The Federal Court has dismissed an application by ASIC alleging breaches of consumer credit provisions by Cigno Pty Ltd and BHF Solutions, finding that the lending model they operated did not contravene the National Consumer Credit Protection Act or the National Credit Code.
In 2019, BHF Solutions started offering credit, on terms designed to fall within an exception to the application of the National Credit Code. It altered its business model to fall within another exception after ASIC made a product intervention order in September 2019.
At the same time, BHF entered into a “loan management facilitation agreement” with Cigno. Loans were sourced through Cigno, which charged fees for assisting customers with loan applications, verifying information in those applications and assessing eligibility for finance, arranging for customers’ account to be debited, monitoring payments and other customer services.
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.
Citing various precedents, 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.
The court’s final word was: “On one view, given the beneficial and protective purpose and objective of the code, it might be thought that this produces a result that could not have been intended. But as the High Court has stated, when construing a provision, 'it must be given its ordinary and grammatical meaning, even if it leads to a result that may seem inconvenient or unjust'.”