FEDERAL COURT OF AUSTRALIA

Australian Securities and Investments Commission v The Cash Store Pty Ltd (in liquidation) (No 2) [2015] FCA 93

IN THIS ORDER:

ASIC Act refers to the Australian Securities and Investments Commission Act 2001 (Cth).

Credit Act refers to the National Consumer Credit Protection Act 2009 (Cth).

OTHER MATTERS:

This Order should be read together with the reasons in Australian Securities and Investments Commission v The Cash Store Pty Ltd (in liquidation) (No 2) [2015] FCA 93 and the Orders of the Court dated 26 August 2014.

THE COURT ORDERS THAT:

Pecuniary Penalties - TCS

1.    Pursuant to section 12GBA(1) of the ASIC Act, the First Respondent (TCS) pay the Commonwealth a pecuniary penalty of $1,100,000 in respect of the declared contravention by TCS of section 12CB of the ASIC Act.

2.    Pursuant to section 167(2) of the Credit Act, TCS pay the Commonwealth a pecuniary penalty of $10,725,000 in respect of the declared contraventions by TCS of Part 3-1 and Part 3-2 of the Credit Act, being:

(a)    a pecuniary penalty of $5,500,000 in respect of the declared contraventions by TCS of Part 3-1 of the Credit Act during the period between 1 July 2010 and 6 March 2012 (the first period);

(b)    a pecuniary penalty of $1,650,000 in respect of the declared contraventions by TCS of Part 3-1 of the Credit Act during the period between 7 March 2012 and 24 September 2012 (the second period);

(c)    a pecuniary penalty of $2,750,000 in respect of the declared contraventions by TCS of Part 3-2 of the Credit Act during the first period; and

(d)    a pecuniary penalty of $825,000 in respect of the declared contraventions by TCS of Part 3-2 of the Credit Act during the second period.

Pecuniary Penalties – AFA

3.     Pursuant to section 167(2) of the Credit Act, the Second Respondent (AFA) pay the Commonwealth a pecuniary penalty of $7,150,000 in respect of the declared contraventions by AFA of Part 3-2 of the Credit Act, being:

(a)    a pecuniary penalty of $5,500,000 in respect of the declared contraventions by AFA of Part 3-2 of the Credit Act during the first period; and

(b)    a pecuniary penalty of $1,650,000 in respect of the declared contraventions by AFA of Part 3-2 of the Credit Act during the second period.

Costs

4.    AFA pay the Applicant’s costs of and incidental to this proceeding.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

introduction

1    On 26 August 2014, I delivered judgment in Australian Securities and Investments Commission v The Cash Store Pty Ltd (in liquidation) [2014] FCA 926 (“the liability judgment”) in which I made findings, and declarations, of contravention by the respondents of the National Consumer Credit Protection Act 2009 (Cth) (“the Credit Act”) in relation to “payday” lending to customers, and by the first respondent (“TCS”) of s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) (“the ASIC Act”) in relation to the sale of consumer credit insurance (“CCI”). The contraventions related to a sample of 281 credit contracts that TCS arranged, and the second respondent (“AFA”) financed, between 1 July 2010 (when the relevant provisions of the Credit Act became operative) and 24 September 2012 (“the relevant period”). These contracts were randomly selected from the 325,756 credit contracts that TCS arranged, and AFA financed, during the relevant period. Out of the 281 contracts, only four contracts were found not to have involved some contravention. The other contracts all involved multiple contraventions. I found systemic and gross failures by TCS and AFA to comply with legislative requirements and a wholesale failure in process. The question of how the Court can, and should, extrapolate the findings of liability across all 325,756 credit contracts entered into during the relevant period was reserved for the penalty hearing. ASIC has submitted that it is “very likely” that over 300,000 of the 325,756 credit contracts entered into contravened one or more of the responsible lending obligations imposed by the Credit Act. ASIC submits that the Court should impose penalties:

(a)    on TCS in respect of the contraventions of Parts 3-1 and 3-2 of the Credit Act of between $8.26 million and $12.39 million;

(b)    on AFA in respect of the contraventions of Part 3-2 of the Credit Act of between $6,385,000 and $9,377,500; and

(c)    on TCS in respect of the contraventions of s 12CB of the ASIC Act, “at or near” the maximum penalty of $1.1 million.

