The Full Federal Court has reversed a previous ruling which found that the lending model operated by Cigno and BHF Solutions was not in contravention of the National Credit Act.
Following an appeal from ASIC, the court unanimously found that a “financial supply fee” charged by Cigno was a charge made for providing credit.
“ASIC took on this case and appealed the Federal Court decision because we were concerned that vulnerable consumers were being charged significant fees which gave rise to hardship and they were not afforded the consumer protections provided by the National Credit Act and Code,” explained ASIC commissioner Sean Hughes.
The lending model operated by Cigno and BHF Solutions purportedly relied on an exemption of the National Credit Code, with the firms claiming to be exempt from holding an Australian credit licence.
As part of this model, BHF Solutions provided the credit and charged a fee under the credit contract to consumers, while Cigno separately charged fees – including the financial supply fee – to arrange and manage the credit under a composite services agreement.
The corporate regulator said the “very high fees” charged by Cigno, combined with the lender’s fees, exceeded the maximum charge allowed to be exempt from holding a credit licence.
“ASIC expects companies to be candid about their credit arrangements,” said Mr Hughes.
“Credit regulation exists to protect consumers from unscrupulous and unfair lending practices and companies should not seek to bypass important consumer protections through artificial structures and mechanisms which expose consumers to additional harm and avoidable cost.”
Credit providers need to comply with a cap on costs in order to remain exempt from the National Credit Act and Code, which impose consumer protection obligations including disclosure requirements, caps on fees and interest rates, hardship provisions and free access to independent external dispute resolution services.
In its decision, the Full Federal Court said that legislation must be considered in a way that “looks to the substance of the credit arrangements rather than their contractual form and ensures that the remedial provisions of the code are not easily avoided by carefully structured credit arrangements”.
ASIC said it had sought declarations only from the court and noted that Cigno and BHF Solutions had 28 days to file an application for special leave to appeal to the High Court.
Proceedings against the firms originally commenced in September 2020 with ASIC alleging that both BHF Solutions and Cigno had contravened section 29 of the National Credit Act.
The regulator claimed that BHF Solutions had engaged in credit activities without holding an Australian credit licence by entering into a credit contract with a borrower and carrying on a business of providing credit.
Additionally, it alleged that Cigno had engaged in credit activities without an Australian credit licence by performing obligations and exercising rights of BHF Solutions in relation to BHF Solution’s credit contract with the borrower and providing a credit service to the borrower.
Both BHF Solutions and Cigno have never held an Australian credit licence.
ASIC’s application was originally dismissed by the Federal Court in June last year, which the corporate regulator subsequently appealed the following month.
Previously, Cigno operated a similar lending model under the short-term credit exemption of the National Credit Code. The firm ceased operating the model after ASIC made an industry wide product intervention order in relation to short-term credit in September 2019.
Shortly after, Cigno filed a judicial review application in the Federal Court seeking to challenge ASIC’s product intervention which was dismissed in April 2020. The firm subsequently appealed this decision in May 2020 which was also dismissed by the Federal Court in June 2021.
The original short-term credit product intervention order lapsed in March last year, and in December ASIC released a consultation paper on its proposed use of its product intervention powers to address significant consumer detriment in the short term credit industry.
