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How ‘bad credit’ lender Cigno dodged ASIC’s grip

Cigno is exactly the kind of company the Australian Securities and Investments Commission had in mind when it asked strengthened powers to prohibit the sale of harmful financial products.

Cigno offers short-term loans (commonly known as payday loans) for as little as $50 to people with what it calls “bad credit”. His customers would understand disabled pensionersadolescents and people affected by mental illness or addiction.

He describes himself as a “emergency cash specialist”, offering help to people who cannot get loans from any other source. Consumer advocates call it a predatory lendertargeting desperate and vulnerable consumers.

Critics say Cigno traps its customers in a “debt spiral“, forcing them to take out new, higher loans to repay the old ones.

Payments directly from bank accounts

In most cases, Cigno collects payments directly from customers’ bank accounts, along with late or declined fees. Many customers find themselves without enough money stays for food or rent.

In a 2019 Consultation PaperASIC found that Cigno’s fees were much higher than other payday business models.

The document included case studies of customers who ended up owing Cigno almost 10 times what they originally borrowed, due to fees and charges.

In one case, a disabled pensioner who borrowed $350 ended up owing $2,630, including late fees and weekly “account maintenance” fees. In another, an unemployed woman who borrowed $120 ended up with a debt of $1,189.

Operate outside of the Credit Law

Cigno may charge these extraordinary fees because it operates outside the scope of consumer credit laws that apply to ordinary payday loans, using loopholes in the National Credit Act.

In 2020, the business regulator took legal action against Cigno in federal court, alleging that his loans violated the law.

He lost the case, but later won on appeal to the full court bench. Now Cigno wants to challenge that result in the High Court.

The Cigno website offers short-term cash loans up to $1,000.

The regulator has asked the federal government for a major new program intervention power of the product
to avoid such costly and endless legal battles.

In 2019, he received the power to make a product intervention voucherprohibiting or restricting the sale of a financial product that causes “significant harm” to consumers.

These orders can remain in effect for up to 18 months. Violations may result in civil and criminal penalties. So far, ASIC has issued three product intervention orders targeting Cigno’s lending practices.

Read more: What 1,100 Australians told us about living with debt they can’t repay

The first orderin 2019 banned a Cigno loan model that took advantage of the National Credit Code’s “short-term credit” exemption.

Under this exemption, the National Credit Act does not apply if a loan is offered for 62 days or less, the associated fees do not exceed 5% of the amount loaned and the effective annual interest rate does not exceed 24%.

Before issuing the order, the companies regulator was required by law to undertake a lengthy consultation process.

New model for Cigno

Meanwhile, Cigno launched a new loan model that took advantage of a “continuous credit» exemption provided for by the Credit Code. This exemption applies to certain loans for which the only charge is a periodic or other fixed charge of up to $200.

The short-term credit order went into effect on September 14, 2019. Within two days, according to ASIC, Cigno was making loans using the new model.

Consumer advocates say the transition has been so smooth that some Cigno customers were unaware of the change, and Cigno’s business”barely skipped a beat”.

New order against Cigno

In July 2020, the corporate regulator launched a consultation on a second order targeting Cigno’s new lending model, which took advantage of the exemption for “continuing credit” contracts under the National Credit Code.

However, he did not issue this order until July 2022. This was partly because Cigno had mounted a challenge to the first order of the Federal Court. He lost that challenge in April 2020, and again on appeal in June 2021.

Meanwhile, in March 2021, the regulator’s “short-term credit” order lapsed.

Another loan model

ASIC says so understand that Cigno-related companies may have started issuing new loans, using the original loan model.

The regulator issued the credit continuation order in July 2022. At the same time, it issued a third orderclosely based on the initial order of short-term credit.

Still, Cigno continues to offer loans through its website.

This has raised suspicion that he switched to another lending model, again dodging the regulator.

Read more: Loan shark regulators need a lesson in behavioral economics

It seems likely that the regulator’s product intervention orders will have limited success against persistent, well-resourced lenders like Cigno.

To tackle the damaging effects of high-cost loans, we need tougher consumer credit laws – including broad anti-avoidance clauses to prevent lenders from using loopholes in the law to target consumers. vulnerable.

The Conversation reached out to Cigno for a response but received no response by the publication deadline.