Recent Cases and ASIC Actions in Consumer Credit: Presentation for Min-IT
A presentation by Dr Paul O’Shea
Tel: 07 3359 7967
What are we doing? only A FEW
- Cash Converters
- Motor Finance Wizard
- Radio Rentals
PACCIOCCO V ANZ (HIGH COURT OF AUSTRALIA)
Maurice Blackburn’s multimillion dollar class action against the ANZ which argued that late fees were “penalties” at common law (as well as breaching other statutory provisions) and, therefore, unenforceable.
Court found that ANZ could justify its $35 fee by:
- Its operational costs (about $5).
- The effect of provision for late payments and defaults on the value of the loan portfolio (about $27)
- The effect on the costs of regulatory compliance with APRA capital requirements of provision for late payments and defaults (about $23).
TAKE AWAY MESSAGES:
- Late fees can take into account more than just the operational costs of their administration (ie email, phone call, letter).
- They can represent the effect on the quality of a loan portfolio with levels of late payment and default => higher cost of funds
- The regulatory capital argument in this case is really only relevant to APRA regulated ADIs SO, as that, represented almost ½ of the expert evidence calculation for the “cost” of the late payment, non-ADIs still need to be cautious when setting their penalty levels.
- For Min-IT clients, you should do the work to identify:
- the operational costs of a late payment;
- an amortized amount for the extra overheads (ie staff and facility time);
- the effect on your cost of funds of making provision for defaults of having late payments;
- a small amount (no more than 4% of the payment) for the lost opportunity cost of the missing funds but only for one payment period.
Record it. And update every 12 months or so. Note, not every cost goes up…as your business becomes larger economies of scale may make them go down!
Cash Converters EU
The relevant contracts were those where the lender had “rebutted the presumption of hardship” which arises when the consumer has 2 or more SACC loans in the previous 90 days.
ASIC alleged that Cash Converters had failed to do so and had relied too much on benchmarks rather than individual assessments of consumer expenses.
- Refund consumers of the Relevant SACCs a total of $10,800,000.
- Have an Independent Expert for Two Compliance Reports (6 and 12 months).
- Implement the recommendations of the Independent Expert.
TAKE HOME MESSAGES:
- Benchmarks can’t be a substitute for asking the consumer about their expenses and then checking the bank statements to verify what they say.
- Benchmarks are only a “check” against the consumer’s own individual expenses.
- Rebutting the presumption is a higher standard than just assessing a consumer to whom the presumption of hardship does not apply.
- ASIC initially prosecuted BMW for some debt collection conduct => Fines of $306,000 + External Compliance Reviews.
- ECR found 98/100 contracts reviewed did not satisfy responsible lending obligations.
- ASIC decided not to wait for the next ECR report and sought EU.
- $14.6 million in remediation payments; and
- $7.6 million in interest rate reductions on current contracts; and
- $50 million in loan write offs;
- a $5 million community benefit to contribute to consumer advocacy and financial literary initiatives.
A total of $77.2 Million Plus the ECR costs plus legals.
TAKE HOME MESSAGES:
- A prestigious marque is no replacement for basic compliance ie staff, training, resources, documentation.
- Again, benchmarks are no replacement for proper inquiry.
- Debt collection is a credit activity and must be conducted in a compliant manner.
- The “job is not done” once the loan is written.
Channic (Federal Court)
An ACL lender associated with a finance broker associated with a car yard in Cairns selling and financing cars to people from remote indigenous communities
Eight cases run by ASIC. Multiple breaches, particularly of responsible lending provisions.
- Channic Pty Ltd (Channic) $278,000,
- Broker Cash Brokers Pty Ltd (CBPL) $278,000
- Mr Hulbert, director’s liability, $220,000
In total, $776,000 for breaching consumer credit laws relating to responsible lending; plus
ASIC’s legal costs of $420,000.
First judicial pronouncement on the responsible lending provisions:
Per Justice Greenwood:
These statutory matters are not matters of form or mere process but represent normative matters of substance….
These normative matters are not simply a “tick the box” compliance exercise. …
TAKE HOME MESSAGE:
- Consumer Requirements and Objectives (often the “poor cousin” of responsible lending) are important.
- “tick box” approaches will not be good enough;
- Vulnerable consumers require particular attention.
- Nimble had not properly assessed the financial circumstances of many consumers before providing them with loans. Nimble relied on algorithms which did not properly take consumers’ financial information into account.
- Nimble failed to consistently recognise where consumers had obtained repeat loans from payday lenders within a short period of time. Even where repeat loans were properly identified, Nimble did not take sufficient or appropriate steps as required by law before providing a loan to the consumer.
- Nimble failed to make proper inquiries of consumers’ requirements and objectives, and inquiries that were made were of a general nature and resulted in not enough information for Nimble to fully understand the consumer’s needs.
- pay more than 7,000 consumers in excess of $1.5 million through a consumer remediation program overseen by Deloitte Touche Tohmatsu;
- make a $50,000 contribution to Financial Counselling Australia; and
- engage an independent external compliance consultant to review their current business operations and compliance with the consumer credit regime and report back to ASIC.
