Two new product intervention orders now in force impose conditions on the issuing of short term credit and continuing credit contracts to retail clients.
- Following consultation, ASIC has made two new product intervention orders effectively capping the fees that can be charged to retail clients under continuing and short term credit contracts to the maximum amounts allowable under the National Credit Code.
- The final orders are similar in substance to the draft orders on which ASIC previously consulted.
- ASIC has flagged that predatory lending practices remain 'an area of concern for ASIC and will remain a priority especially as credit conditions tighten.'
Following consultation, the Australian Securities and Investments Commission (ASIC), has made two new product intervention orders - a short term credit product intervention order and a continuing credit contracts product intervention order – to address what it considers to be the likely/actual 'significant consumer detriment' caused by certain 'predatory' lending practices.
Broadly, the two orders prohibit the provision of short term credit and continuing credit contracts that involve charging retail clients unreasonably high fees, in excess of the cost caps in the relevant exemptions in subsections 6(1) and 6(5) of the National Credit Code (Code).
The orders took effect on 15 July 2022 and will remain in place for 18 months. The new orders only apply to short term credit facilities and continuing credit contracts entered into on or after 15 July 2022.
The orders target two lending models used by Cigno Australia Pty Ltd (Cigno Australia) and its associates.
Short term credit product intervention order
The short term credit product intervention order targets a 'two contract' lending model involving retail clients entering into a short term credit contract with the credit provider, in conjunction with a separate collateral contract (with an associate of the credit provider). Under the collateral contract, the associate charges the client significant fees/other charges. In aggregate, the fees charged under the two contracts are higher than what is permitted under the short term credit exemption in subsection 6(1) of the National Credit Code.
The new order expressly limits the fees/charges payable by retail clients under short term credit contracts (including collateral contracts and/or 'a contract, arrangement or understanding that belongs to a series or combination that constitutes the short term credit facility') to the maximum amount permitted under subsection 6(1) of the National Credit Code.
The new order appears to be substantially the same as the draft order on which ASIC previously consulted (summarised) and similar to the 2019 order previously in place ASIC Corporations (Product Intervention Order—Short Term Credit) Instrument 2019/917 (summarised).
Continuing credit product intervention order
The continuing credit product intervention order is targeted at a similar lending model.
Broadly, the order caps the total fees that can be charged to retail clients under: a) 'the continuing credit contract'; b) 'a collateral contract (other than a collateral non-cash payment facility)'; or c) 'a contract arrangement or understanding belonging to a series or combination that constitutes the continuing credit contract' to the maximum amount permitted under subsection 6(5) of the Code.
Again, the new order appears to be similar in form to the draft order (summarised) on which ASIC previously consulted with some 'technical drafting changes' made in response to feedback received during the consultation.
These changes include amending the definition of buy now pay later (BNPL) arrangements to:
- include arrangements where a BNPL provider pays a bill on behalf of a retail client; and
- to specify that the relevant identifier that is provided or made available by the BNPL provider to the retail client to pay the merchant for the supply of goods or services, must be a debit card or credit card.
For clarity, as flagged above the orders do not operate to ban the provision of all short term or continuing credit contracts that rely on the relevant exemptions in subsections 6(1) and 6(5) of the National Credit Code.
Rather they are targeted at limiting the total fees that can be charged under the 'two contract' model used by Cigno or similar lending models, to the limits prescribed in the National Credit Code.
ASIC has cautioned that it may take further action if needed
ASIC makes clear that it will not hesitate to take further action to 'address the risk of significant detriment and harm arising from the design and operation of these or similar products' if necessary.
'ASIC identified significant detriment and harm especially to vulnerable consumers. ASIC has again exercised its powers to prevent borrowers being charged excessive fees to obtain these products. These intervention orders will protect retail clients from predatory lending practices, and to prevent credit providers charging unreasonable fees in relation to small amounts of credit. This remains an area of concern for ASIC and will remain a priority especially as credit conditions tighten.’
In a statement welcoming ASIC's action, Consumer Action Law Centre CEO Gerard Brody called on ASIC to remain vigilant:
'Making the product intervention orders provides consumers certainty and safety from future use of these models. However, we urge ASIC to do everything it can to secure compensation for those who have paid Cigno’s excessive fees in the past…We also encourage ASIC to closely monitor the operations of Cigno in the coming months as there is a real risk that it will develop yet another avoidant lending model to continue trading. The best solution to this kind of predatory lending is for the federal government to simply close the yawning loopholes and exemptions that exist in our financial services laws'.
[Sources: ASIC media release 14/07/2022; ASIC Corporations (Product Intervention Order – Short Term Credit) Instrument 2022/647; Short Term Credit Product intervention order Explanatory Statement; Short Term Credit Product intervention order notice; ASIC Corporations (Product Intervention Order – Continuing Credit Contracts) Instrument 2022/648; Continuing Credit Contracts Product intervention order Explanatory Statement; Continuing Credit Contracts Product intervention order notice]