david carter - dibbs barker

Case Studies | Recent cases of malpractice

Responsible Lending and Borrowing Summit 2017

David Carter, Partner

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Recent cases of malpractice

BMW Finance

Cash Converters

Channic

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National Credit Act

Credit providers (lenders)

Credit assistance providers (brokers)

Assess unsuitability

Reasonable inquiries about the consumer

SACC – additional requirements

Credit contract assessed as unsuitable

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ASIC RG209: Responsible

Lending Conduct

Reasonable inquiries about a consumer’s financial

situation

Reasonable inquiries about a consumer’s requirements

and objectives

Verification of information provided by a consumer

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BMW Finance - Conduct

Chequered history – series of infringement notices

issued by ASIC

Findings by Independent Consultant about BMW

Finance:

Failed to make adequate inquiries into financial situation of

sample customers because:

Allocated unrealistically low amounts (between $0 and $200

per month) for living and housing expenses; and

Used inappropriate benchmark figures for expenses without

regard to actual financial position of sample customers

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© DibbsBarker 2016

Failed to make inquiries about requirements and

objectives of sample customers in circumstances

where loan provided for a significant balloon payment

at the end of term

Failed to take reasonable steps to verify financial

situation of sample customers because:

Failed to verify income, particularly self-employed or casual

employees; and

Failed to demonstrate that reasonable steps were taken to

resolve materially inconsistent information in its possession

about the financial situation of sample customers

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Failed to assess contracts as unsuitable in

circumstances where financial situation of sample

customers indicated they could only comply with

substantial hardship, including in circumstances where:

Those customers had very low net disposable incomes;

Short term casual or self-employment income was not

reasonably assessed;

There was evidence of recent SACC inquiries on credit files

of customers

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BMW Finance – Outcome

ASIC acted on the independent report

Enforceable undertaking:

Remediation Account - $14.6 million

Remediation Program - $7.6 million interest write off

$50.2 million in loan write offs

Community benefit payment - $5 million

Independent Remediation Consultant appointed

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Cash Converters - Conduct

ASIC investigation into SACC loan products offered

instore and online

Used a benchmark in circumstances where it also

failed to make reasonable inquiries about and take

reasonable steps to verify the consumer’s financial

situation

Entered into the SACC having used a benchmark

without having undertaken the required inquiries and

verification

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Contravention of SACC provisions of National Credit

Act

Assessed the SACC as suitable in circumstances

where it was presumed by operation of the SACC

provisions that the consumer could only comply with

their financial obligations under the SACC with

substantial hardship

Entered into the SACC in circumstances where it was

presumed by operation of the SACC provisions that the

consumer could only comply with their financial

obligations under the SACC with substantial hardship

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Failed to keep adequate records of all material which

formed the basis of the assessment of whether the

relevant SACC was unsuitable, in breach of its

Australian Credit Licence obligations

Failed to comply with its general conduct obligations as

a licensee in respect of the SACC

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Enforceable Undertaking

Remediation Funds - $10.8 million

Refund for fees paid by consumers

Communication Plan

Compliance Review by independent expert

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ASIC v Channic Pty Ltd

Federal Court Decision 2016

© DibbsBarker 2016

http://www.judgments.fedcourt.gov.au/judgments/Judg

ments/fca/single/2016/2016fca1174

Case examined responsible lending and responsible

credit assistance obligations

ASIC sought declarations and orders

http://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2016/2016fca1174

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ASIC v Channic Pty Ltd

© DibbsBarker 2016

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ASIC v Channic Pty Ltd –

Questions to be addressed

© DibbsBarker 2016

Methodology applied by Judge:

The questions are these, so far as CBPL (the broker/credit

assistance provider) is concerned:

Did CBPL provide credit assistance to the relevant borrower, on a

day, by suggesting that the borrower apply, or assisting

the borrower to apply, to Channic for a particular credit contract?

If so, did CBPL within 90 days of that day make a preliminary

assessment that purports to comply with s 115(1)?

If so, does it specify, as required by s 116(1)(a) the period the

assessment covers?

Does the preliminary assessment, if made, assess, as required

by s 116(1)(b) whether the credit contract with Channic will

be unsuitable for the consumer if he or she enters into the credit

contract in the period of the assessment?

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If no to either 3 or 4, CBPL fails to comply with s 115(1)(c)(i).

If a preliminary assessment is made, is it likely, at the time of

the preliminary assessment, that the consumer will be

unable to comply with his or her financial obligations under

the contract if the credit contract is entered into with Channic

in the period proposed for it to be entered?

If the consumer will be able to comply with those obligations,

is it likely that such compliance could only be achieved by

the consumer with substantial hardship?

