ASIC v BHF Solutions: The risks of ‘charge splitting’ in consumer credit contracts

Introduction

The recent Federal Court case of ASIC v BHF Solutions Pty Ltd (No 2) [2023] FCA 787 shows how the Courts will take a substance over form approach to ‘charge splitting’ in credit contracts.  This is where a credit provider seeks to avoid the operation of the National Consumer Credit Protection Act 2009 (Cth) (the Act), by characterising charges for a consumer loan as being for ‘services’ (usually through an intermediary).

In this case, one respondent (BHFS) provided small loans to consumers.   The other respondent (Cigno) agreed in 2019 to manage these loan agreements for BHFS.   Cigno charged borrowers for these management services. Neither company held an Australian Credit Licence (ACL).

At the heart of these proceedings was the question of whether or not borrowers were paying a ‘charge’ for the credit supplied by BHFS.   Broadly, loans are only regulated by the Act if there is charge for credit (amongst other things).

In earlier proceedings, the Full Federal Court found the fees charged by Cigno were in fact a charge for credit, despite Cigno’s contention these charges were for ‘services’.  The High Court then refused leave to appeal this decision, and sent the parties back to the Federal Court to decide remedies and costs.

Decision

The Federal Court ordered injunctions against both respondents, permanently restraining them from:

• providing credit under the Act;
• entering similar credit management agreements; and
• exercising the rights of a credit provider (e.g., assisting or advising consumers to apply for credit contracts and organising repayments).

The Court also declared that both respondents had breached the Act by engaging in a credit activity without holding an ACL.

Regarding BHFS (the lender), the relevant conduct included entering the loan management agreement with Cigno, (under which Cigno could charge service fees to borrowers), and then entering a credit contract with those persons.   This was because the Full Federal Court had earlier found the Cigno ‘service fees’ were in fact charges for these loans made by BHFS. Therefore, BHFS had breached the Act by engaging in a ‘credit activity’ without an ACL.

Regarding Cigno (the loan manager), the Court found it was exercising the rights of a credit provider (BHFS) in relation to a credit contract on behalf of BHFS, particularly by:

• charging a service fee in relation to BHFS’s credit contract;
• maintaining accounts and records with respect to a borrower;
• arranging for the collection of repayments from a borrower;
• monitoring borrower repayments; and
• notifying a borrower about payment defaults and ordering rectification of this.

The Court also found that Cigno was providing a ‘credit service’, particularly by:

• suggesting a consumer apply for a particular credit contract;
• assisting a consumer to apply for a particular credit contract; and
• acting as an intermediary between BHFS and the borrower to secure the provision of credit by assessing the information provided by the borrower, recommending them to BHFS, and sending loan proposal and approval emails to the borrower.

Takeaways

This decision shows that the Courts will take a ‘substance over form’ approach to assessing whether there is a ‘charge’ made for providing credit.  What is required is to examine the circumstances or conditions in which the charge is made and reason for it; i.e. to look to the substance of the credit arrangements rather than their contractual form.