In November last year, Lavan Legal published an article on the liability findings of the Federal Court in Australian Securities and Investments Commission v Cash Store Pty Ltd (in liquidation) [2014] FCA 926 (Liability Judgment). In the article, we noted how the decision was a timely reminder for financiers that proper steps need to be taken in respect of compliance with the “responsible lending obligations” contained in the National Consumer Credit Protections Act 2009 (Cth) (Credit Act).[1]
On 19 February 2015, Justice Davies delivered her findings on the question of penalty in Australian Securities and Investments Commission v The Cash Store Pty Ltd (in liquidation) (No 2) [2015] FCA 93 (Penalty Judgment) and, in a record win for the Australian Securities and Investments Commission (ASIC), awarded penalties totalling $18.975 million against The Cash Store Pty Ltd (in liquidation) (The Cash Store) and Assistive Finance Australia Pty Ltd (AFA).
On 6 September 2013, ASIC commenced proceedings in the Federal Court seeking, amongst other things, declarations that:
The alleged contraventions related to 325,756 credit contracts that The Cash Store had arranged and AFA had financed between July 2010 and September 2012.[4] The loans provided under the relevant contracts were for short term periods between 1 and 36 days and were for amounts up to $2,200 (commonly known as “payday loans”).[5] ASIC did not tender all 325,756 credit contracts at trial rather it relied on a random sample of 281 contracts.[6]
Between August 2010 and March 2012, The Cash Store also marketed and sold CCI to its customers in respect of 182,838 of the 268,903 credit contracts entered into in that period.[7] Only 110 policies resulted in a claim, and of those, only 43 received a settlement or were expected to receive a settlement.
On 26 August 2014, Justice Davies delivered her findings on liability.
Responsible lending
Justice Davies observed that there were clear deficiencies in The Cash Store’s practices and processes, which resulted in systemic failures by The Cash Store to comply with its obligations under the Credit Act and to properly assess whether a credit contract would be unsuitable for the consumer.[8] In particular, it was observed that in relation to the 281 contracts tendered, The Cash Store failed to:
Justice Davies held that the breaches of the Credit Act by The Cash Store were also breaches by AFA as the credit provider. The fact that AFA had outsourced all of its credit activities to The Cash Store did not shield it from liability.[14] Similarly, The Cash Store was found to have been “knowingly concerned in or a party to AFA’s contraventions of its responsible lending obligations” and was thereby taken to have contravened those provisions itself.[15]
Unconscionable conduct
Justice Davies found that The Cash Store had engaged in unconscionable conduct contrary to s 12CB of the ASIC Act by selling CCI to customers from August 2010 to March 2012.[16] Justice Davies’ reasoning focused on the fact that “CCI was unlikely to [have] been of any use to customers” and accordingly, the insurance was not likely to have ever conferred a benefit.[17]
Extrapolation of findings
The question of how the Court could, and should, extrapolate its findings of liability in relation to the 281 contract tendered to all 325,756 credit contracts was reserved for the hearing on penalty and was the subject of the Penalty Decision.
