Court backs ASIC’s ban on short-term lending model

The Australian Securities and Investments Commission (ASIC) moved to ban a particular business model whereby a short-term credit provider and its associate charge fees under separate contracts.

Earlier that year, the regulator had singled out payday lender Cigno and its associate Gold-Silver Standard Finance (GSSF), the latter of which ASIC said charged “significant” upfront, ongoing and default related fees under separate contracts for management and administrative services in relation to the Cigno loan.

The regulator claimed that, when combined, such fees can add up to almost 1,000 per cent of the loan amount.

As such, it banned the model as part of its intervention powers in 2019 – but Cigno quickly filed a judicial review application in the Federal Court of Australia seeking to challenge ASIC’s product intervention order in respect of short-term credit. 

Moreover, Cigno sought a court declaration that the short-term credit order is invalid.

The matter was heard on 30 March with the judge presiding, Justice Stewart, handing down his decision yesterday (15 April).

Cigno’s review application was dismissed by the court, with Cigno ordered to pay the regulator’s costs. ASIC’s product intervention order remain in force.

In his judgment, Justice Stewart said that ASIC is entitled to consider “detriment caused indirectly by the financial product or a class of financial products in the sense of there being something in the circumstances of the availability of the product or the class of products to retail clients that causes the detriment”.

“In my view, ASIC’s delegate identified the relevant class of financial products as being short-term credit or short-term credit provided in particular circumstances, namely as part of the short-term lending model,” he said.

“…s 1023D(3) provides for the exercise of the product intervention order power on the basis not only of detriment that has actually occurred, but also detriment that ‘will or is likely to’ occur as a result of a class of financial products. Thus, there need be no existing product, let alone more than one, for the power to be able to be exercised.”

The judge also noted that while he agreed with Cigno that the product intervention power impinges on parties’ freedom of contract, he outlined that “that is what it was intended to do”, stating: “The question is, what enlivens the power? Having regard to the mischief sought to be addressed, there is nothing to suggest that the basis for the power to be enlivened should be narrowly construed and, indeed, in order for certain identified mischief to be addressed, it is necessary that that basis is more widely construed than what Cigno contends for. Such mischief includes detriment resulting from the product in question being offered to a particular class of consumer or in particular circumstances.”

The judge concluded: “For the reasons given, each of the grounds of review fails. There is no apparent reason why the costs should not follow the event, and no submission was made to the contrary. The applicant should therefore pay the respondent’s costs.”

ASIC commissioner Sean Hughes commented: “We are pleased [the] judgment upheld our intervention order and the consumer protections it is designed to deliver. 

“We will continue our efforts to protect vulnerable consumers, particularly during this time when significant numbers of people are facing uniquely challenging circumstances. We will move swiftly where we see high cost products that seek to exploit the day-to-day immediate needs of financially vulnerable consumers,” he added.

[Related: ASIC to use new powers against short-term lenders]