Consumer legal services and financial counsellors have responded to the Federal Court’s ruling in the Cigno and BHF Solution payday lending case, describing it as “extremely disappointing” and “very narrow”, and have urged ASIC to appeal.
The court 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.
Financial Counselling Australia chief executive Fiona Guthrie said in a statement that in recent years financial counsellors have been inundated with complaints about the lending model used by Cigno and BHF, which “results in people being signed up to contracts with fees costing upwards of 1000 per cent of the original loan application.”
The chief executive of Financial Rights Legal Centre, Karen Cox, said: “ASIC did the right thing to initiate this legal action. Businesses that engage in credit activities need to be licensed and subject to charging limits but tricky business models like this take steps to evade the law.”
The chief executive of the Consumer Action Law Centre Gerard Brody said: “This judgment appears to have taken a very narrow interpretation of the National Credit Act, finding that Cigno’s charges were not in connection with the provision of credit but for ‘application, management and collection services’.”
ASIC deputy chair Sarah Court said: “ASIC took this case in order to protect vulnerable consumers from what we believe to be a harmful lending model. ASIC will carefully consider the judgment before deciding on our response.”
Payday lender BHF Solutions entered into a “loan management facilitation agreement” with Cigno. Loans were sourced through Cigno, which charged fees for assisting customers with loan applications, verifying information in those applications and assessing eligibility for finance, arranging for customers’ account to be debited, monitoring payments and other customer services.
In the example explored in the case (the Morrow loans), A$200 was advanced to the borrower, who ended up paying $177.75 in fees to BHF and Cigno for a loan that was repaid over two months. The borrower went on to borrow a further $300 several months later and then another $300 a few months after that, paying fees each time.
The National Credit Code does not apply to short term credit, where the provision of credit does not exceed 62 days, credit fees and charges do not exceed 5 per cent of the amount of credit and the maximum amount of interest does not exceed an annual percentage rate of 24 per cent.
The court ruled that ASIC did not establish the existence of an ongoing (“composite”) credit contract, that “at all relevant times Cigno was acting as the agent of [the borrower] or on its own behalf” and that the fees charged by Cigno were in exchange for providing services pursuant to the borrower’s service agreement and not for the purpose of credit.