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DIAMONDS ARE FOREVER - may be in love - but certainly not in finance


As ASIC hammers the final nails into the coffin of a diamond trading scheme, one is tempted to ask where did it all go wrong?

Written by

Richard Williams
Partner
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ASIC announced on Wednesday 7 August 2013 that it had commenced legal action in the Federal Court of Brisbane against various companies within the Fast Access Finance Group 1 . ASIC is seeking civil penalty orders against the companies as well as compensation for six consumers who were part of a diamond trading scheme.

The action by ASIC follows a decision made by the Queensland Civil & Administrative Tribunal (QCAT) in late 2011. Back then, QCAT struck down purchase and sale agreements of diamonds entered into by people who were seeking to borrow money. In its decision against Fast Access Finance (Beaudesert) Pty Ltd, QCAT made the observation that;

"the characterisation of the transaction (buying and selling diamonds) in that manner is so highly unlikely, improbable and implausible as to be a complete fiction.  It is ridiculous that a person would wish to enter a business premises in order to buy a product no matter what it be, to sell it immediately and make a loss."

Fast Access Finance had sought leave to appeal against the decision; however, leave to appeal was refused by the QCAT in March 2012.

The diamond trading scheme

Under the diamond trading scheme, a person wishing to take out a loan of $1,000 for example, would be sold diamonds to a value of $2,000 retail. The borrower would immediately resell the diamonds back to a diamond dealer at the wholesale price of $1,000.  The borrower would end up with $1,000 in their hand and an obligation to pay the original retail seller of the diamonds $2,000 by instalments.  As QCAT observed in its decision in 2011:

"They (the purchasers) would never see the diamonds which they contract to purchase and nor would they get any benefit for example by Mrs Carter being able to wear the diamonds".

A more detailed explanation of the process involved in the arrangement is set out at the end of this update – quoted from the ASIC media release.

Conceptually and legally the diamond trading scheme was a brilliant idea.  It structured the provision of financial accommodation to people wishing to borrow money in such a way as to make the transaction:

  • exempt from the provisions of the Consumer Credit legislation
  • exempt from the requirement to hold an Australian credit licence
  • exempt from the 48% interest rate cap which operated in Queensland and elsewhere.

The failure of the scheme

Although the diamond trading scheme might have been beautifully crafted from a legal perspective, the scheme’s Achilles heel was that a court or tribunal could declare that the contractual arrangements were "complete fiction", as the QCAT found in late 2011.

The fallout from the decision of the QCAT is that the transaction becomes a provision of credit by an unlicensed credit provider. The interest rate cap of 48% per annum is breached and the contractual documentation used becomes deficient and non-compliant.

While there are currently no "anti-avoidance" provisions in the National Credit legislation, the ASIC action against certain Fast Access Finance companies is a salutary reminder to lenders.
Lenders need to be aware that however cleverly a finance product might be structured legally; ultimately, the substance of the transaction must be aligned to its legal form. If not, the whole transaction is at risk of being struck down on the basis that it is a ‘complete fiction’.

The Future

Proposals to introduce anti-avoidance provisions in the Consumer Credit legislation space have been recently withdrawn by Treasury, However, in the longer term, there are likely to be provisions dealing with this subject.

It will be interesting to see how the action against the various Fast Access Finance companies by ASIC unfolds in the Federal Magistrates Court and whether the same arguments canvassed before the QCAT are argued again.  The matter is listed for a directions hearing in the Federal Court in Brisbane on 20 September 2013.

This action in the courts by ASIC will also provide guidance on the civil penalty regime and the level of penalties one can expect to see going forward.

It also reflects the determination on ASIC’s part to ensure that people involved in the provision of credit are licenced and they comply with the requirements of the new National Credit legislation.
If you are interested in how the diamond trading scheme worked, please see the ASIC summary below extracted from ASIC’s media release issued on 7 August 2013 (reference 13-205 MR).

"Under the diamond purchase contract model used by the FAF companies, a consumer wanting to borrow, for example, $500 would 'purchase' 4 diamonds at a price of $250 per diamond from an FAF company, with payment of the $1,000 purchase price being deferred and paid in a number of future instalments. Under the diamond sale contract, signed at the same time as the diamond purchase contract, the consumer would 'sell' the same diamonds at a price of $125 per diamond and would receive the $500 proceeds of the sale. The practical effect of the contracts was that the consumer would receive $500 but would incur a $1,000 debt to the FAF company and therefore pay an additional charge of one dollar for every dollar borrowed."

If you are interested in how the diamond trading scheme worked, please see the ASIC summary below extracted from ASIC’s media release issued on 7 August 2013 (reference 13-205 MR).

"Under the diamond purchase contract model used by the FAF companies, a consumer wanting to borrow, for example, $500 would 'purchase' 4 diamonds at a price of $250 per diamond from an FAF company, with payment of the $1,000 purchase price being deferred and paid in a number of future instalments. Under the diamond sale contract, signed at the same time as the diamond purchase contract, the consumer would 'sell' the same diamonds at a price of $125 per diamond and would receive the $500 proceeds of the sale. The practical effect of the contracts was that the consumer would receive $500 but would incur a $1,000 debt to the FAF company and therefore pay an additional charge of one dollar for every dollar borrowed."


1 ASIC action is against Fast Access Finance Pty Ltd, Fast Access Finance (Beenleigh) Pty Ltd and Fast Access Finance (Burleigh Heads) Pty Ltd.

 

Contact us

Penny Cable, Sydney +61 2 9391 3160 pcable@hunthunt.com.au
Jill Milburn, Sydney +61 2 9391 3142 jmilburn@hunthunt.com.au
Richard Williams, Melbourne +61 3 8602 9218 rwilliams@hunthunt.com.au
Neville Debney, Melbourne +61 3 8602 9253 ndebney@hunthunt.com.au
Mary Nemeth, Melbourne +61 3 8602 9258 mnemeth@hunthunt.com.au
Rick Harley, Adelaide +61 8 8414 3373 rharley@hunthunt.com.au
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