2    ASIC correctly raised the question of the application of Barbaro v the Queen (2014) 88 ALJR 372; [2014] HCA 2 in the context of civil penalty proceedings. This has been the subject of judicial consideration and the present state of the authority in this Court is that Barbaro does not prevent the Court from taking a regulator’s submissions on penalty into account in the civil context: Australian Competition and Consumer Commission v EnergyAustralia Pty Ltd [2014] FCA 336; Australian Competition and Consumer Commission v Safe Breast Imaging Pty Ltd (No 2) [2014] FCA 998 at [47]; Comcare v John Holland Pty Ltd [2014] FCA 1191 at [28]. Accordingly, I propose to take ASIC’s submissions into account.

3    Neither respondent attended at the penalty hearing. TCS is in liquidation and the liquidator has not participated in the proceeding. AFA could not be served with the documents because it no longer has a registered office, it does not have any directors as all the directors have resigned and it does not have solicitors acting for it. After several futile attempts at service, ASIC applied for and, on 26 September 2014, was given leave to dispense with service on AFA pursuant to r 1.34 of the Federal Court Rules 2011 (Cth).

power to impose penalties for contravention

4    The Court has made declarations under s 166 of the Credit Act of numerous contraventions by TCS and AFA of the civil penalty provisions in Chapter 3 of that Act. Section 167(2) empowers the Court to order the companies to pay to the Commonwealth “a pecuniary penalty that the Court considers is appropriate”. The maximum penalty that can be imposed is $1.1 million for each contravention: s 167(3)(b).

5     Under the ASIC Act, the Court may impose pecuniary penalties of up to $1.1 million on TCS in respect of its unconscionable conduct in the sale of CCI to payday lending customers: s 12GBA(3). For the purpose of setting the penalty, the Court is required by s 12GBA(2) to have regard to all relevant matters, including the following matters set out in s 12GBA(2)(a)-(c):

(a)    the nature and extent of the act or omission and of any loss or damage suffered as a result of the act or omission;

(b)    the circumstances in which the act or omission took place; and

(c)    whether the person has previously been found by the Court in proceedings under that subdivision to have engaged in any similar conduct.

consideration

6    The Court made findings in relation to the 281 sampled contracts in six categories, being the statutory obligations contained in Part 3 of the Credit Act which TCS and AFA were found to have breached. The contraventions found in relation to the 281 sampled contracts revealed a wholesale failure of process and lack of compliance with the legislative requirements.

7    In summary:

*    Contracts entered into between 1 July 2010 and 6 March 2012

**    Contracts entered into between 7 March 2012 and 24 September 2012

***    The legislative requirement to provide a credit guide to customers came into effect on 2 October 2011

8    The table is broken into the two periods because on or around 6 March 2012, TCS changed some of its policies and practices in response to a non-binding suggestion from ASIC and made some attempt at corrective action. However, as the table highlights, even after the introduction of revised policies and procedures there was continued systemic failure by TCS to comply with its obligations under Part 3 of the Credit Act.

9    ASIC does not seek findings of contravention in relation to the other credit contracts entered into during the relevant period but has submitted that the Court, in setting the penalties, should take into account the statistical likelihood that similar contraventions on the same scale would be found in respect of those other contracts. ASIC led evidence from Professor Ian Gordon of the Statistical Consulting Centre at the University of Melbourne about the statistical likelihood of similar contraventions in respect of those other contracts. In summary, according to Professor Gordon it can be said with 95% confidence that, based on the findings of the Court in relation to the 281 sample contracts:

(a)    in the first period (288,799 contracts in total entered into):

-    TCS failed to make reasonable inquiries about a customer’s requirements and objectives in respect of between 229,921 to 271,118 contracts;

-    TCS failed to make reasonable inquiries about a customer’s financial situation in respect of between 271,737 to 288,720 contracts;

-    TCS failed to verify a customer’s financial situation in respect of between 204,622 to 254,063 contracts;

-    TCS failed to make a preliminary assessment in respect of between 279, 546 to 288,799 contracts;

-    TCS failed to provide the TCS credit guide to the customer in respect of between 63,725 to 71,203 contracts;

-    AFA failed to provide the AFA credit guide to the customer in respect of between 63,725 to 71,203 contracts.

