ASIC has won the latest battle in its long-running war with payday lender BHF Solutions and its associate Cigno, with the Federal Court ruling that BHF and Cigno engaged in credit activity without holding Australian credit licences.
The lending, which occurred between October 2019 and April 2020, contravened the National Consumer Credit Protection Act.
The court has permanently restrained BHF from providing credit, including: providing a line of credit to consumers; providing advances of funds to consumers; and collecting and receiving monies corresponding to repayments for amounts advanced by and/or fees charged by BHF.
It has restrained Cigno from: maintaining accounts and records with respect to consumers; arranging for collection of payments by consumers; monitoring repayments; and transferring money collected from consumers to BHF.
BHF and Cigno operated a business that, in ASIC’s view, attempted to exploit a loophole in the consumer credit law. BHF offered consumer credit and had an arrangement with Cigno to provide “loan management facilitation”. BHF’s fees were only A$15 per loan but Cigno’s fees for such services as assisting with loan applications and arranging for a customer’s account to be debited could be very high relative to the size of a typical loan.
In one example, $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 38 days. The borrower went on to borrow a further $300 several months later and then another $300 a few months after that, paying fees totalling $231.80 for the two follow-up loans.
Converted to an annualised percentage rate, the borrower was paying 800 per cent. The borrower was late with a couple of repayments and paid additional default fees.
The BHF and Cigno business was substantial, lending around $90 million a year in 2019 and 2020.
BHF and Cigno argued that their business model fell within an exemption to the application of the National Credit Code. One of the exemptions under the National Credit Code is that it does not apply to the provision of credit under a continuing credit contract if the only charge that is made is a periodic fixed charge that does not vary according to the amount of credit provided. The maximum charge is $200 over a 12-month period.
In 2019, ASIC used its product intervention power to stop the ending arrangement, saying it “caused significant consumer detriment”.
BHF and Cigno went to court to challenge the product intervention order and ASIC’s ruling that the relationship between the parties was an attempt to exploit a loophole in the law.
ASIC won the first round in the Federal Court in 2020, but the following year the court ruled that the lending model BHF and Cigno operated did not contravene the Credit Act.
The court ruled that “at all relevant times Cigno was acting as the agent of Ms Morrow or on its own behalf”.
The Full Federal Court overturned that ruling last year, finding that at least one of Cigno’s fees, the financial supply fee, was a charge that was made for providing the BHF credit. The financial supply fee was charged for “receiving, verifying, assessing and processing loan applications”, which the Full Court said were all directed to the provision of credit.
It said: “From the perspective of the credit applicant, those services were not an end in themselves. The services only have value to the credit applicant if the application is approved and credit provided.
“The fee was not charged unless credit was provided. It was the provision of credit that triggered the imposition of the fee.”
Following the latest court ruling, ASIC said it is investigating another lending model involving BHF and Cigno. Stay tuned for another instalment.