided to fight the order and the parties have been through three Federal Court proceedings. ASIC’s order remained in place until it expired in March this year.
ASIC then identified an ambiguity in the product intervention provisions in relation to its ability to intervene in relation to the cost of financial and credit products. The law was amended in June to clear up the uncertainty.
Now it is proposing to make a new short-term credit product intervention order in substantially the same terms as the 2019 order.
The consultation paper says: “ASIC is aware of a class of financial products – namely, short-term credit facilities – that were provided to retail clients in the following manner:
• a short-term credit facility is provided by the short-term credit provider, who. Charges fees consistent with limits prescribed in the exemption in the National Credit Code; and
• an associate of the provider provides collateral services, such as application, distribution, management and collection services, in relation to the facility, and charges significant fees or other charges under separate collateral contract.
The parties listed include Finance & Loans Direct Pty Ltd, Gold-Silver Standard Finance Pty Ltd and BHF Solutions as credit providers, and Teleloans Pty Ltd, Cigno and MyFi Australia Pty Ltd (known as Fi-Fit Services) as associates.
ASIC said the target market included vulnerable retail clients who were in financial difficulty and required short-term loans to cover basic living expenses. The product had a high default rate, which resulted in large amounts of default-related fees.
ASIC said it is planning to remake the order because it is concerned that the entities involved may resume issuing credit facilities in the manner described above.
Its proposed continuing credit contracts product intervention order would cover continuing credit contracts issued by the same parties in much the same way as the short-term contracts described above.