In Australian Securities and Investments Commission v The Cash Store Pty Ltd (in liquidation) (No 2) [2015] FCA 93 the Federal Court awarded penalties totalling $18.975 million following its findings of contravention by The Cash Store Pty Ltd (in liquidation) (TCS), and its loan funder, Assistive Finance Australia Pty Ltd (AFA) of the responsible lending provisions of the National Consumer Credit Protection Act 2009 (Cth) (“the Credit Act”) in relation to “payday” lending to customers, and by TCS of s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) (“the ASIC Act”) in relation to the sale of consumer credit insurance (“CCI”). (Background)

UPDATE 1 March 2013: ASIC has responded to comments that TCS was in liquidation and that ASIC’s action was undefended.

It said in part:

The Court’s decision to impose such large penalties demonstrates the seriousness of these contraventions and the Court’s strong disapproval of this predatory conduct. This decision and the large penalty is a key precedent on responsible lending obligations for the consumer credit industry as a whole and for payday lenders in particular.

ASIC will continue to focus on cases involving responsible lending and predatory behaviour. Credit industry participants that ignore this case will expose themselves to the risk of significant adverse decisions by the Court and external dispute resolution schemes, and to regulatory action by ASIC.

Apart from the size of the penalties the case is notable for the court’s acceptance of ASIC’s methodology in analysing loan files for breaches and its acceptance of expert opinion of the statistical likelihood of similar contraventions in respect of all contracts entered into over the period.

The penalties are important as a general deterrence even though specific deterrence for TCS is irrelevant as it is in liquidation.

A summary of the breaches and the penalties imposed is set out below:

Category	First period*	Second period**	Total
Total number of contracts sampled (out of total of 325,756)	183	98	281
1. Failure to make reasonable inquiries about the customer’s requirements and objectives	155	69	224
2. Failure to make reasonable inquiries about the customer’s financial situation	182	86	268
3. Failure to verify the customer’s financial situation	131	20	151
4. Failure to make a preliminary assessment	183	94	277
5. Failure to provide the TCS guide***	64	32	96 (out of a total of 163)
6. Failure to provide the AFA credit guide***	63	30	93 (out of a total of 163)

* Contracts entered into between 1 July 2010 and 6 March 2012
** Contracts entered into between 7 March 2012 and 24 September 2012
*** The legislative requirement to provide a credit guide to customers came into effect on 2 October 2011

The penalty sought by ASIC against TCS for its Credit Act offences was between $8.26M and $12.39M . The Judge awarded $10.725M.

The penalty sought by ASIC against TCS for its ASIC Act offence (CCI mis-selling) was $1.1M. The Judge awarded $1.1M.

The penalty sought by ASIC against AFA for its Credit Act offences was between $6.385M and $9.377M. The Judge awarded $7.15M.

The maximum penalty that can be imposed under s 166 of the Credit Act of numerous contraventions by TCS and AFA of the civil penalty provisions in Chapter 3 of that Act was $1.1 million for each contravention: s 167(3)(b).

Under the ASIC Act, the Court could impose pecuniary penalties of up to $1.1 million on TCS in respect of its unconscionable conduct in the sale of CCI to payday lending customers: s 12GBA(3).

Judge Davies stated that “The contraventions found in relation to the 281 sampled contracts revealed a wholesale failure of process and lack of compliance with the legislative requirements.”

ASIC submitted that the Court, in setting the penalties, should take into account the statistical likelihood that similar contraventions on the same scale would be found in respect of the balance of the 325,756 credit contracts entered into over the period. Judge Davies agreed.

Judge Davies observed that:

“The liquidation of TCS means that specific deterrence is of limited relevance as any pecuniary penalty imposed would not be admissible to proof (s 553 of the Corporations Act 2001 (Cth)), however, this does not mean that an order for a pecuniary penalty should not be made. It is still appropriate to make an order that TCS pay penalties for its contraventions as a measure of the Court’s disapproval of its conduct, and as a measure of the seriousness with which the Court regards the contraventions.”

She concluded:

24 … I consider that it is appropriate to fix penalties on TCS in respect of the Part 3-1 Credit Act contraventions by reference to the five classes of contravention identified by ASIC. Each class represents a separate and different contravention of the statutory requirements under the Credit Act and in my view the same penalty is called for in relation to each class of contravention, giving due recognition to the specific separate statutory requirements imposed under the Credit Act that were breached. The contraventions in each category should be treated as a single course of conduct and penalised as one offence. The contraventions in the first period warrant the maximum penalty in the amount of $1.1 million in respect of the systemic and wholesale failure of compliance with the statutory obligations.

25 TCS’s contraventions during the second period were serious and reflective of a continued disregard of TCS’s responsible lending obligations, despite or notwithstanding ASIC bringing the noncompliance to the attention of TCS. The changes that TCS made were largely ineffectual in ensuring compliance with the responsible lending obligations. Ordinarily taking steps to rectify the contravening conduct and cooperating with the appropriate authority are matters that can carry some weight in fixing the penalty but I do not think that TCS’s co-operation is a weighty factor given the extensiveness of the contraventions that continued. However, due weight does need to be given to the fact that the contraventions essentially involved the same systemic failures of process, and the need to ensure the aggregate penalties overall are just and proportionate in all the circumstances. In my view an appropriate penalty would be 30% of the maximum penalty of $1.1 million in respect of each category. …

28 The penalties to be imposed on AFA in respect of its Credit Act contraventions should be by reference to the same five classes of contraventions in the two periods. I consider there to be a significant public interest in imposing the same penalties on AFA in relation to its breaches in each category as the penalties imposed on TCS for its Part 3-1 contraventions, having regard to AFA’s total disregard of its statutory obligations and abdication of its responsible lending obligations to TCS without supervision. As AFA outsourced the whole of its activities to TCS, its conduct is as egregious as TCS’s contravening conduct. It is relevant that there was no evidence before the Court to indicate that AFA took any steps to ensure that TCS was complying with the responsible lending obligations. It is also relevant that AFA did not acknowledge any deficiencies in process and, indeed, in a letter dated 22 October 2012 to ASIC, was still continuing to maintain that its outsourcing model was fully compliant with the Credit Act. AFA did not cooperate in any meaningful way with ASIC and there is no evidence to indicate that it took any steps to implement change or to show contrition for its widespread contraventions of the Act.

29 Finally, it is necessary to fix the penalties to be imposed on TCS for its contraventions of s 12CB of the ASIC Act. The findings in the liability judgment were that the CCI was sold by TCS to slightly more than two thirds of its loan customers, including to unemployed customers despite the fact that they were unlikely ever to receive a benefit from the insurance because unemployed persons were ineligible to claim for the main components of the coverage, namely disablement and involuntary employment. Further that the CCI was unsuited to the needs of most customers and most unlikely ever to confer a benefit, a fact that must have been known to TCS. Over the period between 14 August 2010 and 16 March 2012, of the 268,903 credit contracts entered into, TCS sold 182,838 CCI policies. These factors again make it appropriate to impose the maximum penalty, for which purpose the course of conduct in respect of the sales of insurance should also be treated as arising from the same conduct and penalised as such. In so concluding, I take into account that TCS has not previously been found by the Court to have engaged in any similar conduct but given the seriousness and extent of the unconscionable conduct engaged in, the maximum penalty is warranted. “