Is it likely, at the time of the preliminary assessment, that

the contract with Channic will not meet the

consumer’s requirements or objectives if the contract is

entered into with Channic in the period proposed for it to be

entered?

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If yes to any of 6, 7 or 8, the credit contract will be

unsuitable by reason of s 118(2). If unsuitable by reason of

s 118(2), CBPL must assess, by reason of

s 118(1), the Channic credit contract as unsuitable for the

consumer, in making the assessment required

by s 115(1)(c)(i) and s 116(1)(b).

Also, does the preliminary assessment cover, as required

by s 115(1)(c)(ii), the period proposed for the entering of

the contract?

Did CBPL make reasonable inquiries as required

by s 115(1)(d) and s 117(1)(a) about the

consumer’s requirements and objectives concerning a

contract with Channic?

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Did CBPL make reasonable inquiries as required by

s 115(1)(d) and s 117(1)(b) about the consumer’s financial

situation?

Did CBPL take reasonable steps to verify the consumer’s

financial situation as required by s 115(1)(d) and s 117(1)(c)?

If no to any of 2, 3, 4, 10, 11 12 or 13 (or yes to any of 6, 7 or

8), CBPL fails to satisfy s 115(1)(c) or (d) and must

not provide credit assistance to the consumer

by suggesting or assisting him or her to apply to Channic

for the particular credit contract: s 115(1).

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Apart from the questions arising out of the operation of s 115

going to the preliminary assessment, is it likely, at the time

CBPL provides credit assistance to the consumer, that he or

she will be unable to comply with his or her financial

obligations under the Channic contract if the contract is

entered into in the period proposed for it to be entered?

As to 15, if it is not likely that the consumer will be unable to

comply with those obligations, is it likely that the consumer

could only comply with such obligations with substantial

hardship?

In any event, is it likely, at the time CBPL provides credit

assistance to the consumer, that the credit contract will not

meet the consumer’s requirements or objectives, if the

contract is entered into in the period proposed for it to be

entered?

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© DibbsBarker 2016

If yes to 15, 16 or 17, the credit contract will be

unsuitable for the consumer by reason of s 123(2).

If unsuitable by reason of s 123(2), CBPL must not provide

credit assistance to the consumer by suggesting that the

consumer apply, or by assisting the consumer to apply for

the particular credit contract with Channic: s 123(1).

Did CBPL, at the same time as providing credit assistance to

the consumer, give the consumer a credit proposal disclosure

document in accordance with s 121(2)?

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© DibbsBarker 2016

Methodology applied by Judge:

The questions so far as Channic (credit provider) is

concerned are these.

It is uncontroversial that Channic entered into credit contracts

with the consumers

Did Channic, within 90 days of the day of entry into the credit

contract (the credit day) make an assessment that purports

to comply with s 128(c)?

If so, does the assessment specify the period the

assessment covers, as required by s 129(a)?

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© DibbsBarker 2016

If Channic has made an assessment, does it

assess whether the contract will be unsuitable for the

consumer if the contract is entered into in the period the

assessment covers, as required by s 129(b)?

Is it likely, at the time of the assessment required by

s 128(c)(i) and s 129(b), that the consumer will be unable to

comply with the consumer’s financial obligations under the

contract if the credit contract is entered into in the

period covered by the assessment?



could only comply with those obligations with substantial

hardship?

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© DibbsBarker 2016

Is it likely, at the time of the assessment required by

s 128(c)(i) and s 129(b), that the credit contract will not meet

the consumer’s requirements or objectives if the credit

contract is entered into in the period covered by the

assessment?

If the answer to 5, 6 or 7 is yes, Channic must assess that

the credit contract will be unsuitable for the consumer by

reason of s 131(1).

Also, does the assessment cover the period in which

the credit day occurs, which for present purposes is the date

of entry into the Channic contract: s 128(c)(ii)?

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© DibbsBarker 2016

Has Channic, before making its assessment,

made reasonable inquiries about the consumer’s

requirements and objectives in relation to the credit

contract: s 128(d) and s 130(1)(a)?

Has Channic, before making its assessment,

made reasonable inquiries about the consumer’s financial

situation: s 128(d) and s 130(1)(b)?

Has Channic, before making its

assessment, taken reasonable steps to verify the

consumer’s financial situation: s 128(d) and s 130(1)(c)?

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© DibbsBarker 2016

If the assessment does not cover the period in which the

credit day occurs, or if Channic has failed to do the things

contemplated by 9, 10 and 11, Channic has failed to comply

with s 128(d).

In the event that Channic fails to comply with s 128(c) or (d),

it must not enter into a credit contract with a consumer who

will be the debtor under the contract: s 128(a).

