The Australian Investment Securities Commission (ASIC) and the Australian Financial Complaints Authority (AFCA) are two powerful authorities in the financial services space.
Each time a challenger takes them to court, it is always telling to see how it plays out. Essentially, legal practitioners get to learn more about the reach of their powers. Two recent cases, Cigno Pty Ltd v ASIC [2020] FCA 479 and QSuper Board v Australian Financial Complaints Authority Ltd [2020] FCAFC 55 have unveiled important information about ASIC and AFCA. This article provides a snapshot summary.
Cigno Pty Ltd v ASIC [2020] FCA 479
In April, 2019 ASIC was provided with a product intervention power. This new regulatory tool enables ASIC to intervene where it is satisfied that a financial and/or credit product has or is likely to result in significant consumer detriment.
In its first use of this power was in September 2019, when ASIC made a product intervention order in relation to a short-term lending model. The model was designed to attract the short-term credit exemption from credit licensing and responsible lending obligations under the National Consumer Credit Protection Act.
Under those exemptions, credit provided for less than 62 days is exempted as long as the fees charged do not exceed 5% of the loan amount and 24% per annum interest. Cigno Pty Ltd, a short-term credit provider, did charge within these limits but borrowers were required to enter a separate contract for management and administration fees with an associate that charged significant fees. Overall, the borrower could pay up to 1000% of the loan amount.
RELATED: Legal Opinions in Australian Finance Transactions 101: Part 1
Cigno Pty Ltd, being ’an affected party’ made application to the Federal Court seeking an order quashing the product intervention order, on the grounds that it was directed at Cigno’s particular model and not on significant detriment resulting from a financial product or class of financial product, as required by the legislation.
However, the Federal Court (Stewart J) found that ASIC has broad powers in making such orders. The outcome of this legal case has demonstrated that is not a prerequisite for ASIC to exercise its product intervention powers in relation to a class of financial products that there actually be any existing product or products in that class (at [72]-[73]). Further, it is not necessary that there be a direct causal link between the class of financial product and the identified detriment. All that is required is for ASIC to demonstrate that the detriment flowed from the specific circumstances in which the product was offered or issued (at [42], [50]).
QSuper Board v AFCA Ltd [2020] FCAFC 55
The Full Federal Court of Australia considered whether, in making a decision, the Australian Financial Complaints Authority Ltd (AFCA) had exercised a judicial power contrary to the Australian Constitution.
The case concerned a complaint against QSuper by a policyholder who claimed that he was entitled to a refund for premiums that he had overpaid. AFCA upheld his complaint, finding that QSuper had not taken adequate measures to ensure that it had communicated its new ratings, which would have resulted in the policyholder being entitled to access lower premiums.
Liked this? Try reading: Legal Opinions in Australian Finance Transactions 101: Part 2
QSuper argued that AFCA had gone beyond its powers and exercised the Commonwealth’s judicial power in deciding whether QSuper had complied with the requirements of s 1017B(4) of the Corporations Act. This subsection requires notice to be given to policyholders of the effect of events or changes in a policy to understand the nature and effect of the change.
The Court (Moshinsky, Bromwich and Derrington JJ) ruled that AFCA does not exercise judicial power. Its decisions are not enforceable of themselves and would require further proceedings. It does not finally settle the rights between the parties and is not determinative. It therefore lacks the finality which is inherent in the exercise of judicial power. So, it cannot be said “that any of the provisions of the [Corporations Act 2001 (Cth)] which establish the AFCA scheme and grant AFCA power to make determinations offend Ch III of the Constitution” (at [187]).
In making determinations, it is likely that AFCA will be in a strong position to examine which legislative provisions have been complied with by a financial services operator.
Background
In Update 127 of Robson’s Annotated Corporations Legislation, Grant Holley, the author of this article, has provided the inaugural annotations to provisions in Parts 7.9A and 7.10A of the Corporations Act 2001 (Cth).
Part 7.9A, which relates to product intervention orders, kicked in on 6 April 2019. Part 7.10A, which took effect from 6 March 2018, established an external dispute resolution system relating to financial services and the Australian Financial Complaints Authority. The first judgments on these newly released sections of Chapter 7 (Financial services and markets) of the Corporations Act were delivered earlier this year.
You can examine this case in more detail via Robson’s Annotated Corporations Legislation on the Thomson Reuters’ e-store.
