Consumer groups are warning of an explosion in high-interest payday loans if coronavirus supports are canceled as planned in September.
Business watchdog ASIC has already taken action against two short-term credit providers – Cigno and BHF Solutions (BHFS) – after the pair allegedly overcharged desperate borrowers by exploiting a license exemption granted to credit contracts continuous.
One of the companies – BHFS – provided small loans that technically did not violate any law, while Cigno allegedly acted as a “service provider” by referring clients to BHFS and charging expensive fees.
This is the second time in as many years that ASIC took action against Cigno, although ASIC commissioner Sean Hughes said new product intervention powers would prevent other companies from using the same loophole in the future.
Talk to The new daily, Consumer Action Law Center Managing Director Gerard Brody praised ASIC’s response.
“What ASIC is saying with both the initial product intervention power introduced last year and this one is that companies shouldn’t be able to artificially use two contracts to circumvent the rules, ”he said.
But powers aren’t enough to stop unscrupulous lenders from finding new loopholes to exploit, Brody warned.
Mr Brody said it only took Cigno a few days to create a new unregulated lending product after ASIC shut down a previous lending model in 2019.
Instead, Brody said the federal parliament urgently needs to pass the Small Amount Credit Deeds Bill, designed following a sector review in 2016.
This legislation includes broad anti-avoidance measures that would make it illegal for companies to exploit loopholes, rather than allowing ASIC to play “mole-tailed” with targeted intervention powers.
Mr Brody said there was an urgent need for these laws to be passed as soon as possible.
He noted that increased government budget support in the form of JobKeeper and increased payments from JobSeeker have dampened demand for payday loans.
But when these supports are unwound, this trend should be reversed, he warned.
In a statement to investors, Cash Converters CEO Sam Budiselik said demand for low-value credit contracts fell 18% between January and April.
While this has hurt Cash Converters’ finances in the short term, Mr Budiselik said demand is expected to return as supports are removed and the economy recovers.
Credit union criticizes dubious lenders
The credentials proposed by ASIC have also been welcomed by the president of the National Credit Providers’ Association, Michael Rudd.
Mr Rudd said companies like Cigno, which design products outside the National Consumer Credit Protection Act (NCCPA), put borrowers at risk.
“The facts are that current laws and consumer protections for small loans do not cover lenders like Cigno or other providers who offer ongoing credit contracts,” he said.
“Lawmakers should ban the use of service agreements with third parties that allow unscrupulous companies to get away with charging exorbitant fees.”
Cigno in ASIC’s sights again
Cigno – one of two companies in ASIC’s sights – is no stranger to the action of the regulator.
In July 2019, ASIC used its product intervention powers against the lender after discovering that it was charging interest rates on loans as high as 990%.
These loans were also structured in a way that allowed Cigno to violate NCCPA laws, meaning affected clients could not lodge their complaints with the AFCA mediation service.
This time, ASIC says Cigno is using another legal loophole to effectively achieve the same result.
According to the regulator, the loans were granted by BHFS in the form of “continuous credit contracts”.
These contracts are for small loans with fees capped at $ 120 per year and, due to their small size, are also outside of the NCCPA.
However, clients received the loans from BHFS through a contract with Cigno, which acted as a sort of third party and charged additional fees for unnecessary services.
These included “expedited” processing fees, collection of payments, and ongoing administration and management fees.
In at least one case, a disabled pensioner who had borrowed money to cover medical bills was charged 490% of their original loan amount.
