Determination 17 December 2014 Credit Payday lender Application of National Credit Code Unjust contract Provisions of contract not adequately explained Credit and Investments Ombudsman Limited ABN 59 104 961 882
DETERMINATION Consumer: Financial Services Provider (FSP): Mr G Australian credit provider Key issue: Whether the contracts entered into between the FSP and the consumer were unjust transactions within the meaning of the UCCC and NCC. Summary 1. I find that: (a) (b) the contracts the consumer entered into with the FSP and a third party are credit contracts regulated by the Uniform Consumer Credit Code (UCCC) and its successor legislation, the National Credit Code (NCC); and the credit contracts are unjust transactions within the meaning of the UCCC and NCC. 2. To resolve this complaint, I order the FSP to pay the consumer the sum of $8,805.78, being a refund of all money paid by the consumer to the FSP over and above the principal amounts advanced to him under the credit contracts. Background to the complaint 3. This complaint is the subject of a preliminary review issued by the Credit Ombudsman Service Limited (COSL) on 19 November 2014, a copy of which is annexed to this Determination. 4. The material facts and claims made by the consumer are summarised in the preliminary review. The COSL case manager concluded that the FSP unreasonably charged the consumer $8,325 and recommended it refund this amount to resolve the complaint. 5. On 21 November 2014, the FSP informed COSL that it did not accept the recommended resolution and gave reasons as to why. On 27 November 2014, the consumer notified COSL that he accepted the case manager s recommended resolution. Following a final attempt by COSL to obtain the FSP s agreement to the recommended resolution, the FSP again wrote to COSL on 4 December 2014 and informed it that it disagreed with COSL s view of the complaint and reiterated its reasons why. 6. Consequently, the complaint has been referred to me for Determination and I have proceeded to make this decision on the basis of the information provided by the parties to date.
Key issue 7. In my view, the key issues to be decided in this Determination are whether the transactions the subject of this complaint are credit contracts regulated by the UCCC/NCC (collectively, the Credit Code) and, if so, whether they are unjust. Relevant considerations 8. In making this Determination, I have had regard to: (a) (b) (c) relevant legal requirements or rights provided by law to the consumer in relation to the subject matter of the complaint; applicable codes of practice; good practice in the financial services industry; and (d) fairness in all the circumstances. 1 9. Both the consumer and the FSP have been given the opportunity to provide information in support of their respective positions. I am satisfied that all information provided by the parties has been exchanged between the parties, and that each party is aware of the issues raised in this complaint. Findings and reasons for decision 10. In my view, there is no material dispute as to facts of this matter. It is common ground that the consumer entered into 30 different transactions with the FSP and a third party company over the period 1 September 2008 through to 29 February 2012. 11. The documentary records for all 30 transactions are in some respects incomplete. However, based on the information available to me and on the balance of probabilities, I have inferred that each of the 30 transactions appears to have been comprised of: (a) (b) a request from the consumer to borrow money from the FSP (which was sometimes in writing by way of a short facsimile from the consumer to the FSP), for purposes such as to purchase a new pair of glasses and payment of car registration; a document titled Sales Agreement, which records: i. the FSP as the Seller ; ii. the consumer as the Buyer ; iii. the goods the subject of the agreement as being various quantities of loose modern brilliant cut diamonds, 0.10 cts, colour H, clarity P1 ; iv. the price of the goods (which varies according to their quantity) v. the type of sale as being by Instalment Sale ; and (c) the terms of payment (which varies according to the cash price and the commencement date, but is always on a fortnightly basis); 1 COSL Rule 12.1 8 th Edition. All references to COSL Rules in this Determination are references to the 8 th Edition Rules.
