Payday lenders cop $730,000 in fines over “sham” diamond selling model

The Australian Securities and Investments Commission has flagged a continued focus on the payday lending sector after the Federal Court fined lender Fast Access Finance $730,000 last week for breaches of consumer credit laws and engaging in credit activities without holding an Australian credit licence.

However, the in-house lawyer for the company says the scale of the fine indicates the circumstances were not found to be as serious as ASIC made out.

ASIC first brought action against three companies trading as Fast Access Finance in 2013, with the commission alleging the companies operated a business model in which consumers wanting small value loans were required to sign documents for the purchase and sale of diamonds in order to obtain the loan.

ASIC alleged there were no diamonds involved in the transactions and consumers did not intend to buy or sell diamonds.

Rather, the regulator argued the diamond purchase and sale documents were actually “designed to camouflage what, in reality, were loan transactions to which the National Consumer Credit Protection Act 2009 (National Credit Act) applied” and that the companies intended “to conceal the true nature of the transaction from those responsible for enforcing the interest cap”.

In September 2015, the Federal Court found in relation to one of the transactions, the Fast Access Finance lending model “comprised a pretence or sham, brought into existence as a mere piece of machinery, to conceal the true nature of the transaction, which was the provision of credit. Neither side intended that the Sales Agreement should create the relationship of vendor and purchaser”.

The court found the contracts for sale and purchase of diamonds added nothing to the loan transaction, but did have the effect of allowing interest well over the 48% interest rate cap for the loans, in some cases up to 1000%.

In deciding penalties against the three companies last week, Judge Dowsett considered the sale of diamonds “was designed to conceal the true nature of the money lending transactions” to “circumvent the limit upon the rate of interest, which was 48%”.

The Court also took into account that it was likely Fast Access Finance and its controlling officers had at least a strong suspicion that the model was in contravention of relevant legislation.

In-house legal counsel for Fast Access Finance Rob Legat told SmartCompany this morning he believes the scale of the fine handed down shows the Federal Court did not find the circumstances were as serious as what was claimed.

“The amount determined by the court was well below both the maximum available, and the amounts awarded in recent, similar cases,” Legat says.

The maximum penalty payable for each offence was $1.1 million, according to a statement from ASIC in 2015.

“We feel this reflects an assessment by the court that the circumstances were well below the level of seriousness that ASIC was representing,” Legat says.

In a statement on the decision of penalties, ASIC deputy chairman Peter Kell drew attention to the Commission’s recent focus on lenders using models that avoid upholding consumer protections on lending.

“ASIC will continue to crack down on lenders who use avoidance models in an attempt to deprive consumers of these important protections,” he said.

The Commission also drew attention to nine other cases in which it pursued payday lenders for avoidance models, highlighting this as a continued area of focus going forward.

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