In Australian Securities and Investments Commission v BHF Solutions Pty Ltd [2022] FCAFC 108 the Federal Court of Australia Full Court upheld ASIC’s appeal in respect of the interpretation of the phrase “charge that is or may be made for providing the credit” in sections 5(1)(c) and 6(5) of the National Credit Code in relation to whether a continuing credit contract is exempt from regulation.

UPDATE 26 July 2022: Cigno and BHF Solutions have lodged an application to seek leave from the High Court to appeal the Full Federal Court’s decision.

UPDATE 15 December 2022: The High Court has dismissed special leave appeal applications by Cigno Pty Ltd and BHF Solutions Pty Ltd, against the decision of the Full Federal Court which unanimously found that a ‘financial supply fee’ charged by Cigno was a charge ‘made for providing credit’. 

UPDATE July 2023: Federal Court finds CIgno and BHF carried on credit activity without required credit licence.

Although it was a narrow question, the issue was important to ASIC in the context of regulating small amount credit contracts and short-term loans.

The Full Court agreed that a “charge that is or may be made for providing the credit” identifies what it actually is that the consumer pays or promises to pay in order to obtain a provision of credit.

In Justice O’Bryan’s judgment of 211 paragraphs he analysed the lending arrangements by BHF Solutions Pty Ltd (BHFS) and Cigno Pty Ltd (Cigno). Neither company held an Australian CRedit Licence.

The commercial arrangements between Cigno and BHFS were recorded in an agreement titled “Loan Management Facilitation Agreement”. Under that agreement, BHFS is described as being in the business of lending or advancing personal loans to consumers under “Loan Agreements” in respect of which BHFS charges a $15.00 fee with a maximum loan term of 62 days, while Cigno is described as being in the business of marketing, facilitation, management services and collections in relation to loan agreements. The essential structure of the arrangement was that Cigno would market loans to consumers, process loan applications and manage collections while BHFS would advance the loans to the consumers.

The borrower agreed to pay certain fees to Cigno if the borrower obtained a loan from BHFS. The Cigno fees included:
(a) a “Financial Supply Fee” which was calculated as a base amount of $13 plus 60% of the amount of the loan to be arranged by Cigno;
(b) an “Account Keeping Fee” of $5.95 per week during the term of each such loan; and
(c) a “Change of Payment Schedule Fee” of $22 in the event the borrower requested a change to their payment obligations under the loan arranged by Cigno.

It was calculated for a sample loan that if the fees were converted into an annualised percentage interest rate, the rate would be approximately 800%.

The Full Court rejected the trial judge’s decision that the only charge for providing the credit under the Loan Agreements is the BHFS fee (and notwithstanding the existence of the Cigno fees).

Justice O’Bryan concluded that:

A broader construction of the phrase “charge … made for providing the credit” is to be preferred. Giving the statutory language its full ordinary meaning, the Code would apply if a charge is made in exchange for, on account of or by reason of the provision of credit, applied in a commercially practical manner. There is nothing strained in construing the preposition “for” in s 5(1)(c) in that manner. The construction requires a direct relationship between the charge and the provision of credit by looking to the circumstances in which, or conditions on which, the charge is made or imposed and the reason for the charge. It looks to the substance of the credit arrangements rather than their contractual form and ensures that the remedial provisions of the Code are not easily avoided by carefully structured credit arrangements.

If you found this article helpful, then subscribe to our news emails to keep up to date and look at our video courses for in-depth training. Use the search box at the top right of this page or the categories list on the right hand side of this page to check for other articles on the same or related matters.