(d) a document titled Purchase Agreement, which records: i. a third party company as the Purchaser ; ii. the consumer as the Vendor iii. the price of the diamonds the subject of the agreement; iv. the diamonds the subject of the agreement (the details of which vary according to their quantity, but which are always described as loose modern brilliant cut diamonds, 0.10 cts, colour H, clarity P1 ). 12. The FSP has also provided a copy of a Product Disclosure Card, which it says was read out to the consumer as part of each transaction and contains the following wording: MUST BE READ IMMEDIATELY UPON ESTABLISHING THE CUSTOMER IS SEEKING CREDIT FOR A PERSONAL OR CONSUMER PURPOSE [FSP] cannot offer or provide you with a loan under the National Credit Code. However, there is a way to access some funds involving two separate transactions; subject to satisfactory application and approval. In the first transaction, we sell you some diamonds which you pay off in instalments. You only pay us the purchase price; no further charges. The price is supported by valuation, which I can show you. Once the Sales Agreement is signed, you own the diamonds. Then it s your choice to receive the diamonds or sell them to another company, [third party], in a second transaction. If you choose to receive the diamonds, we ll get them delivered here for your collection. You can then do whatever you like with them. If you choose to sell them to [the third party], they will buy the diamonds on set terms. You can then do whatever you like with them. If you choose to sell them to [the third party], they will buy the diamonds on set terms. We act as their agent for signing documents. Once the Purchase Agreement is signed, they will pay you by direct deposit to your bank account. You ll receive the money, in full, as soon as normal bank processing times allow, and we ll deliver the diamonds to them on your behalf. You re under no obligation to sell diamonds to [the third party]. [The FSP] earns no commission or other income from that transaction. It s only offered as an option for you to consider in meeting your needs. 13. Ostensibly, by entering into these transactions with the FSP and the third party company, the consumer appears to agree to purchase a quantity of diamonds from the FSP for a fixed sum (payable by instalments) and then simultaneously agrees to sell the diamonds to the third party company for a sum which is generally around 50% of the purchase price he has agreed to pay the FSP, with the third party then depositing that sale amount into the consumer s bank account. The net result of the transaction is that the consumer walks away with a cash sum paid by the third party and a corresponding liability to repay approximately double that amount to the FSP.
14. In its responses to this complaint, the FSP appears to acknowledge that the structure of the transaction was designed to avoid regulation by the Credit Code. The Credit Code is a law designed to protect consumers by imposing certain disclosure and conduct obligations on providers of consumer credit, thereby giving consumers greater confidence and better outcomes when using credit products, and addressing practices that could affect the stability of the industry, particularly the systematic provision of credit to consumers who cannot afford to meet the repayments. 2 15. The following extracts from the FSP s submission dated 21 November 2014 illustrate its position on the matter clearly: Commercial enterprises are freely able to structure their businesses in any manner they please so long as they do so in a legal manner. There is no impediment to conducting business in the manner that [the FSP] did. Likewise, there is no impropriety in avoiding the operation of a legislative prohibition by not transacting in the way that breaches the law. In addition to the comments above, we point out that [the consumer s] ultimate intention when he approached [the FSP] was to obtain a sum of money and this is what he received. [The consumer] was obviously not picky about the manner in which he achieved that aim, otherwise he would not have freely entered into the agreement that he did. 16. The structure of the transaction used by the FSP and the third party company in their dealings with the consumer was the subject of a Queensland Civil and Administrative Tribunal (QCAT) decision in the matter of Rachael Carter & Michael Sinclair v Fast Access Finance (Beaudesert) Pty Ltd and Diamond Clearing House Pty Ltd. 3 17. Having considered the transaction documents in that case (which appear very similar in terms to those set out in paragraph 11 above), the QCAT Adjudicator found that the characterisation of the transaction in the manner argued by the Respondents in that case: 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. 18. The Adjudicator found that the transaction breached certain provisions of the UCCC and was unjust. The Respondents sought leave to appeal the QCAT decision in the Tribunal s Appeals jurisdiction but their application was refused. 4 The Member hearing the appeal considered, amongst other things, whether the Adjudicator had correctly characterised the transaction as a credit contract regulated by the UCCC. The Adjudicator s conclusion and reasons relevant to these issues were upheld as correct. 5 19. In the preliminary review and subsequent correspondence with the FSP, the case manager notified the FSP that COSL considered the QCAT decisions to be persuasive authorities on the issues raised in this complaint, and based a number of findings on the reasoning used by the Tribunal. In its responses, the FSP claimed that the Tribunal s reasoning process was flawed, and provided a number of quotes from various court judgments which the FSP said supported its position that the arrangement should not be classified as a credit contract regulated by the Credit Code. 2 http://consumercredit.treasury.gov.au/content/default.asp 3 [2011] QCAT. 4 Fast Access Finance (Beaudesert) Pty Ltd and Anor v Charter and Anor [2012] QCATA 51. 5 Ibid, at [22]-[31].
