ASIC’s Product Intervention Powers commenced on 6 April 2019 with amendments to the Corporations Act 2001 (Corporations Act) and the National Consumer Credit Protection Act 2009 (NCCP Act) passed by parliament. These powers were introduced to allow ASIC to intervene where products have resulted in (or are likely to result in) significant detriment to retail clients in relation to various financial products. In July 2019, ASIC released Consultation Paper 316 on the first proposed use of its product intervention powers in relation to the short term credit industry.
Which Products are the Target of ASIC’s First Use of its New Power?
ASIC’s first proposed use of the product intervention power targets credit providers and their associates who offer short term credit of amounts up to $1000 and who charge fees under separate contracts. These credit providers have structured their arrangements to take advantage of the short term credit exemption in the National Credit Code at Schedule 1 of the NCCP Act by requiring the money to be repaid within a term of 62 days. These credit contracts are therefore not regulated by the National Credit Code or subject to the Australian Credit Licensing regime.
Associates of short term credit providers offer collateral services under a separate agreement with the consumer to fast track the credit application. The fees for these collateral services are often very high relative to the amount borrowed by the consumer. ASIC has found that the total fees and repayments can amount to up to 990% of the loan amount. ASIC considers this type of short term lending model can (and does) cause significant consumer detriment, including:
- the target market for these types of loans are consumers in urgent need of small amounts of credit and experiencing financial stress;
- the total cost payable under the contract is significantly higher than the maximum charges permitted by the NCCP Act;
- there is no adequate assessment of the consumer’s capacity to repay the loan and ASIC has found credit is often provided under this model to consumers who are likely to default;
- default fees result in high fees being charged, beyond the default fees permitted by the NCCP Act;
- high levels of repeat use by vulnerable consumers can lead to consumers ending up in a high cost debt spiral.
At this stage ASIC has only identified two credit providers who utilise this model and therefore any proposed order would only affect these two entities. However, the proposed order could also affect any new entrants to the industry and may also affect entities which ASIC has not identified during the course of its inquiries.
ASIC’s proposal to address the consumer detriment as outlined in CP316 includes three options:
- Option 1: the use of the product intervention power to prohibit specific short term lending models which benefit from the short term credit exemption – this is ASIC’s preferred option;
- Option 2: encouraging the use of alternative products or action through warning messages; or
- Option 3: no change to the current regime.
ASIC’s proposal under Option 1 involves limiting the total fees that can be charged by short term credit providers and their associates under short term credit contracts and collateral services contracts. ASIC has also anticipated that a new model may be established in order to circumvent the proposed product intervention order. Accordingly, ASIC’s proposal under Option 1 would allow it to amend the product intervention order, or to introduce a new order, to address any new model which may be established.
ASIC is required to consult with industry stakeholders and affected parties prior to exercising its powers and CP316 provides interested parties to provide their comments to ASIC on this issue. The consultation period is relatively short – input from the public and affected stakeholders is due to ASIC by 30 July 2019 and ASIC has stated that it anticipates making a decision on its proposed product intervention order in August 2019.
- Consultation Paper 316
- 19-177MR ASIC consults on proposal to intervene to stop consumer harm in short term credit
- 19-079MR ASIC Welcomes Approval of New Laws to Protect Financial Service Consumers
Should you have any questions about how ASIC’s new powers could affect your business, please contact us.