(b)    in the second period (36,958 contracts in total entered into):

-    TCS failed to make reasonable inquiries about a customer’s requirements and objectives in respect of between 22,300 to 29,273 contracts;

-    TCS failed to make reasonable inquiries about a customer’s financial situation in respect of between 29,414 to 34,559 contracts;

-    TCS failed to verify a customer’s financial situation in respect of between 4,780 to 10,993 contracts;

-    TCS failed to make a preliminary assessment in respect of between 33,217 to 36,543 contracts;

-    TCS failed to provide the TCS credit guide to the customer in respect of between 8,692 to 15,843 contracts;

-    AFA failed to provide the AFA credit guide to the customer in respect of between 8,019 to 15,055 contracts.

10    I consider that it is appropriate in setting the penalty to take into account the analysis conducted by Professor Gordon and the statistical likelihood of similar contraventions in respect of all contracts entered into over the period. As stated at [63] of the liability judgment, TCS in its 2012 credit licence annual compliance certificate signed on 30 May 2012 candidly admitted that its arrangements were deficient in various crucial respects. TCS admitted, amongst other things, that it did not have “adequate arrangements and systems in place to ensure that it complied with the conditions of its licence” and the credit legislation, and that it did not have “adequate arrangements and systems in place to maintain the competence to engage in the credit activities authorised by its licence” or “to ensure that its representatives were adequately trained and competent to engage in the credit activities authorised by its license”. It is well apparent that the contravening conduct of TCS and AFA was neither isolated nor confined and that their lending practices disregarded, and fell well short of, the statutory requirements for “responsible lending”. The contraventions were very serious. TCS and AFA were major players in the payday lending industry before their operations ceased, deriving substantial fees and interest through lending to financially vulnerable persons, many of whom were unemployed. The widespread and significant nature, extent and duration of the contravening conduct calls for the imposition of the maximum penalties.

11    It is well established that the principal purpose of imposing a pecuniary penalty is to act as a specific deterrent to the contravenor and as a general deterrent to others against engaging in the type of conduct that is the subject of the contraventions: NW Frozen Foods v Australian Competition and Consumer Commission (1996) 141 ALR 640; Australian Competition and Consumer Commission v Dateline Imports Pty Ltd (No 2) [2014] FCA 1222. As French J (as his Honour then was) stated in Trade Practices Commission v CSR Ltd (1991) ATPR 41-076; [1990] FCA 521, the object is to put a price on contravention that is sufficiently high to be a deterrent to others and not be considered as an acceptable cost of doing business.

12    The liquidation of TCS means that specific deterrence is of limited relevance as any pecuniary penalty imposed would not be admissible to proof (s 553 of the Corporations Act 2001 (Cth)), however, this does not mean that an order for a pecuniary penalty should not be made. It is still appropriate to make an order that TCS pay penalties for its contraventions as a measure of the Court’s disapproval of its conduct, and as a measure of the seriousness with which the Court regards the contraventions: Australian Competition and Consumer Commission v SIP Australia Pty Ltd [2003] ATPR 41-937; [2003] FCA 336; Australian Competition and Consumer Commission v Nonchalant Pty Ltd (in liq) [2013] ATPR 42-442; [2013] FCA 605 at [46]-[47].

