ASIC to use new powers against short-term lenders

The corporate regulator singled out Cigno and its associate Gold-Silver Standard Finance (GSSF), which are not covered by the National Consumer Credit Protection Act 2009 (NCCP Act). 

The corporate regulator said it was targeting the lender’s model of charging fees under separate contracts, which could blow out combined fees to 990 per cent of the borrowed amount. ASIC noted that the target market for short-term loans is consumers in urgent need of small amounts of money, which it said indicates the “vulnerability” of the target market. 

ASIC also mentioned in its consultation paper that short-term loans are required to be repaid within 62 days, which increases the risk of default.

“There is no adequate assessment of a consumer’s capacity to meet repayments – for example, GSSF/Cigno have provided credit to many consumers who were likely to default,” the consultation paper stated. 

Borrowers who default are charged fees that exceed the maximum amount that can be charged under the NCCP Act, ASIC observed, and there are high levels of repeat use, meaning that consumers can end up in a “high-cost debt spiral”. 

One case mentioned in the consultation paper relates a borrower on Newstart who had to repay $1,189 after taking out a $120 short-term loan through Cigno. The borrower was charged an initial $90 financial supply fee, $5.95 in weekly account fees, a $6 credit card fee and, after failing to meet their repayment obligations, was charged dishonour fees and ongoing costs.

The regulator said the borrower would have had to repay a maximum $153.60 if they had entered into a small-amount credit contract regulated by the NCCP Act, and a maximum $130.64 if they had entered into an exempt short-term credit facility.

“Sadly we have already seen too many examples of significant harm affecting particularly vulnerable members of our community through the use of this short-term lending model. Consumers and their representatives have brought many instances of the impacts of this type of lending model to us,” ASIC commissioner Sean Hughes said. 

“Given we only recently received this additional power, then it is both timely and vital that we consult on our use of this tool to protect consumers from significant harms which arise from this type of product.”

The consultation paper considers three options to address the issues seen in short-term lending:

1. use of product intervention power to prohibit certain short-term lending models allowing credit providers and their associates to charge fees or other charges in excess of the cost restrictions under the short-term credit exemption;
2. encourage the use of alternative products or action through warning messages; and 
3. no change. 

ASIC said it prefers the first option and proposed the following legislative instrument: 

1. “A short-term credit provider must not provide credit to a retail client under a short-term credit facility except in accordance with the condition in subsection (3).” 
2. “A short-term credit provider or an associate must not impose or provide for collateral fees and charges for the provision of a collateral service to a retail client except in accordance with the condition in subsection (3).”
3. Subsection (3): “The imposition of or provision for collateral fees and charges by a short-term credit provider or an associate for the provision of a collateral service to a retail client in addition to the credit fees and charges that may be imposed or provided for by the short-term credit provider under the short-term credit facility must not exceed the maximum amount of credit fees and charges permitted under subsection 6(1) of the National Credit Code in relation to the provision of credit under the short-term credit facility.”

Feedback to ASIC’s proposals are to be submitted by 30 July 2019, with the regulator expecting to make a decision on how it applies its new product intervention powers to short-term lenders in August.  

The release of the discussion paper also comes after payday lender Nimble announced that it would be steering away from providing high-interest, short-term loans and towards becoming a digital bank offering a broader range of products. 

[Related: Aggregators call for new approaches to responsible lending]