In 2019, ASIC
received a new product intervention power as part of the Federal Government’s
response to the Financial
System Inquiry. This power allows ASIC to
intervene, including to ban or set restrictions on financial and
credit products in the interest of consumer protection. This
applies even if there is no demonstrated or suspected breach of any
law, allowing ASIC to address apparent deficiencies in the
statutory law, in the interest of protecting
It didn’t take long for ASIC to put its new power to use
against unlicensed lenders who sought to circumvent the
National Credit Code on the basis of a technicality.
In September 2019, ASIC targeted an unlicensed lender offering
short term loans which met the Code exemption criteria, but which
were coupled with separate side agreements from a related entity
that provided for the of balance fees and charges as services from
the related entity. Now in August 2020, ASIC again proposes to use
the same power against the same lender to ban certain continuing
credit contracts structured in the same manner.
ASIC Commissioner Sean Hughes said in 2019: “ASIC is ready
and willing to use the new powers that it has been given. The
product intervention power provides ASIC with the power and
responsibility to address significant detriment caused by financial
products, regardless of whether they are lawfully
ASIC was unsuccessful in civil proceedings in the Federal Court
in 2014 to ban the same side agreement short term lending model
used by other lenders at that time. This was on the basis that the
Code had not been breached and the Court noted that it was a matter
for Parliament to modify the Code to correct any loopholes that
might exist. Well, the Federal Government wasn’t going to have
any of that.
What happened this time?
Subsection 6(5) of the National Credit Code exempts from the
application of the Code continuing credit contracts (eg. credit
cards and overdrafts) if the total charged for providing the
- is a periodic or fixed charge that does not vary according to
the amount of credit provided; and
- does not exceed the amount prescribed by regulation, which is
currently $200 for the first year and $125 for each subsequent
This means that a lender offering a facility of this kind to a
consumer does not need to comply with the Code and does not need to
be licensed and have a membership with AFCA.
An unlicensed lender sought to take advantage of this exemption
by offering a continuing credit facility that meets the low fee
pre-requisites, coupled with a side service agreement from a
related entity under which the customer is charged fees for
services such as processing drawdowns or fast-tracking
These additional fees are not minimal amounts. ASIC identified
that in certain cases, consumers would pay some 220% to 490% of the
loan amount in total fees and charges.
To make matters worse, ASIC states these facilities are targeted
at vulnerable consumers and advertised as ‘payday loans’,
‘Centrelink loans’, ‘bad credit loans’,
’emergency’ or ‘fast cash’ facilities. They appear
to incentivise the customer to choose higher fee options for a
faster advance. They have uncapped default fees and direct debit
arrangements which may result in additional overdraw fees and
charges to the customer’s account.
AFCA is rightly concerned that it has no jurisdiction in these
facilities if not covered by the Code, and that consumers entering
into these arrangements will have no recourse to AFCA’s
external dispute resolution and determination process. It strongly
supports ASIC’s use of product intervention power to ban this
Lessons to be learned
ASIC’s product intervention power is found in Part 7.9A of
the Corporations Act 2001 and Part 6-7A of the
National Consumer Credit Protection Act 2009 and allows
ASIC to intervene in exactly this type of case, where no law has
technically been breached.
ASIC’s proposed order, in this case, will confirm that
lenders cannot hope to circumvent the National Credit Code with
side services agreements and will prohibit continuing credit
contracts in circumstances where the total of fees and charges
charged by the lender, together with any other party under any
collateral contract or arrangement, exceed the maximum charge
stipulated by the Code.
The use of ASIC’s product intervention power, in this case,
highlights that lenders can no longer hope to get by based purely
on the letter of the law. Lenders, including unlicensed lenders,
will need to consider the intent of the Credit Code and the effect
of their products and services on consumers, in light of the
possibility that their products and services could be banned or
restricted, irrespective of their apparent legitimacy.
ASIC’s product intervention power is not limited to credit
products but includes other financial services. ASIC’s
Regulatory Guide RG272 provides more details on when and how ASIC
will exercise its product intervention power and is recommended
reading for all lenders and financial services providers.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.