The nature and extent of the detriment, including the actual or potential financial loss to consumers resulting from the product

In considering whether a financial product has resulted, will result or is likely to result in significant consumer detriment, ASIC must take into account the nature and extent of the detriment, including the actual or potential financial loss to consumers resulting from the product: paragraph 1023E(1)(a) and (b) of the Act.

Short term lending model

ASIC considers the short term lending model results in significant detriment. The short term lending model involves two services or products provided to a retail client:

·         provision of short term credit (short term credit facility) by the short term credit provider, who charges fees consistent with limits prescribed in the short term credit exemption in subsection 6(1) of the National Credit Code (the short term credit exemption); and

·         an associate of the short term credit provider, providing collateral services (such as application, management and collection services) in relation to the provision of the short term credit, and who charges significant fees or other charges under a separate collateral contract.

ASIC considers the short term lending model results in significant detriment because of the combination of the following factors:

·         the target market includes vulnerable consumers who are in financial difficulty and require short term loans generally to cover basic living expenses, many of whom have been declined for regulated credit;

·         the short term nature of the loans provides consumers with limited time to raise funds to make the required repayments;

·         the overall fees and charges charged under the model are significantly higher than what is permitted under the short term credit exemption;

·         the short term lending model has a high default rate, which results in large amounts of default related fees being charged to consumers; and

·         many consumers cannot afford to repay the short term loans or repay them without suffering substantial hardship.

 ASIC has taken into account the nature and extent of the significant detriment, comprising financial loss and non-financial detriment.

Financial loss

ASIC has identified the following financial losses as resulting from the short term lending model:

·         Consumers are being charged significant upfront, ongoing and default fees under the short term lending model, in excess of what is permitted under the short term credit exemption.

·         Additional fees from third parties are often incurred, including bank charges in relation to dishonoured direct debits and overdrawn fees.

·         As a result of the significant fees and charges and subsequent increase in debt, consumers are often unable to meet other financial commitments.

As the short term credit facilities provided under the short term lending model are not regulated ‘small amount credit contracts’, consumers do not have the following statutory protections under the National Consumer Credit Protection Act 2009 (National Credit Act) and National Credit Code:

·         not to be charged more fees and costs than credit providers can charge if the contract was a small amount credit contract (being an establishment fee of up to 20% of the credit amount, and a monthly fee of up to 4% of the credit amount);

·         not to be charged an establishment fee if they refinance; and

·         not to be obliged to repay more than double the amount borrowed in the event of default.

Significant fees

The following table illustrates the type of fees that have been charged under the short term lending model.

Source: Cigno’s website as at 28 June 2019

Note:   The Financial supply fee is based on the payment option that the consumer selects. Cigno offers six different payment options with a different financial supply fee for each option. For example, one payment option has a financial supply fee of 35% of the loan amount, and the eight payment option has a financial supply fee of 115% of the loan amount. The six and eight payment options are only offered to existing customers.

From a review of these fees and additional confidential data received, ASIC understands that:

·         The lender fee, 5% of the loan amount, is the only fee charged by the short term credit provider under the short term credit facility. This amounts to approximately 2% of the overall fees charged under this short term lending model. 

·         The remaining fees are charged by the short term credit provider’s associate under a separate collateral contract. This amounts to approximately 98% of the overall fees charged under this short term lending model.

·         These fees charged by the associate under a collateral contract, comprising 98% of the overall fees charged under the short term lending model, exceed the fees that can be charged under the short term credit exemption.

·         The short term lending model has a high default rate, which is almost double the default rate of similar regulated credit products, such as small amount credit contracts.[1]

·         Approximately 60% of the associate’s total revenue earnt through the short term lending model was attributable to default related fees as a result of missed payments.

·         Approximately 30% of the associate’s total revenue earnt through the short term lending model was attributable to the financial supply fees.

·         ASIC estimates that at least 270,000 consumers have obtained credit through the short term lending model from May 2016 to April 2019.  

Case Studies

In CP 316, ASIC provided three case studies of consumers who had suffered significant detriment caused by the short term lending model. For example, see Case study 1, which highlights the impact of default fees from paragraph 5 of CP 316:

Case study 1: Impact of default fees

Consumer A was on a Centrelink Newstart allowance when she obtained short term credit through Cigno for $120.

Under the contract:

o    Cigno charged a $90 financial supply fee;

o    Cigno charged $5.95 in weekly account keeping fees;

o    GSSF charged a credit fee of $6; and

o    the total amount to be repaid was $263.60, by four fortnightly payments of $66 (with the fourth payment being $65.60).

Consumer A could not afford the repayments and immediately defaulted. She was charged various dishonour fees and ongoing weekly account-keeping fees. As a result, Consumer A became liable to repay $1,189 on the original amount of $120 (or 990% more than she borrowed).

By comparison, if Consumer A had entered into a small amount credit contract regulated by the National Credit Act, she could have been charged a maximum total fee of $33.60 comprising:

o    an establishment fee of up to 20% of the amount of credit ($24); and

o    a monthly fee of up to 4% of the amount of credit for four fortnights ($9.60).

