In Australian Securities & Investments Commission v Thorn Australia Pty Ltd [2018] FCA 704 the Federal Court of Australia ordered a $2 million penalty against Thorn Australia Pty Ltd’s (Thorn) Radio Rentals for contravening its responsible lending obligations in respect of 275,060 leases entered into over a three year period between 23 January 2012 and 1 May 2015. Thorn was also ordered to pay ASIC’s legal costs of $200,000. Background.

In handing down the penalty, the Court found that Thorn failed to make reasonable inquiries about each consumer’s financial situation, specifically it failed to make an inquiry as to each consumer’s actual housing costs and each consumer’s actual expenses, before making an assessment as to the unsuitability of each lease.

By reason of its failure to make an inquiry as to each consumer’s actual housing costs and its failure to verify each consumer’s actual expenses it had not made an assessment that properly assessed whether the lease would be unsuitable for the consumer if the lease was entered into as required by section 152 of the National Credit Act.

ASIC and Thorn filed a statement of agreed facts and joint submissions.

When the proceedings were commenced, the limitation period had expired for the period between 1 and 21 January 2012. Accordingly, no pecuniary penalty was imposed for that period.

Justice Jagot observed that “It is not, however, that the respondent ignored its statutory obligations or did nothing to comply with them. Rather, instead of doing what was actually required, [Thorn] applied its Credit Assessment Model to determine a consumer’s capacity to make repayments.”

The parties agreed that “By applying the Capacity Percentage and not inquiring about each consumer’s actual housing costs before making its assessment of unsuitability, ASIC submits and Thorn now accepts that it did not satisfy its obligation to make reasonable inquiries about each consumer’s financial situation in contravention of s 153(1)(b) of the Act.”

With respect to the penalty Justice Jagot considered the following factors:

“The maximum penalty: By s 167(3) of the Act, the pecuniary penalty must not be more than five times the maximum number of penalty units referred to in the civil penalty provisions (2,000 units for each contravention in the present case). Whatever view is taken of the number of contraventions per lease, the fact that the statutory requirements were contravened for each of the 275,060 leases means that the maximum penalty is so large as to be meaningless in the context of the respondent’s overall conduct.
Deterrence: Despite the maximum penalty being so large as to be meaningless, the central requirement of deterrence, both specific and general, demands a material pecuniary penalty… ASIC submits and Thorn now accepts that Thorn ought to have known that its failure to comply with the obligations under the Act could cause serious potential financial harm to its consumers including its consumer base who were recipients of Centrelink payments and were making payments under the Relevant Consumer Leases using Centrepay.
Thorn’s contraventions in respect of its failures to inquire about consumers’ actual housing costs and to verify consumer’s expenses were serious breaches of important aspects of the legislative scheme designed to protect the interests of all consumers, including the vulnerable consumers that constituted the majority of Thorn’s consumer base, although they were not deliberate.
To this must be added the fact that the respondent:
… had between an approximately 25 to 33% share of the market for consumer leases in Australia. That market share resulted in Thorn deriving substantial revenue and profit from its consumer leasing business. Thorn’s Consumer Leasing Business was the primary contributor to Thorn Group Limited’s financial results.
In addition, the parties agreed that:
…there was a substantial profit from Thorn’s Consumer Leasing Business is relevant not only to ensuring that the quantum of the penalty is appropriate, it is also relevant that by such profit Thorn had substantial resources at its disposal to enable it to implement policies and procedures to secure strict compliance with the Responsible Lending Obligations. In the face of substantial profits, Thorn ought to have complied with the obligations applicable to the line of business which was making the substantial contribution to those profits.
Further, the following matters are agreed, which must be taken into account in the context of the need for specific deterrence:
For the financial year ended 31 March 2017, Thorn Group Limited’s net assets were $210,238,000, including cash and cash equivalents of $14,681,000. During the Relevant Period, the Consumer Leasing Business was the largest contributor to the Thorn Group Limited’s and Thorn’s earnings during that period. “