The Federal Court of Australia has imposed record penalties totalling $18.975 million against The Cash Store Pty Ltd (in liq) and Assistive Finance Australia Pty Ltd for their failure to comply with consumer lending laws. In setting the penalty, the Court considered a sample of 281 contracts and the statistical likelihood of similar contraventions in respect of all contracts – numbering over 300,000 – entered into between 1 July 2010 and 24 September 2012.
Why is this case important?
This decision demonstrates that a Court may be willing to make declarations of contraventions on a sample set of contracts (or transactions) and, in determining the penalties to be imposed for those contraventions, take into account the statistical likelihood of similar contraventions in respect of the set of contracts (or transactions) from which the sample set was taken.
The Cash Store Pty Ltd (“TCS”) ran a business arranging short term, low value loans (commonly known as “payday loans”) on behalf of Assistive Finance Australia Pty Ltd (“AFA”), which AFA funded. The Australian Securities and Investments Commission (“ASIC”) alleged that TCS and AFA had breached their responsible lending obligations under the National Consumer Credit Protection Act 2009 (Cth) (“Credit Act”) in relation to 325,756 credit contracts that TCS arranged, and AFA financed, between 1 July 2010 and 24 September 2012. The allegations (and contraventions) were that TCS and AFA failed to: make reasonable inquiries about a customer’s requirements and objectives, make reasonable inquiries about a customer’s financial situation, take into reasonable steps to verify ta customer’s financial situation, make a preliminary assessment and provide TCS’s and AFA’s credit guides to customers.
Due to the number of contracts involved, the question of liability proceeded on a sample of 281 contracts. On 26 August 2014, Justice Davies delivered judgment in which her Honour made findings and declarations of contravention by TCS and AFA of the Credit Act and (in the case of TCS) of section 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) (“ASIC Act”) in relation to the sale of consumer credit insurance (“Liability Judgment”).
The question of how the Court could, and should, extrapolate the liability findings across the 325,756 contracts was reserved for the penalty determination stage and was the subject of Justice Davies’decision on 19 February 2015.
The penalties imposed
Justice Davies imposed penalties based on the findings of contravention in relation to the 281 sampled contracts which were the subject of the Liability Judgment. TCS and AFA did not attend the penalty hearing. The Court imposed penalties despite TCS being in liquidation (with the consequence that any pecuniary penalty imposed would not be admissible to proof) in order to show its disapproval of the conduct in question.
ASIC did not seek findings of contravention in relation to the other credit contracts entered into during the relevant period. Instead, ASIC submitted that Justice Davies should, in determining the penalties to be imposed for the contraventions in relation to the 281 sample contracts, take into account the statistical likelihood that similar contraventions on the same scale would be found in respect of those other contracts. In this regard, ASIC adduced evidence from Professor Ian Gordon, of the Statistical Consulting Centre at the University of Melbourne, about the likelihood of similar contraventions in respect of those other contracts. Professor Gordon gave evidence that it could be said with a 95% degree of confidence that the findings in relation to the 281 sample contracts could be extrapolated to the other contracts entered into between 1 July 2010 and 24 September 2012. Justice Davies considered that it was appropriate, in setting the penalty, to “take into account the analysis conducted by Professor Gordon and the likelihood of similar contraventions in respect of all contracts entered into over the period”.
In this regard, her Honour noted that TCS had admitted in its 2012 credit licence annual compliance certificate that it did not have “adequate arrangements and systems in place to ensure that it complied with the conditions of its licence” and the credit legislation, that it did not have “adequate arrangements and systems in place to maintain the competence to engage in the credit activities authorised by its licence” or to “ensure that its representatives were adequately trained and competent to engage in the credit activities authorised by its license”. Her Honour found that AFA outsourced the whole of its activities to TCS and, as such, its conduct was as egregious as TCS’s contravening conduct. In this respect, her Honour noted that it was relevant that there was no evidence to indicate that AFA took any steps to ensure that TCS was complying with its responsible lending obligations.
In considering the appropriate penalties, Her Honour reaffirmed the orthodox principles that:
- pecuniary penalties should serve both as a specific deterrent to the contravener and a general deterrent to others against engaging in the particular conduct; and
- a contravener should not be punished more than once for the same conduct. It was therefore necessary to consider whether and the extent to which the contravening conduct should be regarded as a single course of conduct and penalised as one offence for each category of contravention.
In considering the appropriate penalties, her Honour found that the contravening conduct of TCS and AFA was neither isolated nor confined, and the contraventions were serious. Her Honour considered that TCS’s and AFA’s role as major players in the “payday” lending industry, and the widespread and significant nature, extent and duration of the contravening conduct called for the imposition of the maximum penalties. In the ultimate result, her Honour imposed penalties of:
- (in relation to TCS) $1,100,000 in respect of the contravention of section 12CB of the ASIC Act and $10,725,000 in respect of the contraventions of Part 3-1 and Part 3-2 of the Credit Act; and
- (in relation to AFA) $7,150,000 in respect of the contraventions of Part 3-2 of the Credit Act.
The penalty is the largest civil penalty ever obtained by ASIC. Viewed in the context of a marked upturn in regulatory scrutiny across many parts of the financial services industry, this result reflects not only the regulator’s determination to secure enforcement outcomes but also the willingness of the courts to impose significant penalties to punish egregious conduct.