ASIC has commenced civil penalty proceedings against Volkswagen Financial Services Australia for allegedly breaching responsible lending laws – just days after Volkswagen was hit with the largest penalty order ever made for contraventions of Australian Consumer Law.
As the Australian Securities and Investments Commission (ASIC) continues its review into the car finance industry’s compliance with responsible lending, debt collection and hardship obligations (a report for which is expected in early 2020), the regulator has now revealed that it has commenced proceedings in the Federal Court of Australia against Volkswagen Financial Services Australia Pty Ltd (Volkswagen) for alleged breaches of the NCCP in relation to responsible lending laws.
The automotive finance and insurance solutions subsidiary of the major car manufacturer, Volkswagen, provides borrowers in Australia with consumer loans to purchase new and used cars.
However, the financial services regulator has alleged that – between 20 December 2013 and 15 December 2016 – the financial services arm contravened the responsible lending provisions of the National Consumer Credit Protection Act 2009 (Cth) (National Credit Act) in relation to 49,380 loan contracts.
The allegations largely centre around failures to undertake “reasonable steps” to inquire about or verify a borrowers’ living expenses.
Moreover, ASIC alleged that Volkswagen did not make adequate assessments in accordance with s129 of the National Credit Act in relation to whether each of the loan contracts was unsuitable for the relevant consumer – in contravention of s128(c) of the National Credit Act.
As such, ASIC is asking the federal court to find that Volkswagen contravened the National Credit Act provisions in respect of each of the loans and to impose a civil penalty on it for doing so.
The maximum penalty for one contravention of the relevant provisions during the period of the contraventions was 10,000 penalty units, which equates to $1.7 million in the period to 31 July 2015 and $1.8 million thereafter.
ASIC also alleged that Volkswagen contravened its obligations under s47 of the National Credit Act requiring it to engage in credit activities efficiently, honestly and fairly and to comply with the National Credit Act. There is no penalty for a contravention of that provision.
Speaking of the case, ASIC commissioner Sean Hughes said: “The responsible lending obligations in the National Credit Act are intended to prevent consumers entering unsuitable credit contracts.
“While ASIC will continue to enforce the law and target poor practices, it is entirely the responsibility of credit providers to properly assess whether the consumer has the capacity to service the loan without incurring substantial hardship.”
The proceeding will be listed for a first case management hearing on a date to be determined by the court.
The Volkswagen case continues ASIC’s focus on how lenders interrogate a borrower’s living expenses when writing loans.
Earlier this year, ASIC lost its case against Westpac regarding its assessment of unsuitability, with the Honourable Justice Perram decreeing that a lender “may do what it wants to in the assessment process” and so does not have to use a borrower’s actual verified expenses in undertaking the assessment.
However, ASIC has appealed this decision to the Full Court of the Federal Court because it considers the decision to be “inconsistent” with the legislative intention of the responsible lending provisions and may result in “an erosion of improvements in responsible lending standards over recent years to the point that lenders are applying bare minimum standards”.
ASIC has also said the judgement creates uncertainty as to what is required for a lender to comply with its assessment obligations.
Earlier this month, ASIC sought to provide greater clarity around responsible lending by publishing an updated version of its responsible lending regulatory guidance.
Volkswagen hit with $125m penalty over emissions testing scandal
The ASIC case is the latest court case brought against Volkswagen, after the German parent group, Volkswagen AG, was ordered to pay $125 million in penalties by the Federal Court for making false representations about compliance with Australian diesel emissions standards (in breach of consumer law).
The penalty is the highest total penalty order ever made by the Federal Court for contraventions of the Australian Consumer Law.
In a case brought to the Federal Court by the Australian Competition and Consumer Commission (ACCC), Volkswagen admitted that, when it sought approval to supply and import more than 57,000 vehicles into Australia between 2011 and 2015, it did not disclose to the Australian government the existence of “Two Mode” software.
Volkswagen admitted that when switched to Mode 1 for the purposes of emissions testing, the software caused its vehicles to produce lower nitrogen oxide (NOx) emissions, but that when driven in on road conditions, the vehicles switched to Mode 2 and produced higher NOx emissions.
The car manufacturer also admitted that it made false representations when applying for the vehicles to be published on the government’s Green Vehicle Guide website (which provides consumers with ratings for the environmental performance and fuel consumption of vehicles sold in Australia, based on data submitted by the vehicle manufacturer), a rating it would have allegedly failed to obtain had the government been aware of the effect of Two Mode software on the emissions testing results.
All new motor vehicles supplied or imported into Australia must comply with Australian standards for exhaust emissions.
Speaking of the case, ACCC chair Rod Sims commented: “Essentially, Volkswagen’s software made its diesel cars, utes and vans operate in two modes. One that was designed to test well and another that operated when the vehicle was actually being used and which produced higher emissions. This was concealed from Australian regulators and the tens of thousands of Australian consumers driving these vehicles.
“If the affected Volkswagen vehicles had been tested while operating in the mode Australians were driving in, they would have exceeded the NOx emissions limits allowed in Australia,” he said.
Mr Sims added that Volkswagen’s conduct was “blatant and deliberate”.
He went on to outline that the new record penalty reflects a trend of ever higher penalties for breaches of Australian consumer law, with the previous highest penalties of $10 million for Coles, Ford and Telstra recently overtaken by penalties of $12 million against We Buy Houses and then penalties of $26 million ordered against vocational training provider Empower Institute.
“[This] $125 million in penalties were imposed under the old penalty regime of up to $1.1 million per breach.
“Under laws that came into effect later last year, maximum penalties are now the higher of $10 million, three times the profit or benefit obtained or, if this cannot be determined, 10 per cent of turnover,” Mr Sims warned..
“Volkswagen’s conduct undermined the integrity and functioning of Australia’s vehicle import regulations, which are designed to protect consumers,” Mr Sims said.
In December 2016, Volkswagen provided a software update in Australia that removed the Two Mode software, leaving the vehicles to operate in one mode at all times.
The ACCC’s proceedings against Audi AG, which is owned by Volkswagen, and its Australian subsidiary Audi Australia Pty Ltd have now been discontinued as part of the resolution of these matters.
[Related: ASIC ban on flex commissions takes effect]
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.
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