Major Australian retailer, Thorn Group, and its consumer leasing business, Radio Rentals, has agreed to refund almost $20 million to customers who entered into leases with the company following an ASIC investigation into breaches of their responsible lending obligations.
On 23 January 2018, ASIC lodged civil penalty proceedings (Proceedings) with the Federal Court of Australia after Radio Rentals admitted to four contraventions of the National Consumer Credit Protections Act 2009 (Cth) (Act) with respect to over 270,000 consumer leases for household goods during the period between January 2012 and May 2015 (Relevant Period).
This is not the first time that Radio Rentals has come under scrutiny due to its consumer contracts. The legal implications of a class action commenced against Radio Rentals, where the claimants are alleging that the Radio Rentals’ ‘rent, try and $1 buy’ promotion was misleading or deceptive. Those proceedings are ongoing but are not directly related to Radio Rental’s latest agreement with ASIC.
Breaches of the National Consumer Credit Protections Act 2009 (Cth)
The Act, which established the National Credit Code, regulates the finance industry by imposing obligations on credit providers, credit assistance providers and others involved in credit activities – including lessors that offer consumer leases.
ASIC claims that during the Relevant Period, Radio Rentals breached their responsible lending obligations under section 130 of the Act by:
- failing to make reasonable inquiries about each consumer’s financial situation
- failing to take reasonable steps to verify each consumer’s financial situation
- failing to make inquiries as to each consumer’s actual housing costs and failed to verify each consumer’s actual expenses
- entering into leases in circumstances where they had not:
- made reasonable enquiries about each consumer’s financial situation
- taken reasonable steps to verify each consumer’s financial situation.
Following commencement of the Proceedings, Radio Rentals admitted to breaching the Act and, together with ASIC, will submit a Statement of Agreed Facts to the Court, making joint submissions that the appropriate penalty for Radio Rental’s contraventions of the Act is $2 million. It’s an open question whether the Court may take a different view of the appropriate penalty for Radio Rentals given recent publicity surrounding responsible lending practices.
In addition to the civil penalty, ASIC has accepted an enforceable undertaking from Radio Rentals to address ASIC’s concerns about Radio Rentals’ lending practices – with Radio Rentals agreeing to refund retained excess payments from customers that were more than their lease contracts required. So far, Radio Rentals has refunded approximately $11.8 million of the $13.8 million customer who overpaid during the Relevant Period. Further terms of the undertaking require Radio Rentals to:
- refund or write-off approximately $6.1 million in default fees and charges relating to an estimated 60,000 leases resulting from the conduct that is the subject of the Proceedings
- hold the balance of both the responsible lending refunds and the over payment refunds that cannot be returned to customers in trust and, ultimately, donate the unclaimed funds as a community benefit payment
- appoint an independent expert to review its compliance with obligations under its Australian credit licence (including general conduct and responsible lending obligations) and oversee the refund program.
Radio Rentals has also agreed to roll out new plain English lease contracts by June this year and work with ASIC to improve communications with customers whose leases are ending or have ended.
Complying with your responsible lending obligations
Responsible lending practices do not only apply to the banks. As ASIC continues its industry-wide review into responsible lending practices, it is important for all credit providers to ensure their lease contracts (including equipment lease and hire purchase options) comply with the Act.
The key takeaway from ASIC’s investigation into Radio Rentals is that credit licensees must avoid entering into consumer leases, suggesting a consumer lease or assisting a customer applying for a consumer lease if the lease is unsuitable for the consumer based on their current financial circumstances in accordance with s 129 of the Act.
In addition to ensuring the lease is suitable for the consumer under section 131(2) of the Act, licensees can help safeguard their credit and consumer lease contracts by:
Drafting contracts in plain English: draft contracts in plain English and make considerations for the needs of the customer. For example, as was the case with Radio Rentals, by ensuring the lease contracts are free from legalese and include provisions for vulnerable consumers with limited financial means.
Enquiring and verifying a consumer’s financial situation: credit providers should ensure that they have made reasonable enquiries and taken reasonable steps to verify the consumer’s financial situation – including a consumer’s capacity to make payments. This includes considering the consumer’s financial situations, requirements and objectives. The level of investigation into a consumer’s financial situation required will depend on the complexity, term and amount of the contract but will depend on the complexity, term and amount of the contract but will largely revolve around investigating:
- the consumer’s current income and expenses
- the consumer’s credit history
- the consumer’s current assets
- the consumer’s age and number of dependents
- the consumer’s identity through a verification process
- whether there are any reasonably foreseeable significant changes to the consumer’s financial situation.
Complying with the Act for the life of the lease: responsible lending obligations do not cease to exist once the credit contract or consumer lease has been signed. A credit provider’s obligations continue for the life of the lease, including any extensions to the term of the lease so any changes to the contract must also comply with the Act.
By targeting the largest consumer leasing business in Australia, ASIC has made itself clear – the needs of the consumer remain at the heart of the Act and compliance with responsible lending obligations extends to all facets of the licensed finance industry.
The first case management hearing of the Proceedings will be held in the Federal Court in Sydney on 20 February 2018 at 9:30am.