Apart from any question concerning the making of an

assessment as required by s 128, is it likely, at the time the

credit contract is entered into, that the consumer will

be unable to comply with his or her financial

obligations under the contract: s 133(2)(a)?

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© DibbsBarker 2016



could only comply with those obligations with substantial

hardship: s 133(2)(a)?

Is it likely, at the time the credit contract is entered into, that

the credit contract does not meet the

consumer’s requirements or objectives: s 133(2)(b).

If the contract is unsuitable by reason of s 133(2), Channic

must not enter into the credit contract with a consumer who

will be the debtor under the contract: s 133(1).

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How the Judge saw it

© DibbsBarker 2016

Plainly enough, the statutory regime requires the

relevant inquiries and verification to be undertaken in

order to enable the credit provider to make an informed

assessment about the suitability of the proposed

particular credit contract for the particular consumer in

the context of the financial situation of that individual

and the requirements and objectives of the consumer

in entering into the particular contract.

These statutory matters are not matters of form or mere

process but represent normative matters of substance.

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© DibbsBarker 2016

The legislation is beneficial in the sense that it seeks to

ensure that a consumer does not enter into an

“unsuitable” credit contract (within the statutory notion

of that concept) by casting a statutory obligation on a

credit provider not to enter into such a contract coupled

with a regime for inquiries and verification about the

relevant statutory matters and an assessment protocol.

These normative matters are not simply a “tick the box”

compliance exercise.

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© DibbsBarker 2016

Channic obtained documents from CBPL. Based on those

documents, Channic used them to fill out other documents it

needed to complete in purported discharge of its obligations

under the NCCP Act. Mr Hulbert knew how Mr Humphreys

went about obtaining the completion of the Credit

Application Form and the Preliminary Test. Mr Hulbert also

knew (because he set the terms) that Mr Humphreys was

remunerated by only commission payments (both as to the

sale of the motor vehicle through Supercheap and as to the

entitlement to a commission upon a consumer entering into

a credit contract with Channic) and he knew that a positive

surplus on the Preliminary Test was, at least, a significant

criterion for a consumer to obtain credit from, and a credit

contract with, Channic.

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© DibbsBarker 2016

As mentioned earlier, the incentives within CBPL were

operating against the discharge of reasonable inquiries about

the consumer’s financial situation and reasonable steps in

verification of their financial situation and reasonable inquiries

into the requirements and objectives of the consumer.

In the context of these circumstances, Channic simply relied

upon the CBPL material.

Channic needed, as a matter of statutory obligation, to bring

its own inquiring mind to the relevant statutory matters, first,

because it had a duty to do so under the NCCP Act

and second, because Mr Hulbert needed to ensure that each

contract was not unsuitable for the consumer having regard to

the potentially distorting remuneration incentives operating

within CBPL.

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© DibbsBarker 2016

However, for all the reasons previously mentioned, I

am satisfied that Channic did not make reasonable

inquiries to determine each consumer’s requirements

and objectives in relation to the credit contract because

the only relevant inquiries concern someone at

Channic looking at the CBPL referred documents and

“filling out” the Schedule 1 Loan Inquiry Checklist as a

process or clerical matter and then “telling” the

consumer on the credit day the elements of the loan

contract rather than interrogating the consumer about

the consumer’s requirements and objectives for that

particular contract.

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© DibbsBarker 2016

I am also satisfied that Channic failed to make reasonable

inquiries about the financial situation of the consumer or

take reasonable steps to verify the financial situation of the

consumer. Mr Hulbert relied upon the CBPL material sent to

him by Mr Humphreys.

The state of Channic’s inquiries and verification steps could

rise no higher than the flawed character and quality of the

material assembled by Mr Humphreys with all its limitations

because Mr Hulbert did not go beyond it and he knew

its limitations. Secondly, Channic did not make its own

inquiries and did not bring an independent “credit providers”

mind to the statutory tasks.

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© DibbsBarker 2016

It follows that I have found that CBPL has contravened

ss 113, 114, 115, 116, 117, 118, 121 and 123 of the

NCCP Act.

I have found that Channic has contravened ss 128, 130,

131 and 133 of that Act.

I have found that Mr Hulbert is a person who has been

knowingly concerned in each of those contraventions.

I have found that Channic engaged in unconscionable

conduct in breach of s 12CB of the ASIC Act.

I have found that each credit contract was unjust at the

time it was entered into, in terms of s 76 of the National

Credit Code.

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Lessons to be learned from

the Case Studies

© DibbsBarker 2016

Culture which is detrimental to responsible lending will

lead to problems

Adequate resources and systems needed to carry out

responsible lending

Responsible lending is not a tick-a-box exercise

Interrogate the information customer’s provide

david carter - dibbs barker

Economy & Finance