In ASIC v The Cash Store Pty Ltd (in liq) [2014] FCA 926 the Federal Court of Australia declared that The Cash Store Pty Ltd (in liquidation) (TCS), and its loan funder, Assistive Finance Australia Pty Ltd (AFA), both breached the responsible lending provisions of the National Credit Act and that TCS engaged in unconscionable conduct in the sale of consumer credit insurance.

UPDATE: The matter is listed for a penalty hearing on 15 December 2014.
On 15 December 2014 the hearing on penalty was held. A decision has been reserved.
On 19 February 2015 the Federal Court awarded penalties totalling $18.975 million against The Cash Store Pty Ltd (in liquidation) (TCS) and Assistive Finance Australia Pty Ltd (AFA) for their failure to comply with consumer lending laws.

Responsible lending issues
TCS arranged short term, low value loans usually to customers who were on low incomes or in receipt of Centrelink benefits.

The loans were for up to $2,200 for periods between 1 and 36 days. TCS would lend up to between 35% and 50% of the customer’s next scheduled pay. Some customers had multiple or overlapping loans over the same period.

The alleged contraventions related to 325,756 credit contracts to about 52,000 customers. ASIC tendered a representative sample of 281 contracts for the purposes of establishing liability.

The judgment describes the methodology and information used by ASIC to review loan files.

Justice Davies concluded that there was a “wholesale failure in process” by TCS: there were no questions regarding customers’ expenses other than accommodation. Credit was advanced purely on the basis of a customer’s capacity to pay the loan amount when due out of the next pay packet or centrelink receipt.

No preliminary assessments were made. Checklists were occasionally completed or not completed properly.

The purpose of a loan (to verify a customer’s objectives or requirements) was usually not stated clearly or not at all: ASIC argued that a purpose of “personal” or “living expenses” was inadequate but “bills” was sufficient. But in a small number of contracts Justice Davies accepted “food” (for a loan of $214.95), “doctor, insulin” (for a loan of $164.95) and “work shoes” (for a loan of $257) was specific enough.

He concluded there was a failure to make reasonable enquiries about the customer’s financial situation including their fixed and variable expenses and other debts, at a minimum income and rent or mortgage payments.

He also decided there was a failure by TCS to provide a credit guide: there were no copies on loan files.

Justice Davies concluded there was “a systemic failure on the part of TCS” and AFA to comply with their responsible lending obligations.

The breaches by TCS were also breaches by AFA: the outsourcing of loan servicing by AFA to TCS did not exonerate AFA from liability for non-compliance.

Consumer credit insurance issues
TCS also sold its customers consumer credit insurance (CCI) marketed as a “payment protection plan”.

During the relevant period, TCS sold consumer credit insurance in 182,838 of the 268,903 credit contracts (68%), collecting premiums of 3,38% of the loan amount of approximately $2.27 million. It retained $1.3 million as income. 110 claims were made with only 43 policies receiving a settlement claim totalling $25,118.

It was intended to cover death and dismemberment, disablement, cancer, heart attack or stroke, involuntary unemployment and catastrophic illness.

Customers obtained CCI cover in 145 of the 281 sampled contracts.

TCS’s policy was not to explain the details of the insurance to customers. The customers were told that a payment protection plan had been arranged for them. It was offered regardless of whether the customer was on centrelink benefits or were obtaining a loan for a very short period of time.

Justice Davies concluded that the policies would rarely provide effective coverage for payday borrowers who had a median term loan of 13 days.

Unemployed customers were ineligible for benefits for disablement or involuntary unemployment.

Justice Davies declared TCS contravened section 12CB of the ASIC Act in its selling of CCI.

He said “the sales of CCI by TCS are characterised by moral obloquy and the oppobrium of unconscionability”.

The matter will be listed for a further hearing in relation to the civil penalties payable by TCS and AFA.