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ASIC had commenced the proceedings against the short-term lenders in September, seeking declarations of contravention and injunctions over a business model where the companies reportedly provide small amounts of credit to a large number of consumers, while charging substantial fees and not holding Australian credit licences.
The companies reportedly provided small amounts of credit to a large number of consumers, while charging substantial fees and not holding Australian credit licences, according to ASIC.
The regulator had argued that the companies had contravened the National Consumer Credit Protection Act, but the court has ruled the lending model steered clear of breaches.
ASIC’s case had included three case studies of consumers who had borrowed from BHFS under the agreement with Cigno. One was Leah Morrow, had entered into a credit contract with BHFS through Cigno around 18 October 2019, with ASIC referring to three separate drawdowns of loans advanced by the company to her between October 2019 and August 2020.
ASIC had argued that Ms Morrow could not receive the loans from BHFS unless she paid an excessive amount in fees, listing a financial supply fee, account keeping fee and the change of payment schedule fee. Cigno on the other hand, had contended that its services charges were an “essential quid pro quo for the provision of the credit”.
The judgement noted there was no allegation that the services charged for and supplied by Cigno were not genuine services.
The judgement from Justice John Hally read:
“The respondents submit, and I accept, that:
(a) the fees charged by Cigno were in exchange for, or the quid pro quo for, providing the services pursuant to the Morrow Services Agreement, not for the provision of credit; and
(b) it is not possible to ignore the terms of the Morrow Services Agreement and ‘the reality that Cigno provided services pursuant to that agreement, and the reality that the fees paid to Cigno were fees for providing those services’.”
“ASIC took this case in order to protect vulnerable consumers from what we believed to be a harmful lending model,” ASIC deputy chair Sarah Court said.
“ASIC will carefully consider the judgment before deciding on our response.”
Cigno previously operated a similar model under the short-term credit exemption under s6(1) of the National Credit Code.
On 12 September 2019, ASIC made an industry-wide product intervention order, banning a short-term credit model where providers and associates charged fees under separate contracts.
The regulator made the order after it was satisfied that the product resulted in significant consumer detriment, due to the excessive overall cost.
Cigno made an application to the Federal Court to challenge the product intervention order, but was unsuccessful.
In May 2020, it filed an appeal, which was heard by the Full Federal Court on 19 November. The court’s decision is reserved.
The product intervention order lapsed this past March.