The Cash Store decision: A timely reminder that you need to assess a customer’s needs before you lend them money

On 26 August 2014 Justice Davies handed down her decision in Australian Securities and Investments Commission v Cash Store Pty Ltd (in liquidation) [2014] FCA 926.  The decision is a timely reminder for financiers that proper steps need to be taken in respect of compliance with the “responsible lending obligations” contained in National Consumer Credit Protection Act 2009 (Cth) (Credit Act).

Background

The Cash Store Pty Ltd (in liquidation) (TCS) was placed into liquidation on 21 October 2013.  Prior to its liquidation, TCS operated effectively as a pay day loan broker on behalf of Assistive Finance Australia Pty Ltd (AFA).  Both AFA and TCS held Australian credit licences that authorised them to engage in particular credit activities. 

AFA and TCS are not related companies but had a business arrangement under which AFA outsourced to TCS the full “servicing” of the payday loans that AFA funded.

In or about April 2012 the Australian Securities and Investments Commission (ASIC) commenced a formal investigation into TCS which resulted in proceedings being commenced by ASIC against TCS and AFA.  ASIC sought declarations that TCS and AFA had contravened a number of provisions of the Credit Act and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).¹

From the evidence tendered by ASIC it was apparent that a large number of the customers of TCS were in receipt of Centrelink benefits or were otherwise low income earners.

The loans were generally for amounts up to about $2,200 and were for short-term periods between 1 and 36 days.  Between 1 July 2010 (when the relevant provisions of the Credit Act became operative) and 24 September 2012, TCS arranged 325,756 individual credit contracts for about 52,000 customers. 

ASIC did not tender all of the individual credit contracts at trial but instead relied on a sample of 281 of the contracts. 

Legislation

The Credit Act imposes “responsible lending obligations” on credit licensees that are designed to ensure that credit licensees do not suggest, or assist a consumer to apply for, or enter into a credit contract that would be “unsuitable” for the consumer.  See for example sections 115, 116 and 117 of the Credit Act.

The Credit Act provides that the credit licensee must assess the credit contract as “unsuitable” if:

  • it is likely that the consumer would not be able to repay the loan without substantial hardship; or
  • the contract would not meet the consumer’s requirements or objectives.

The Credit Act also prescribes that for the purpose of making the assessment, the credit licensee must make reasonable inquiries about the consumer’s objectives and requirements and financial situation, and take reasonable steps to verify the consumer’s financial situation.

Issues

The central issue in this case was whether TCS had made reasonable inquires about the customers’ requirements and objectives and further whether there was any inquiry into the customers’ financial situations and whether that inquiry was verified.

ASIC’s views

In respect of the failure to make reasonable inquiries about the customers’ requirements and objectives ASIC considered TCS to have made reasonable inquiries about the customers’ requirements and objectives if:

  • the file indicated the purpose for which the loan was sought; and
  • the individual customer’s stated purpose was specific enough to enable TCS reasonably to ascertain what the money was needed for.

In respect of the failure to make reasonable inquiries about the customers’ financial situation ASIC regarded TCS as having made reasonable inquiries about the customers’ financial situation if TCS made inquiries about the customer’s income, and the extent of that customer’s fixed and variable expenses and other debts.

In respect of the failure to verify the customer’s financial situation ASIC took the view that there had been reasonable verification if, at a minimum, the customer’s income and rent or mortgage payments had been verified, although ASIC did not concede that only those items required verification.

Trial Judge’s view

Generally Justice Davies found that there was a failure by TCS to:

  • make reasonable inquires about the customer’s requirements and objectives;
  • make reasonable inquiries about the customer’s financial situation; and
  • verify the customer’s financial situation.

Justices Davies stated at paragraph 30 of her judgment that:

…prior to March 2012 (when new processes were put into place in response to ASIC’s concerns) there was a wholesale failure in process.

Justice Davies continued on and stated that:

TCS had some sort of “safety” check process in that loan officers were provided with a checklist to tick off but the examination of the files bears out that the checklist was only occasionally completed and more often than not, all boxes would be ticked including alternate boxes (for example, both the boxes relating to the PAYG Employees and Self-Employed persons would be ticked, as in the case of CN/12), indicating that the form was treated as a mere box ticking exercise

Lavan Legal comment

It would be hard to find a similar example of the conduct of TCS which clearly fell short of the requirements of the Credit Act.  The decision in this case however serves to highlight, importantly, what ASIC views as the reasonable standard in respect of compliance with the Credit Act, which should serve as a helpful basis to any financiers involved in short term financing. 



¹ This article does not consider the ASIC Act contraventions in respect of the sale of consumer credit insurance.