The total amount repayable under the contract would have been $153.60 compared to $263.60 with the Cigno product.

If Consumer A had entered into an exempt short term credit facility, she could have paid a maximum of $130.64 comprising:

o    the initial amount of $120;

o    a 5% fee on this amount ($6); and

o    24% p.a. interest for 56 days ($4.64).

This case study demonstrates how default fees arising from missed payments can make an initially small loan become almost 10 times the original loan amount.

In response to CP 316, aggrieved consumers, financial counselling and community legal centres provided over 100 consumer case studies to support their submissions, which highlighted common themes of:

·         charging of excessive fees;

·         consumers’ lack of understanding of the fees/charges;

·         irresponsible lending with no adequate affordability assessments resulting in high levels of default related fees;

·         targeting and exploitation of vulnerable consumers, in particular Indigenous consumers; and

·         high prevalence of direct debits from consumers’ accounts leaving insufficient funds to pay for basic living expenses.[2]

ASIC has observed similar themes arising out of reports of misconduct received by ASIC in relation to the short term lending model.

Reports of Misconduct

·         From 1 July 2016 to 31 August 2019 ASIC received 209 reports of misconduct against Cigno Pty Ltd (Cigno), one user of the short term lending model. This is the largest number of reports of misconduct made to ASIC across all entities of complaints relating to short term credit, payday and personal loans.

·         These complaints have raised similar themes that were raised by the case studies discussed above, with the majority of complaints (86%) regarding excessive fees, charges and interest rates.

Non-financial detriment

As the contracts provided under the short term lending model are not regulated ‘small amount credit contracts’, consumers do not have the various consumer protections under the National Credit Act and the National Credit Code, including:

·         to have a proper responsible lending assessment by the credit provider about whether the credit amount is affordable and meets their requirements and objectives;

·         for Centrelink recipients who receive at least 50% of their gross income as payments under the Social Security Act 1991, to ensure that repayments do not exceed 20% of their gross income for that payment cycle;

·         to insist that credit providers have IDR processes and are a member of an EDR scheme, which would make it possible for them to complain (free of charge) to the EDR scheme in the event of a dispute;

·         to apply for hardship and be given the relevant protections under section 72 of the National Credit Code;

·         to be provided with a warning statement before they enter the contract, which explains and outlines the costs payable and alternatives available to them; and

·         to rely on the various other protections and provisions of the National Credit Act and Code (e.g. the rebuttable presumption that if they were in default under a regulated small amount credit contract or had two or more such contracts at the time of a preliminary assessment, they could only comply with their financial obligations under the relevant contract with substantial hardship).

Consumers have also been reported to suffer physical and mental hardship due to the financial stress, distress and anxiety caused by the short term lending model. These impacts are discussed in the section below.   

Further details of the significant detriment caused by the short term lending model is set out in CP 316 at paragraphs 35 to 67.

The impact that the detriment has had, will have or is likely to have on consumers

In determining whether a financial product has resulted, will result or is likely to result in significant detriment, ASIC must also take into account the impact that the detriment has had, will have or is likely to have on consumers: paragraph 1023E(1)(c) of the Act.

Risk of significant financial harm

The Revised Explanatory Memorandum for the Consumer Credit Legislation Amendment (Enhancements) Bill 2012 makes it clear that short term lending is a product that has a significant risk of financial harm as it may:

·        cause long term financial detriment to consumers who are financially stressed;

·        cause debt spirals and create a cycle of disadvantage that reduces the consumer’s potential for financial and social inclusiveness;

·        increase the consumer’s financial detriment as the more loans the consumer takes out within a short period, the more the repayments which leave less income to pay for ongoing expenses.

Due to the short term of this type of loan, the consumer can be expected to receive less income over the loan term, leaving the consumer with little or no opportunity to put aside income to repay the loan.

Limiting the financial impact of short term lending, by limiting the fees that can be charged, can conversely improve or stabilise the consumer’s financial position as consumers would be charged lower amounts and would likely have lower levels of repeat borrowing.

Types of consumers impacted

Information available to ASIC, including CP 316 submissions and reports of misconduct, indicates the types of consumers affected by the significant detriment include:

o    vulnerable consumers from low socio-economic groups, including unemployed consumers, sole parents, consumers with intellectual disabilities, mental or physical illness, Centrelink recipients, consumers with substance or addiction issues, Indigenous consumers, including those with low levels of financial and English literacy, young consumers and elderly consumers; and

o    consumers in financial difficulty requiring credit to pay for basic living expenses.

Data which ASIC has received on a confidential basis indicates that:

·         The demand for the short term lending model is driven mostly by low-income households experiencing significant financial distress and which require short term credit to meet basic living and essential household expenses.

·         A high proportion of consumers who have obtained short term credit through the short term lending model state they had been declined for regulated credit products (such as small amount credit contracts). 