20. I do not find the FSP s submissions convincing. Similar to the conclusions reached by the Tribunal in the cases noted above, I consider that: (a) (b) a credit contract, regulated by the Credit Code, was formed in each of the 30 transactions the FSP and the third party entered into with the consumer; and those credit contracts are unjust transactions within the meaning of the Credit Code. 21. The reasons for these conclusions are explained below. (a) a credit contract (as defined in the Credit Code) 6 was formed in each of the 30 transactions the FSP and the third party entered into with the consumer. A credit contract under the Credit Code is defined as:... a contract under which credit is or may be provided, being the provision of credit to which this Code applies. 7 The definition of contract under the Credit Code includes a series or combination of contracts, or contracts and arrangements. 8 As the NSW Court of Appeal observed in Bahadori v Permanent Mortgages Pty Ltd: 9 160 There can be no doubt that the credit contract must be one to which the credit provider, against whom relief is sought under the Code, is a party. But that does not require that where the extended definition of contract applies, the credit provider, must have been a party to each and every contract or arrangement that formed the relevant series. 161 As was pointed out during the course of argument, there is much to be said for the view that where the relevant credit contract is comprised of a series or combination of contracts or contracts and arrangements which have closely connected parties, it matters not that each of those contracts or arrangements must involve the ultimate credit provider so long as, at the end of the day, it can be said that that credit provider is a party to the credit contract. In this case, I find that the Sale Agreements and Purchase Agreements are a series of contracts which satisfy the Credit Code definition of contract. I also find that credit (as defined in the Credit Code) is provided under those contracts because, by entering into the Sale Agreement, the consumer incurs a deferred debt to the FSP being the so-called purchase price of the diamonds. 10 This places the consumer and the FSP in the position of debtor and credit provider respectively for the purposes of the Credit Code. 6 UCCC, section 5; NCC, section 4. 7 Ibid. 8 Section 204. 9 [2008] NSWCA 150. 10 UCCC, section 4(1)(b); NCC, section 3(1)(b).
Finally, I am satisfied that the Credit Code applies to these provisions of credit because, at the time the credit contracts were entered into: i. the consumer was a natural person; 11 ii. the credit was provided or intended to be provided wholly or predominantly for personal, domestic or household purposes (such as the purchase of a new pair of glasses and to pay for car registration); 12 iii. a charge was made for providing the credit (being the amount the consumer was required to repay to the FSP over and above the cash amount advanced to him); 13 and iv. the FSP provided the credit in the course of a business that has plainly involved the routine provision of credit, whether or not that business was carried on as part of or incidentally to any other business of the credit provider carried on in this jurisdiction. 14 In short, the diamond purchase and sale agreements were not contracts for that purpose they were credit contracts for the provision of credit to which the Credit Code applies. In reaching this conclusion, I have had regard to the beneficial nature of the Credit Code 15 as well as Parliament s intention to ensure strong consumer protection through truth in lending. 16 (b) The credit contracts are unjust transactions within the meaning of the Credit Code. The Credit Code enables a court to reopen a transaction resulting in a credit contract if the court is satisfied that, in the circumstances relating to the credit contract at the time it was entered into, the contract was unjust. 17 When considering whether a credit contract is unjust (the meaning of which includes, unconscionable, harsh or oppressive), 26 the court is to have regard to the public interest and to all the circumstances of the case, and may have regard to certain matters which are set out in the Credit Code, including: 18 i. the consequences of compliance, or noncompliance, with all or any of the provisions of the contract; 19 and ii. the extent to which the provisions of the contract and their legal and practical effect were accurately explained to the debtor and whether or not the debtor understood those provisions and their effect. 20 11 UCCC, section 6(1)(a); NCC section 5(1)(a). 12 UCCC, section 6(1)(b); NCC section 5(1)(b). 13 UCCC, section 6(1)(c); NCC section 5(1)(c). 14 UCCC, section 6(1)(d); NCC section 5(1)(d). 15 Permanent Mortgages Pty Ltd v Michael Robert Cook and Karen Cook [2006] NSWSC 1104, at 88. 16 Explanatory Memorandum to the National Consumer Credit Protection Bill 2009 (Cth) para 8.3. 17 UCCC, section 70(1); NCC section 76(1). 18 UCCC, section 70(2); NCC section 76(2). 19 UCCC, section 70(2)(a); NCC section 76(2)(a). 20 UCCC, section 70(2)(i); NCC section 76(2)(i).
