Federal Court slams payday lender for unconscionable conduct and breaches to consumer credit laws

The corporate watchdog has emerged victorious in its case against collapsed payday lender The Cash Store, with the Federal Court ruling this week The Cash Store and associated entity Assistive Finance Australia breached consumer credit laws and acted unconscionably when selling insurance products.

The Australian Securities and Investments Commission, which launched legal proceedings against the two companies in September last year, has labelled the ruling “a landmark case for the consumer credit regime” and “essential reading” for all credit licensees.

The Cash Store was once one of the nation’s largest payday lenders, but it collapsed into administration just days after ASIC acted on claims the business broke credit standards by targeting customers who wouldn’t be able to repay any loans.

The Federal Court sided with ASIC this week, ruling there was “a systemic failure” on the part of both companies to meet their responsible lending obligations to their customers, the majority of which were on low incomes or welfare payments.

The court also found The Cash Store engaged in unconscionable conduct when selling consumer credit insurance to the same customers as it was highly unlikely the customers would ever see any benefit from the insurance policies.

While the amount of civil penalties imposed on The Cash Store and Assistive Finance Australia will be determined at a further hearing on November 17, the maximum penalty for a corporation that breaches responsible lending and credit guide laws is $1.1 million per contravention.

Denise Boyd, director of policy and campaigns at the Consumer Action Law Centre, told SmartCompany the case provides “really good guidance about how responsible lending law applies to lenders”.

Boyd says credit providers, including payday lenders, have certain responsibilities when it comes to providing loans and the court has made it clear the “lender has to be reasonably clear about the purpose of the loan”.

This means making reasonable enquiries as to the income and expenses of the person applying for the loan, and ensuring the loan doesn’t create additional financial hardship, says Boyd.

“The Cash Store had multiple examples of contracts with very vague purposes such as ‘living needs’ … they didn’t make reasonable enquiries about the purpose of the loans,” she says.

Boyd says the court also made strong statements about The Cash Store’s practice of selling lenders insurance products.

“The Cash Store sold insurance on 180,000 loans, collected $2.2 million in premiums, kept $1.3 million in commissions, but only paid out 43 policies,” says Boyd.

Boyd says this type of insurance is usually only sold to provide assistance to people who lose their jobs, but in most cases, individuals who apply for short-term loans from payday lenders may already be out of work.

“It is a useless product,” says Boyd.

“These people are already at the bottom end of the scale in terms of access to credit.”

Boyd says the court’s ruling on “unconscionable conduct” in selling the insurance products is “a challenge to the insurance sector”.

“Insurance companies should be seriously considering if they want their products to be sold in this way,” she says.

Boyd says the case also highlights the need for anti-avoidance provisions in credit laws, which would go some way to addressing concerns with payday lenders such as The Cash Store.

“If we had anti-avoidance provisions, it would allow ASIC to respond flexibly to changing business models, including payday lenders,” says Boyd.

“It would give them powers to respond when things are emerging … rather than waiting for harm to occur.”

SmartCompany was unable to contact The Cash Store or Assistive Finance Australia.