ASIC did not seek findings of contravention in relation to the other credit contracts entered into during the relevant period. Rather, ASIC submitted that the Court should take into account the “statistical likelihood” that similar contraventions on the same scale would be found in respect of the other contracts.[18] In this regard, ASIC sought to rely on expert evidence. The expert gave evidence that it could be said with 95% confidence that the Court’s findings in relation to the 281 contracts could be extrapolated to the other contracts entered into during the relevant period, being July 2010 – September 2012.[19] The Court accepted ASIC’s submission and agreed that it was appropriate in the circumstances to take into account the expert’s analysis and the statistical likelihood of similar contraventions in respect of all contacts entered into over the relevant period.[20]
General penalty principles
In considering the appropriate penalty, her Honour observed that the principal purpose served by the imposition of penalties is deterrence, both specific and general. Importantly, her Honour noted that while specific deterrence was of little relevance in this case due to the liquidation of The Cash Store, it was still appropriate to impose penalties “as a measure of the Court’s disapproval of the conduct, and as a measure of the seriousness with which the Court regards the contraventions”.[21]
Her Honour also affirmed the well established principle that a contravenor should not be punished more than once for the same conduct.[22] In this regard, her Honour paid particular attention to the extent to which the contravening conduct should be treated as a single course of conduct and be penalised as one offence.[23]
Key considerations
Her Honour observed that The Cash Store and AFA were “major players” within the payday lending industry when the conduct occurred and that during that time, they were deriving substantial fees and interest by lending to financially vulnerable persons, many of whom were unemployed.[24] Her Honour considered that this, along with the widespread and significant nature, extent and duration of the contravening conduct, called for the imposition of the maximum penalties.[25]
Her Honour also took into consideration the fact that The Cash Store had changed some of its practices on or around 6 March 2012 as a result of receiving a non-binding suggestion from ASIC.[26] Her Honour concluded that there should be a differentiation in the penalties imposed for the conduct occurring after that date, however, she noted that:
[i]n one sense the conduct in the second period was even more egregious because the scale of the contraventions after 6 March 2012 reflects a continued gross lack of attention to, and disregard of, legal obligations and a failure to put into place practices and procedures that did not comply with the responsible lending obligations.[27]
Her Honour also found that as AFA had outsourced all of its credit activities to The Cash Store without supervision,[28] its conduct was as egregious as that of The Cash Store,[29] and as such the same penalties should be imposed on AFA as The Cash Store. Her Honour also took into consideration the fact that AFA had not acknowledged any deficiencies in process and that by letter to ASIC dated 22 October 2012, had maintained that its outsourcing model was fully compliant with the Credit Act.[30]
Ultimately, her Honour ordered The Cash Store to pay:
And ordered AFA to pay:
This decision highlights the fact that both ASIC and the Court take the “responsible lending provisions” under the Credit Act very seriously, regardless of the size of the loan involved. In this case, the fact that The Cash Store and AFA were major players within the industry and were profiting from vulnerable people appear to have been key considerations for Justice Davies’ decision to impose such significant penalties, particularly given the fact that The Cash Store was in liquidation.
While the liability and penalty proceedings were not contested by The Cash Store or AFA, the Court’s decision to impose such substantial penalties sends a stern warning to the consumer credit industry as a whole, that proper steps must be taken to ensure compliance with the responsible lending obligations contained in the Credit Act.[31]
[1] This article should be read in conjunction with the article published on 14 November 2014.
[2] Australian Securities and Investments Commission v Cash Store Pty Ltd (in liquidation) [2014] FCA 926 at [1].
[3] Ibid.
[4] Ibid [3], [6].
[5] Ibid [6].
[6] Ibid [10] – [13].
[7] Ibid [7].
[8] Ibid [62].
[9] Ibid [66].
[10] Ibid.
[11] Ibid.
[12] Ibid.
[13] Ibid.
[14] Ibid [67] – [72].
[15] Ibid [73] – [75].
[16] Ibid [94].
[17] Ibid.
[18] Australian Securities and Investments Commission v The Cash Store Pty Ltd (in liquidation) (No 2) [2015] FCA 93 at [1].
[19] Ibid [9].
[20] Ibid [10].
[21] Ibid [12].
[22] Ibid [10], [21].
[23] Ibid [13].
[24] Ibid [10].
[25] Ibid.
[26] Ibid [16] – [20], [22], [25].
[27] Ibid [22].
[28] Her Honour noted that there was no evidence before the Court to indicate that AFA took any steps to ensure that The Cash Store was complying with its responsible lending obligations.
[29] Ibid [28].
[30] Ibid.
[31] Australian Securities and Investments Commission, Response: Significance of Cash Store decision for credit industry < http://asic.gov.au/about-asic/media-centre/asic-responds/asic-response-significance-of-cash-store-decision-for-credit-industry>.