For example, in its submission the Australian Financial Complaints Authority (AFCA) stated that this type of lending (short term lending model) is targeted at vulnerable consumers including those that are most vulnerable as they need money quickly and are in financial hardship, suffering financial abuse or who have low financial literacy. AFCA refers to a recently released report by the Senate Economics Committee into credit and financial products targeting Australians at risk of financial hardship (which they feel to be true for the short term lending model) which said:

 ‘Often these products appear not only to have been targeted at Australians in financial hardship—they seem to have been designed to take advantage of them. It is difficult to escape the conclusion that many providers’ business models depend on vulnerable consumers who have limited awareness of other product options, limited negotiating power, and limited propensity to complain about improper or illegal behaviour’.^[3]

ASIC also notes that there has been a particular rise in short term credit obtained through the short term lending model which has impacted Indigenous communities.   

In the submission from Financial Counsellors Association of Western Australia, it states that evidence collected by locals and advocacy groups shows that hundreds of Indigenous people in remote WA communities have been to signed up to these types of loans.[4] Similar comments were made in the submission from South Australian Financial Counsellors Association, which stated that its members in the Northern Territory and South Australia have reported an escalating problem with Cigno targeting vulnerable clients.[5]

Impact on consumers

The impact that the significant detriment has on these types of consumers identified above, includes:

·         exacerbating existing financial stress;

·         the inability to meet basic living expenses on an ongoing and prolonged basis;

·         inability to improve financial position;

·         disempowering consumers and exacerbating financial exclusion;

·         undermining consumers’ financial capability and resilience;

·         stress, anxiety and further negative physical and mental health outcomes caused by financial difficultly.

Worsening financial position

From the information available from reports of misconduct, consumer data and CP 316 submissions, ASIC observes that the combination of financially stressed consumers obtaining short term credit with no adequate affordability assessment, high fees (upfront, ongoing and default fees), plus a high default rate, results in small debts spiralling into larger debts, exacerbating a consumers’ overall financially stressed position and reducing their ability to meet ongoing basic living expenses.  The submissions provided in response to CP 316 generally support this observation.

For example, Financial Rights Legal Centre (FRLC) stated that offering credit to those who cannot reasonably afford to repay the credit does not amount to financial inclusion, rather it’s quite the opposite, as consumers’ debts rapidly increase beyond their capacity to repay and become constrained financially and psychologically. FRLC cited research conducted by ANZ, which indicated that saving, and not borrowing for everyday expenses, are strongly correlated with financial well-being. [6]

Financial Counselling Australia, the peak body for financial counsellors in Australia, noted that its financial counsellors have repeatedly seen consumers fall into debt spirals as a result of these types of loans, because the consumers could never afford to repay the original loan, resulting in repeat borrowing, rolling over of original debts with spiralling costs and default costs.[7]

The Consumer Credit Law Centre SA (CCLCSA) stated that when consumers enter into a short term credit agreement, their existing financial stress is compounded by the onerous conditions imposed by the lender and they suffer further detriment.[8]

LawRight referred to research which indicates that these types of loans often leave consumers in a worse financial position[9] – any influx of cash is short lived with  consumers required to take up additional credit to meet the high cost of the loan, creating a cycle of hardship.[10]

Legal Aid Queensland is of the opinion that the most significant issue of the short term lending model is that the model targets vulnerable consumers experiencing financial stress, and then exacerbates that financial stress through the use of a high cost, high fee model which does not assist a consumer to resolve their difficulties, but rather contributes to a further deterioration of those financial circumstances.[11]

Adverse health impacts

ASIC understands that financial stress and difficulties caused by the short term lending model can flow onto other aspects of consumers’ lives and can have adverse health impacts which affects overall quality of life. This have been evident in reports of misconduct and CP 316 submissions.

For example, CCLCSA stated that many consumers have reported feeling of despair and hopelessness when they realise they are caught in a vicious cycle of debt from which they are unable to escape without forgoing basic living requirements.[12]

LawRights’ submission referred to research which discusses the various health impacts of financial pressures, including depression, reduced psychological well-being, obesity and anxiety, confirming that this is particularly true for unsecured short term credit.[13]

Legal Aid NSW also discussed the health impacts caused by financial stress and referenced research from the University of Melbourne which found that financial hardship negatively impacts on physical and mental health, and overall quality of life, and that the impacts are more severe for people with long term debt problems and Centrelink recipients[14].  

ASIC has observed the following examples of impacts of the significant detriment on consumers from the reports of misconduct, CP 316 submissions and case studies:

·         consumers have been left with no money to pay for food;

·         consumers have had to seek emergency food relief;

·         consumers have been unable to pay rent and housing expenses and become at risk of homelessness;

·         consumers have had to file for bankruptcy;

·         consumers have suffered from stress and anxiety and other mental health impacts arising from, or exacerbated by, the financial stress, including one consumer who was reported to have committed suicide; and

·         consumers have suffered additional stress and anxiety when their debts were referred to external debt collectors who threaten them with legal action.

For example, CCLCSA reported that clients have sought emergency relief for food and accommodation as they are left with insufficient funds to buy food or pay rent due to Cigno’s direct debit repayments.[15] FRLC also noted that some of their clients who have sought assistance with Cigno loans are surviving on food vouchers or going without essential medications, many have rental arrears, and some are already homeless.[16]