ASIC’s first product intervention order bans short term credit model

ASIC recently announced the first order issued under its new product intervention powers.

ASIC has made an order to impose a condition on the exemption to the NCCP Act that short-term credit providers currently rely on. The new condition effectively bans short term credit business models that require consumers to pay fees to the credit provider and associates of the credit provider in relation to short term credit which, when combined, exceed the prescribed limits for regulated credit.

Currently, short term credit providers are exempt from the Australian credit regime if the fees charged for a loan of up to 62 days does not exceed 5 per cent of the loan amount and an annual interest rate of 24 per cent. Accordingly, provided they meet the criteria, these providers do not need to comply with the responsible lending obligations and prescribed interest limits.

However, a number of credit providers were engaging associates who simultaneously charged upfront, ongoing fees and default fees for loan-related “management and administrative” services. In some cases, the combined fees totalled nearly 1000 per cent of the initial loan amount.

Whilst the order relates to a short term credit business model, ASIC’s order shows all financial services and credit industry participants the extent to which ASIC can use the new power. AFCA is very supportive of ASIC using the new power to prevent poor consumer outcomes, and has indicated it may provide information to ASIC about problem financial products it encounters in performing its role.

The order commenced on 14 September 2019. After its commencement, Cigno Pty Ltd applied to the Federal Court of Australia to quash the order on the grounds that it is invalid.

If Cigno Pty Ltd is unsuccessful, the order will remain in force for 18 months, at which time it will be either be extended or made permanent with Ministerial approval, or lapse. A breach of the order may result in up to 5 years imprisonment and fines of up to $1.26 million per offence.