The corporate regulator has exercised its new production intervention power, banning a type of payday lending in which two companies work in tandem to get around Australia’s rules against extortionate interest rates.
The Australian Securities and Investments Commission said on Thursday it would ban a business model in which one company charged management and administration fees and the other charged interest.
ASIC said that when combined those fees could add up to almost 1,000 per cent of the loan amount.
Under the National Consumer Credit Protection Act 2009, short-term lenders are only supposed to charge a maximum of 24 per cent annual interest.
Following the financial services royal commission, ASIC was given the power in April to ban financial and credit products that it judged were causing significant consumer detriment.
“ASIC is ready and willing to use the new powers that it has been given,” commissioner Sean Hughes said.
“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 provided.”
ASIC said that two-party model has been used by Cigno and Gold-Silver Standard Finance, and more recently by MYFI Australia and BHF Solutions.
MYFI’s registry page on ASIC’s website shows it was formerly called Cigno, although there is still a website in that name.
One disability pensioner from WA’s Kimberly region told the ABC in July that she took out two loans totalling $250 from Cigno last year and thought she had paid it back until she got calls from a collection agency about an unpaid debt for $880.50.
“ASIC will take action where it identifies products that can or do cause significant consumer detriment,” Mr Hughes said.
“In this case, many financially vulnerable consumers incurred extremely high costs they could ill-afford, often leading to payment default that only added to their financial burden.”
Cigno and BHF have been emailed for comment.
ASIC said it consulted on the ban before implementing it and stakeholders were supportive.
The payday ban goes into effect from Saturday and remains in force for 18 months, unless extended or made permanent.
The agency is also consulting on a proposed ban on over-the counter binary options and limits on contracts of difference.