The law recognises that there is a public interest in holding people to contracts they freely enter into a bad bargain or poor investment decision is not a sufficient basis on which to relieve a person from their legal obligations. 21 However, this consideration is to be balanced against the public interest in giving effect to the protective nature of the Credit Code, 22 particularly where a consumer is unable to reasonably protect their own interests. 23 The FSP says the volume of transactions the consumer entered into (30) indicates that he understood precisely what kind of bargain he was entering into and that he did so willingly. The FSP also points to the wording of its Product Disclosure Card in support of its position. I disagree. The consumer s written requests to the FSP show that it was his intention to borrow money for ordinary personal purposes not to become a purveyor of precious stones that, by his own account, he has never seen. The FSP s Product Disclosure Card itself highlights that its contents are to be communicated to any customer of the FSP who wishes to borrow money for a personal or consumer purpose. Further, the consumer s correspondence to the FSP when he first began to dispute the cost of the transactions shows that he did not comprehend the purported legal or practical effect of the documents he had been signing in order to obtain loans from the FSP. None of the transaction documents I have seen clearly explain that the real cost of the credit appears to have actually been between 84% and 100% of the principal amount advanced. All of the debts the consumer incurred under these contracts had to be repaid within time periods of less than one year as such, the annual percentage rate (if this cost is classified as interest) was higher than these amounts. 24 22. Having regard to the public interest which I do not consider to be served by giving effect to credit contracts which are at odds with the truth in lending purpose of the Credit Code - I find that: (a) (b) the consequences of compliance with the provisions of the contract, being the obligation to repay up to twice the amount being borrowed; and the FSP s failure to accurately explain the provisions of the contracts and their legal and practical effect to the consumer, and the consumer s inability to have understood those provisions and their effect, are factors which weigh in favour of a conclusion that the 30 credit contracts the consumer entered into with the FSP are unjust within the meaning of the Credit Code. 21 Baltic Shipping v Dillon (1991) 22 NSWLR 1 at 9, cited with approval in Provident Capital Ltd v Naumovski [2013] NSWSC at [298]. 22 McKenzie v Smith; Lenehan v Smith (1998) ASC 155-025. 23 Provident Capital v Papa [2013] NSWCA 36, at [7]; cited with approval in Bendigo and Adelaide Bank Ltd v Karamihos [2014] NSWCA 17, at [31]. 24 From 2010 onwards and prior to the Consumer Credit Legislation Amendment (Enhancements) Act 2012 (Cth), the maximum interest rate that could legally have been charged under a Code-regulated credit contract was 48% per annum.
Assessment of loss 23. In COSL s preliminary review, the case manager found that the consumer had suffered financial loss as a result of the FSP s conduct and recommended the FSP compensate the consumer for this loss. 25 24. I agree with the case manager s finding that the consumer has suffered financial loss as a result of the FSP s conduct. I assess the consumer s loss as being the total amount of money he has paid the FSP over and above the principal sums advanced to him under the credit contracts. I do not consider it fair or appropriate that the FSP derive any financial benefit from a transaction method which, in my view, was intended to avoid the regulation of the Credit Code at significant cost and detriment to the consumer. Order 25. I order that the FSP pay the consumer compensation in the sum of $8,805.78, inclusive of interest. 26 Raj Venga Credit Ombudsman 25 See paragraphs 13 and 14 of the Recommendation. 26 Using the cash rate set by the Reserve Bank of Australia over the period in question.
