ASIC has issued a product intervention order imposing conditions on the sale of short term and continuing credit contracts, prohibiting fees in excess of cost caps in the National Credit Code.
Under the National Credit Code, 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.
Nor does the code apply under a continuing credit contract if the only charge that is made, or may be made, for providing the credit is a periodic or other fixed charge that does not vary according to the amount of credit provided. The maximum charge is A$200 over a 12-month period.
The making of the order follows ASIC’s release of a consultation paper in December, which raised concerns about a class of financial products that had the following characteristics:• a short-term credit facility is provided by the short-term credit provider, which charges fees consistent with limits prescribed in the exemption in the National Credit Code; and• an associate of the credit provider that provides collateral services, such as application, distribution, management and collection services, in relation to the facility, and charges significant fees or other charges under separate collateral contract.
ASIC said that when all charges were combined, the cost of the loan could be as high as 1000 per cent annualised.
The product intervention power was introduced in 2019, allowing ASIC to make individual and market-wide product intervention orders where there is a risk of significant consumer detriment. It can take a range of temporary actions including stop orders, banning a product or product feature, imposing sale restrictions and amending product information.
ASIC identified several examples of detriment, including clients who were left with no money to pay for food and rent, and others who filed for bankruptcy and suffered from anxiety.
The order takes effect on Friday.
ASIC’s use of the power has been highly contested. It first used it in September 2019, when it stopped a group of lenders using a similar loan structure to the one described above.
One of the affected parties, Cigno Pty Ltd, challenged ASIC’s use of the power in the Federal Court. It was unsuccessful.
And last month, the Full Federal Court ruled that ASIC had the power to regulate the credit activities of such product providers. Cigno and its associate BHF Solutions argued that the fees charged by the associate of the credit provider were for a range of services “none of which constituted the provision of credit”.
The court ruled that “from the perspective of the credit applicant, those services were not an end in themselves. The services only have value to the credit applicant if the application is approved and credit provided.
“The fee was not charged unless credit was provided. It was the provision of credit that triggered the imposition of the fee.”