ASIC brings action against small amount credit lender for licence breaches


ASIC brings action against small amount credit lender for licence breaches

ASIC has brought civil penalty proceedings against Ferratum Australia Pty Ltd, the Australian arm of the Finland-based financial services company Multitude SE, offering mobile and digital financial services in approximately 25 countries mainly in Europe, including, in Australia, a SACC (‘payday’) lending products.

Ferratum offers loans of between $500 – $1,900 for up to 12 months.  ASIC alleges a number of breaches of Ferratum’s Australian Credit Licence which have implications for all credit licensees.

Small amount credit contracts (SACCs) are regulated differently from other loans under the National Consumer Credit Code.  Only a limited number of fees of particular kinds can be charged on SACC loans.  Further, while a consumer is entitled to pay a SACC loan out at any time, the the calculation of the early payout fee or cost that may be charged for doing this is prescribed.

ASIC alleges that Ferratum breached the National Credit Code in three ways:

  • charging fees not permitted under the Code;
  • overcharging early payout fees; and
  • failing to comply with the general obligations to
    • do all things necessary to ensure that the credit activities authorised by the licence are engaged in efficiently, honestly and fairly;
    • comply with the Act and the Code; and
    • maintain the competence in engage in the credit activities authorised by the licence.

Fees not permitted under the Code

The Code prescribes the fees that may be charged by SACC lenders as follows:

  • a permitted establishment fee or monthly fee under the Code;
  • a default fee or charge; and
  • Government fees charges or duty.

Ferratum charged a number of additional fees including fees payable for making changes to the DDR arrangements for repayment of the loan, manual direct deposits, returned mail, and returned payments due to the provision of incorrect bank information. ASIC alleges that almost 11,000 contracts between March and September 2019 were affected.

In addition, ASIC claims that a “DDR Alteration Fee”, payable when a change to DDR arrangements is requested ‘after you are in default’ is prohibited.  The fee was charged almost 34,000 times between October 2019 and August 2021 and is alleged not to be a default fee or charge payable ‘in the event of default’.  It is, rather, payable at any time after any default had occurred, including if default had been remedied and the request was made for reasons unrelated to it.  As this is not one of the fees permitted for SACC loans, it is prohibited under ss 23A and 24(1A).

A civil penalty of up to $1.11M potentially applies to each of these thousands of violations .

Overcharging Early Payout Fees

In addition to charging fees that are prohibited under the Code, Ferratum is alleged to have miscalculated the fees it was permitted to charge.

Section 82(2) of the Code prescribes the elements of the amount a consumer may be required to pay out their credit contract early, which include ‘early termination charges, if provided for in the contract’.  ASIC reviewed a sample of 147 loan contracts which were repaid early between March 2019 and July 2020.  Of this sample, 40 consumers were overcharged by between $2.16 and $608.  In six of these cases the overpayment exceeded $100.

ASIC alleges that because of calculation errors Ferratum required payment of amounts in respect of a monetary liability that could not be imposed consistently with the Code, and is in breach of section 82(2) and section 24(1A)(b) of the Code.  The statement of claim details fees overcharged in the aggregate sum of $14,000. Again, a civil penalty of up to $1.11M potentially applies to each of these 40 violations.

Breaches of the general licence obligations

In  addition to those that were overcharged for paying out their loan early, ASIC found that a further 59 of the 147 were undercharged, and only 48 were charged the correct amount.

A key point for all credit licensees raised by this enforcement action is the analysis by ASIC that by correctly calculating the early payout amount in only one of every three cases, Ferratum breached its general licence obligations to provide credit activities efficiently, honestly and fairly, to comply with the Act and the Code, and to maintain the competence to engage in the authorised credit activities.

It is alleged that Ferratum calculated these fees manually using an Excel spreadsheet and kept no records of its calculation of the Early Payout amounts charged to consumers.  ASIC drew the high error rate in the calculation of these amounts to Ferratum’s attention in late 2016 and called on it to automate the calculation of these fees and eliminate the risk of human error.

ASIC alleges that Ferratum failed to implement any system to ensure, record or monitor the proper calculation of the Early Payout amounts owing by consumers to it which is therefore a breach of the general licence obligations to conduct the credit activities efficiently, honestly and fairly and to maintain the competence to engage in the authorised credit activities.

As for imposing a monetary liability that is prohibited under the Code, the maximum civil penalty for a breach of the general licence obligations is 5,000 penalty units or $1.11 million.

Conclusion

ASIC is seeking pecuniary penalties in respect of over 45,000 separate violations of these Code provisions, implying a potential maximum liability of $50 billion.

With credit licensees now also subject to breach reporting obligations, if these circumstances were to occur again and the calculation errors were not reported as they occurred, the licensee would also risk prosecution for failure to report significant and systemic breaches of their obligations, as well as for the violations themselves.

Tips to Take Away

  • Administrative errors in the calculation of fees and charges may be trivial in isolation but can attract significant penalties of up to $1.11 million.
  • Licensees breach reporting obligations make it imperative that all instances of such errors are detected and reported to ASIC in accordance with Code requirements, whether they are systemic or not.
  • Systems automation to the maximum extent possible to eliminate the risk of manual data handling is critical to effective compliance risk management, as is comprehensive record keeping, and a robust testing and monitoring regime to detect and address errors