Consumer advocacy groups are warning of an explosion in high-interest payday loans if coronavirus supports are wound back as planned in September.

Corporate watchdog ASIC has already taken action against two short-term credit providers – Cigno and BHF Solutions (BHFS) – after the pair allegedly  overcharged desperate borrowers by exploiting a licensing exemption granted to continuing credit contracts.

One of the businesses – BHFS – provided small loans that technically broke no laws, while Cigno allegedly acted as a ‘service provider’ by referring customers to BHFS and charging costly fees.

It’s the second time in as many years that ASIC has taken action against Cigno, although ASIC commissioner Sean Hughes said new product-intervention powers will prevent other businesses using the same loophole in future. 

Speaking to The New Daily, Consumer Action Law Centre chief executive Gerard Brody welcomed ASIC’s response.

“What ASIC is saying with both the initial product intervention power introduced last year and this one, is that businesses shouldn’t be able to artificially use two contracts to get around the rules,” he said.

But the powers aren’t enough to stop unscrupulous lenders finding new loopholes to exploit, Mr Brody cautioned.

Mr Brody said it took Cigno only days to create a new, unregulated lending product after ASIC shut down a previous lending model in 2019.

Instead, Mr Brody said federal parliament urgently needs to pass the Small Amount Credit Contract Bill, designed following a sector-wide review in 2016.

This legislation includes broad anti-avoidance measures which would make it illegal for companies to exploit loopholes, rather than having ASIC play “whack-a-mole” with targeted intervention powers.

Mr Brody said it’s urgent that these laws be passed as soon as possible.

He noted increased government fiscal support in the form of JobKeeper and increased JobSeeker payments have curbed demand for payday loans.

But when those supports are unwound, that trend is set to reverse, he cautioned.

In a statement to investors, Cash Converters CEO Sam Budiselik said demand for small amount credit contracts dropped 18 per cent between January and April.

Although that has hurt Cash Converters’ finances in the short term, Mr Budiselik said demand is expected to return as supports are removed and the economy recovers.

Credit association slams dodgy lenders

ASIC’s proposed powers were also welcomed by National Credit Providers’ Association chair Michael Rudd.

Mr Rudd said businesses like Cigno, which design products to sit outside the National Consumer Credit Protection Act (NCCPA), put borrowers at risk.

“The facts are that the current laws and consumer protections for small amount loans do not cover lenders such as Cigno or other providers who offer continuing credit contracts,” he said.

“Legislators should ban the use of third-party service agreements which allow unscrupulous companies to get away with charging exorbitant fees.”

Cigno in ASIC’s sights again

Cigno – one of the two businesses in ASIC’s firing line – is no stranger to action from the regulator.

In July 2019, ASIC used its product-intervention powers against the lender after discovering it was charging interest rates on loans as high as 990 per cent.

These loans were also structured in a way that enabled Cigno to sit outside NCCPA laws – meaning affected customers could not take their complaints to ombudsman service AFCA.

This time, ASIC says Cigno is using a different legal loophole to effectively achieve the same outcome.

According to the regulator, loans were provided by BHFS in the form of ‘continuing credit contracts’.

These contracts are for small loans with fees capped at $120 a year, and because of their small size, they too sit outside the NCCPA.

However, customers received the loans from BHFS through a contract with Cigno, which acted as a sort-of third party and charged additional fees for unnecessary services.

These included fees for ‘fast-track’ processing, collecting payments, and ongoing administration and management costs.

In at least one case, a disability pensioner who borrowed money to cover medical expenses was charged 490 per cent of their original loan amount.