The Cash Store (TCS) was a large player in the payday lending industry with over 80 stores across Australia. Assistive Finance Australia was the funder of the loans arranged through the stores. The Australian Securities and Investments Commission (ASIC) brought proceedings in relation to responsible lending obligations under the consumer credit legislation, and for unconscionable conduct in relation to insurance distribution.
ASIC had a significant victory in the Federal Court, ultimately obtaining nearly $19 million in penalties (the largest civil penalty ever obtained by ASIC), but views are divided on what the decision in the case means for industry.
Important issues arising from the decision include:
- Inquiries about customer needs and objectives – The Court’s conclusions have real potential to raise the bar on this point, finding that reasons for seeking a loan such as "personal", "living expenses" and "travel" were not sufficient to understand the applicant’s requirements and objectives. The Court referred to the need for purpose to be sufficiently specific and to the amount of credit being consistent with that purpose. This has the potential to require a higher standard of inquiries on industry, particularly if this standard is applied to larger value / more mainstream loans. In many circumstances it is difficult to see what value will be gained from asking more detailed questions about purpose (e.g. for personal loans, questions about a proposed holiday or travel), and borrowers are likely to find it intrusive.
- Inquiries about income and expenses – The Court acknowledged that the extent to which further information and additional inquiries may be needed in order to assess the consumer’s financial capacity to service and repay will be a matter of degree in each particular case. To the extent that doubt remained on this point, the Court clarifies that lenders must always make inquiries about income. More controversially, the Court’s factual findings regarding the extent of inquiries could be seen as requiring a more granular level of information, potentially about income, and almost certainly about individual expenses than what may currently be collected across some industry segments if applied across the board to other types of lending and borrowers.
- Verification by benchmarking – The Financial Ombudsman Service has said that the case makes it difficult for lenders to rely on automated benchmarking systems for verification. This reflects the Ombudsman’s long standing position that direct evidence of income is a base requirement. However, the judgement says little about the appropriate means of verification, and ASIC’s Regulatory Guide 209 on responsible lending still confirms that these kinds of tools can be useful for confirming whether it is reasonable to rely on information provided by the customer, or whether further inquiries are warranted. ASIC also points out that the systems need to be monitored and reviewed to ensure continued effectiveness.
- Unconscionable conduct by distributing inappropriate products – Given the nature of the customer base and the consumer credit insurance product distributed by TCS (the Court considered the low payout rate and loss ratios, and the low likelihood that the cover would be of use to customers, particularly to the significant percentage of the customers who were unemployed), it was self-evidently unsuited to the needs of most customers and the Court held that the sale by TCS of the insurance was unconscionable. There may be a potential question regarding whether such findings suggest a more general expectation that a product’s suitability for a targeted customer base needs to be assessed before the product is offered.
- ASIC’s approach to seeking penalties – ASIC introduced evidence regarding a relatively small selection of loan contracts (selected from more than 325,000 contracts over the period) and the Court found breaches in respect of approximately 99% of those. ASIC used evidence about the extent of the non-compliance to seek penalties at the higher end of the range in relation to the contraventions which were individually proved. This approach is likely to be used in other future cases where ASIC seeks large penalties in respect of contraventions. ASIC has said that the case “sends a clear message to the entire consumer credit industry about the seriousness of such breaches of the law”.
While the Court made a small number of statements of general principle, the reasoning in the decision is largely steeped in the particular facts of the case. There is a general issue about the extent to which the findings in the case will be broadly applicable to loans of other types and in other circumstances. The proceedings were not defended, so ASIC’s positions were not tested against contrary argument, but on the other hand the Court did not accept all of ASIC’s positions. Further, the context was one of vulnerable consumers and, in ASIC’s words, “predatory behaviour”. There are good arguments to be made about whether a reasonable level of inquiry around purpose, or around quantifying specific expenses, would differ in circumstances where the overall financial position of a borrower in both absolute terms and relative to loan size was different to that in the individual instances considered by the Court in cash store. However, ASIC has stated that the case “is a key precedent on responsible lending obligations for the consumer credit industry as a whole and for payday lenders in particular”, some amendments to its Regulatory Guide indicate a hardening of its minimum expectations.
ASIC is continuing to focus on responsible lending practices within the industry, not merely within the payday lending sector, and continues to expand the scope of its inquiries. All industry participants should therefore be reviewing their responsible lending practices.