The Australian Securities and Investments Commission has won the latest, and maybe final, round in its long-running fight with short-term lender BHF Solutions and its associate Cigno, succeeding in an appeal before the Full Federal Court over its power to regulate the companies’ credit activities.
The court’s ruling closes a loophole in the National Credit Code that allowed payday lenders to get around fee restrictions by working with third parties that charged separate “service” fees.
BHF Solutions offered consumer credit and had 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 could be very high relative to the size of a typical loan. BHF’s own fees were only $15 per 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.
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 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 a case before the Federal Court last year, 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 credit contract.
ASIC argued that Cigno was BHF’s agent and that Cigno’s fees were for the provision of credit, while Cigno said its business was as a “facilitator for and on behalf of the borrower”.
It said Cigno’s charges were an “essential quid pro quo for the provision of the credit” and “an essential precondition of the loan in the present case.”
BHF and Cigno argued that the only charge for providing credit was BHF’s $15 fee, which is capped at $120 a year, while Cigno’s fees were for a range of services “none of which