The Full Federal Court has dismissed an application by finance company Cigno Pty Ltd, seeking to quash an ASIC product intervention order in relation to the provision of short-term credit.
ASIC made an order in September 2019, its first use of its product intervention power, to stop a group of short-term lenders using a loan structure that it found caused significant consumer detriment.
The lenders were Cigno, Gold-Silver Standard Finance Pty Ltd, MYFI Australia Pty Ltd and BHF Solutions Pty Ltd.
Under the Credit Act, a short-term credit provider is exempt from credit licensing and responsible lending obligations if the fees charged for a loan of up to 62 days do not exceed 5 per cent of the loan amount and 24 per cent per annum interest.
Under the loan structure in question, the credit provider’s charges were within these limits but its associate charged upfront, ongoing and default related fees under a separate contract for management of the loan.
ASIC said that when all charges were combined the cost was almost 1000 per cent of the loan amount.
A product intervention order is an industry-wide order made by legislative instrument and applies to any business attempting to use this loan structure.
Cigno made an application to the Federal Court to have the order quashed, arguing that ASIC must be satisfied that detriment is caused by the financial product and not by “something extraneous to the product”, such as the collateral contracts that included the extra fees and charges.
In a ruling handed down in April last year, the court said that this view of the product intervention power was too narrow.
The court said: “There are a number of indications that it need not be a financial product or a class of financial products that ‘itself’ directly causes the detriment, and that detriment caused indirectly by the financial product or 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.”
It also said: “The product intervention power contemplates that a financial product or class of financial products might be likely to cause significant detriment because of the particular circumstances in which it is issued or offered, and not because of something inherent in the product or the products in the class of product concerned.
“Significant detriment indirectly caused by the product or the class of product is sufficient to enliven the power.”
The court also ruled ASIC could exercise the power on the basis that detriment “will or is likely” to occur and not only that it has occurred.
Cigno appealed the decision and yesterday the Full Federal Court dismissed its application, upholding the earlier judgment.
In the ongoing battle between Cigno and its associates and the regulator, to date the result are evenly divided.
Last week, 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.
Cigno and its associates adjusted their business model in 2019, after the product intervention order and it was this revised model that ASIC sought to have declared a breach of credit standards.