Business watchdog ASIC loses lawsuit against payday lenders

The company’s watchdog has lost a legal battle over a payday loan model it says can charge customers up to 1,000% of the original loan amount.

The Federal Court on Wednesday dismissed the Australian Securities and Investments Commission’s case against Cigno and its associate BHF Solutions, neither of which holds an Australian credit license.

“There was no allegation that the services provided by Cigno were not genuine services provided under a genuine agreement or that the stated purposes for which these services were provided were a sham or any allegation that the services were not in fact provided,” Judge John Halley wrote in his published decision.

“The fees charged by Cigno were in exchange or consideration for the provision of the services…. not for granting credit.

However, Justice Halley admits that the “precise legislative language” of the National Credit Code may have led to unintended consequences.

“Given the beneficial and protective purpose and object of the code, one would think that it produces a result that could not have been foreseen,” Judge Halley said.

The ruling comes after ASIC used new product intervention powers to ban what it described as a ‘predatory business model’, in which a short-term credit provider and its associates charge a fee under separate contracts.

The practice involved associated companies charging large up-front, ongoing, and default-related fees under a separate contract for loan management and administration services.

Combined, these fees amounted to nearly 1,000% of the loan amount, with many financially vulnerable consumers often incurring extremely high costs that they could not afford.

ASIC defended its bid to ban the short-term credit model.

“ASIC took on this case to protect vulnerable consumers from what we believe to be a harmful lending model,” said ASIC Vice President Sarah Court.

“ASIC will carefully consider the judgment before deciding our response.”

Community lawyers and financial advisors have also backed ASIC’s moves to curb the lending model.

“ASIC has done what it takes to initiate this legal action,” said Karen Cox, CEO of the Financial Rights Legal Centre.

“Companies that engage in credit business must be licensed and subject to billing limits, but tricky business models like this take steps to evade the law.”