Recommendation 19 November 2014 Credit Payday lender Application of National Credit Code Unjust contract Provisions of contract not adequately explained Credit and Investments Ombudsman Limited ABN 59 104 961 882
Dear Mr L 1. We have completed our investigation of this complaint and provide our preliminary review for your consideration. Background to complaint 2. Between 1 September 2008 and 29 February 2012, the consumer entered into 30 sales agreements with the financial services provider (FSP) for various amounts totalling $17,700 (loans). The sales agreements were for the purchase of loose diamonds, namely, loose modern brilliant cut diamonds, 0.10 carats each, colour H, clarity P1. 3. On the same day that each sales agreement was entered into, the consumer also entered into a purchase agreement with a third party company (DP) to sell the diamonds for approximately half the price the diamonds were purchased for. 4. The consumer was not shown the diamonds at any time. 5. The consumer has paid the loans in full but feels that he has overpaid $9,375 as the loans entered into were interest free loans. Consumer s claims Law 6. The consumer claims that: (a) he was charged interest on the loans when the loans entered into were interest free, and (b) the transaction involved the selling of diamonds as a way to give credit to consumers and to avoid the application of the maximum interest rate cap under the Uniform Consumer Credit Code and National Credit Code. 7. In resolution of the complaint, the consumer would like to receive a refund of $9,375. 8. We consider the Queensland Civil and Administrative Tribunal s decision of Carter and Sinclair v Fast Access Finance (Beaudesert) Pty Ltd and Diamond Clearing House Pty Ltd [2011] QCAT 525 (Sinclair), to be current authority for this matter. 9. In this case, the Adjudicator found that: (a) the nature of the transaction between Ms Carter and Mr Sinclair (the borrowers) and Fast Access Finance (Beaudesert) Pty Ltd (Fast Access Finance) was one of the sale and purchase of diamonds They would never see the diamonds which they contracted to purchase and nor would they get any benefit for example by Ms Carter being able to wear the diamonds. (paragraph 26), (b) the characterisation of the transaction in that manner is so highly unlikely, improbable and implausible as to be a complete fiction [and 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 (paragraph 27),
(c) the loan entered into was for a personal, domestic or household purpose, therefore the Consumer Credit Code (QLD) applied, making the interest paid excessive and over the 48% threshold, (d) Fast Access Finance was not entitled to any interest credit charge or profit, and (e) Fast Access Finance was ordered to pay Ms Carter and Mr Sinclair $1,500, being the amount in excess of $1,000 (which was the amount advanced to Ms Carter and Ms Sinclair). Our preliminary review 10. The circumstances around entry into the contracts by the consumer in this case and the borrowers in the Sinclair case are the same in that: (a) they entered both a sales agreement and purchase agreement for the sale of diamonds on the same day; (b) under the sales agreements, they would always pay approximately double the amount that they would receive in payment from their subsequent purchase agreement with Diamond Clearing House or DP; and (c) they did not see any diamonds during the transaction. 11. However in contrast to the Sinclair case, the consumer entered into 30 contracts with the FSP (not just one). 12. We consider that the findings from Sinclair should be applied to this complaint as: (a) the transaction and contracts entered between the borrowers and Fast Access Finance appear to be identical in nature to those entered between the consumer and the FSP, (b) the consumer s loans were for a personal, domestic or household purpose (purchasing household items) (like in Sinclair), and (c) the consumer did not see any of the diamonds, nor did he obtain a benefit from selling the diamonds (like in Sinclair). 13. The total sale price of the diamonds (for the period of 1 September 2008 to 29 February 2012) was $9,375. The consumer paid a total of $17,700 back on the loans. 14. We consider the difference in the amount paid by the consumer ($17,700) and the sale price of the diamonds ($9,375) to have been unreasonably charged. In accordance with Sinclair, we do not consider it to have been the consumer s intention when approaching the FSP for the loans to purchase and sell diamonds at a significant loss.