Westpac Case Federal Court Action commenced March 2017
- One of several prosecutions by ASIC against Westpac (e.g. Rate Rigging, Credit Card Limits)
- This one was for breach of responsible lending obligations for home loans with interest free periods. ASIC provides, in the Statement of Claim, seven (7) examples of “all loans not referred to manual assessment between December 2011 and March 2015.” It seeks declarations (based on the findings about the seven examples) to apply to ALL such loans (Multi-million $ penalty). Loans were for amounts ranging from $400,000 – $1.2 million. All for residential purposes.
- ASIC alleges that Westpac used 2011 – 2012 HEM as benchmark (with some adjustments). Didn’t verify actual expenses from bank statements etc. Seemed to ignore self-declarations of expesnes by consumers.
- ASIC alleges that if consumers declared expenses had been used in the credit assessments, each of the seven example loans would have resulted in substantial monthly deficits.
- ASIC alleges that Westpac also failed to take into account the likely capacity (or lack thereof) of consumers to meet payments when interest free period expired (these were up to 10 years).
- Westpac is defending, saying that the HEM is “a useful input” into its credit assessment process but denied that it did not “consider the consumer’s individual financial circumstances.”
- Westpac has pointed out that none of the seven example loans are in default (but declined to comment on the overall default rates for the portfolio of interest free loans in question) and, of course, none of them have finished their interest free periods.
- Westpac has not done themselves any favours by announcing in August 2017 that it will “more closely scrutinies borrower’s income” than it has done before (though this case is about expenses).
- Case is unlikely to resolve until late 2018 (if then).
TAKE HOME MESSAGE:
- Benchmarks can only be used as a “default” ie if the consumer’s self-declaration is too low.
- Benchmark indexes must be regularly updated e.g. electricity is now much more expensive and cannot be simply adjusted for by inflation.
- There is no real substitute for examining the bank statements for actual expenses and (if these are below the benchmark index) asking the consumer how and why they are achieving this without hardship.
Motor Finance Wizard EU May 2017
- ASIC alleged that MFW failed
- to make reasonable inquiries about consumers’ income and expenses
- to take reasonable steps to verify consumers’ expenses.
- ASIC has accepted an enforceable undertaking from Motor Finance Wizard, which includes:
- over $11 million in refunds and write-offs to 1,511 customers who entered into a consumer lease or loan between 1 July 2010 and 16 July 2014
- $100,000 payment to a community benefit program funding consumer initiatives
- re-assessing each consumer’s capacity to make payments under the consumer lease or loan under a remediation program overseen by an independent auditor who will report to ASIC
- giving affected consumers the option to remain in or terminate the consumer lease or loan
- allowing consumers to keep the car at the end of the lease term, if they elect to keep the lease
- engaging an independent expert to review its current business operations and compliance with the consumer credit regime and report to ASIC
Radio Rentals EU and Civil Penalties Case Jan 2018
Civil penalty proceedings
- ASIC has lodged civil penalty proceedings with the Federal Court of Australia, in which Thorn Australia Pty Ltd t/a Radio Rentals has admitted to four contraventions by Radio Rentals of the National Credit Act in respect of each of the 278,683 consumer leases which it entered into in the period from 1 January 2012 to 1 May 2015.
- These contraventions relate to the responsible lending obligations of lease providers which require them to make inquiries and take steps to verify the consumer’s financial situation, in order to assess whether the lease is suitable for the consumer, before it is entered into.
- ASIC and Thorn will file a Statement of Agreed Facts in the Federal Court , and will make joint submissions that the appropriate penalty to be paid by Thorn is $2 million. The penalty amount payable by Thorn will be determined by the Court.
ASIC has accepted an Enforceable Undertaking (EU) from Thorn, to further address ASIC’s responsible lending concerns and to address concerns about Radio Rentals accepting and retaining excess payments from customers that were more than the lease required. Radio Rentals has already returned approximately $11.8 million of the $13.8 million to customers who overpaid.
Under the terms of the EU, Radio Rentals will:
- refund or write-off approximately another $6.1 million in default fees and charges relating to an estimated 60,000 leases as a result of the responsible lending conduct which is the subject of the civil penalty proceedings.
- hold the balance of both the responsible lending refunds and the overpayment refunds that cannot be returned to customers in trust and ultimately donate it as a community benefit payment if the money is not claimed.
- appoint an independent expert to review its compliance with obligations under its Australian credit licence (including general conduct and responsible lending obligations) and oversee the repayment scheme.
TAKE HOME MESSAGE:
- RLO applies to leases just as much as loans
- ASIC has turned its “eye” to consumer leases (even before the Panel Reforms are applied).
- Penalties and refunds can be substantial
TAKE HOMES AND TAKE AWAYS
- The more work you do on compliance the less you will have to spend on regulatory litigation.
- Do regular compliance checks: => Don’t wait for ASIC to impose an external compliance review on your licence…get one done voluntarily and then don’t ignore your reviewer’s recommendations!
- Training is the answer! The gap between a reasonable set of compliance documents and non-compliant files is the work of your staff!
- If approached by ASIC:
- Cooperate…they have ways.
- Don’t defend the indefensible.
- Make a deal!