Providers of short-term credit and continuous credit contracts are on ASIC’s radar, with ASIC recently issuing two new product intervention orders modifying what fees can be charged when relying on the different credit exemptions. These orders follow ASIC’s successful appeal before the Full Federal Court, which unanimously found that a ‘financial supply fee’ charged by a service provider is a charge ‘made for providing credit’. Given that many BNPL providers rely on these exemptions, the implications of these orders are significant for the BNPL sector.
ASIC made the product intervention orders by way of legislative instruments imposing conditions on the issuing of short term credit (ASIC Instrument 2022/647) and continuing credit contracts to retail clients (ASIC Instrument 2022/648). The orders came into effect on 15 July 2022.
What are the orders?
The Short-Term Credit Product Intervention Order is intended to improve on and extend the current restrictions on what short-term credit providers can charge. Currently, fees or charges for the provision of short-term credit are capped. The intervention orders extend these caps to restrict the types of fees or charges under a collateral or associated contract. This would include, for example, contracts for administration services in connection with a credit contract so that credit providers cannot exceed the cap limits by restructuring their fees across multiple contracts for multiple related services.
Similarly, the Continuous Credit Product Intervention Order is intended to prevent providers of continuous lines of credit from charging certain fees or charges under a collateral contract and limits the amount a credit provider can charge for associated services.
ASIC’s Explanatory Statement states that in their view the costs associated with short-term or continuous credit contracts far outweigh the benefits. As such, the orders seek to protect vulnerable customers who may suffer significant harm from predatory lending practices. They do this by clarifying what fees are caught by the fee caps for short-term credit and continuous credit contracts and make it clear that the fee caps also apply to fees, interest and charges under collateral contracts.
ASIC has defined collateral contracts as one that is separate to but also related to the short-term or continuous credit contract between a credit provider and retail client. This could include contracts for services such as assisting with the application for credit, distribution of loan products, or administration of, or debt collection activities in relation to, a short-term or continuous credit contract. It includes activities associated with arranging for short-term or continuous credit, including fast tracking applications.
If an activity is a by-product of a short-term or continuous credit relationship, and a fee or charge is imposed, the provider will need to ensure they are compliant with the fee caps under the product intervention orders. Non-credit services which necessarily or optionally include a credit component may also be caught under the orders as a collateral contract.
Impact on exempt credit providers
In Consultation Paper 355 (Product Intervention Orders: Short Term Credit and Continuing Credit Contracts), ASIC stated that credit providers are charging fees for the provision of credit in line with the caps under the Code, but these charges only equate to a minor percentage of the overall fees (i.e., 2%). ASIC also states that the fees under a separate contract, such as a contract for service or engagement of a third-party service provider, equates to the remainder of the overall fees (i.e., 98% of the total fees charged) and far exceeds the caps outlined by the Code.
Service providers such as bill smoothers, invoice financiers or buy now, pay later providers who are currently operating under a credit exemption may now be caught by the National Credit Code. Such providers should review their current arrangements to ensure that they comply with the Product Intervention Orders in order to continue to rely on the exemptions, otherwise service providers may face heavy penalties or may be required to get an Australian credit licence.
Exemptions?
There may be an exemption for providers that impose fees or charges under a collateral non-cash payment facility.
Buy now, pay later providers may also be exempt where they are relying on the continuous credit exemption.
How we can help
We can advise you on the application of the orders to your business and help you work through the available options. Contact us for advice and assistance.
For more information, please contact Jaime Lumsden, Michele Levine and Stephanie McClelland