13    In setting the penalties to be imposed, it is necessary to take into account the extent to which the same wrongful conduct involved a breach of more than one civil penalty provision: s 175 of the Credit Act. In the present case, applying that principle, the failure to make inquiries about a customer’s objectives and requirements in relation to a particular contract, which was a breach by TCS of both s 115(1)(d) and s 117(1)(a) in relation to that contract, is to be treated as a single contravention. Similarly, the failure to make reasonable inquiries about a customer’s financial situation in relation to a particular contract, which was a breach by TCS of both s 115(1)(d) and s 117(1)(b) in relation to that contract, is to be treated as a single contravention. The failure to verify a customer’s financial situation in relation to a particular contract, which was a breach by TCS of both s 115(1)(d) and s 117(1)(c) in relation to that contract, is to be treated as a single contravention. Finally, the failure to make a preliminary assessment in relation to a particular contract, which was a breach by TCS of both s 115(1)(c) and s 116(1) in relation to that contract, is to be treated as a single contravention. A similar approach is to be taken with respect to TCS’s and AFA’s contraventions of Part 3-2 of the Credit Act.

14    I therefore agree with ASIC that it is appropriate to fix penalties on TCS in respect of the Part 3-1 Credit Act contraventions by reference to five classes of contravention as follows:

(a)    the failure to make reasonable inquiries about a customer’s requirements and objectives (Category A1);

(b)    the failure to make reasonable inquiries about a customer’s financial situation (Category A2);

(c)    the failure to take reasonable steps to verify the customer’s financial situation (Category A3);

(d)    the failure to make a preliminary assessment (Category A4); and

(e)    the failure to provide TCS’s and AFA’s credit guides to customers (Category A5).

15    ASIC also submitted that the Court should impose penalties by reference to the period when the contraventions occurred (ie pre or post 6 March 2012): that is, imposing separate penalties for the second period by reference to the five same categories identified in para 14:

(a)    the failure to make reasonable inquiries about a customer’s requirements and objectives (Category C1);

(b)    the failure to make reasonable inquiries about a customer’s financial situation (Category C2);

(c)    the failure to take reasonable steps to verify the customer’s financial situation (Category C3);

(d)    the failure to make a preliminary assessment (Category C4); and

(e)    the failure to provide TCS’s and AFA’s credit guides to customers (Category C5).

16    ASIC proposed lesser penalties in relation to the contraventions in the second period when TCS took some steps at improving its practices and was co-operating with ASIC. ASIC also submitted that a lesser amount is appropriate for TCS’s accessorial contraventions of Part 3-2 of the Credit Act, giving recognition to the requirements of proportionality and totality.

17    In respect of TCS’s contraventions of Part 3-1 and Part 3-2 of the Credit Act during the first period, ASIC submitted that the Court should consider imposing penalties in the range of:

(a)    Category A1: $1.1 million to $1.165 million for contraventions of ss 117(1)(a) and 115(1)(d), plus $220,000-$330,000 for contraventions of ss 130(1)(a) and 128(d);

(b)    Category A2: $1.1 million to $1.165 million for contraventions of ss 117(1)(b) and 115(1)(d), plus $220,000-$330,000 for contraventions of ss 130(1)(b) and 128(d);

(c)    Category A3: $550,000 to $825,000 for contraventions of ss 117(1)(c) and 115(1)(d), plus $110,000-$165,000 for contraventions of ss 130(1)(c) and 128(d);

(d)    Category A4: $1.1 million to $1.165 million for contraventions of ss 116(1) and 115(1)(c), plus $220,000-$330,000 for contraventions of ss 129 and 128(c);

(e)    Category A5: $550,000 to $825,000 for contraventions of ss 113(1) plus $550,000-$825,000 for contraventions of s 126(1).

18    The lesser penalties for the category A3 contraventions were said to reflect the overlap with the nature of the category A2 contraventions, and for the category A5 contraventions, the shorter time period over which the contraventions occurred (the legislative requirement to provide a credit guide to customers came into effect on 2 October 2011) and correspondingly lower number of contraventions involved.

19    In respect of TCS’s contraventions of Part 3-1 and Part 3-2 of the Credit Act during the second period, ASIC submitted that the Court should consider imposing penalties in the range of:

(a)    Category C1: $550,000 to $775,000 for contraventions of ss 117(1)(a) and 115(1)(d), plus $110,000-$165,000 for contraventions of ss 130(1)(a) and 128(d);

(b)    Category A2: $550,000 to $775,000 for contraventions of ss 117(1)(b) and 115(1)(d), plus $110,000-$165,000 for contraventions of ss 130(1)(b) and 128(d);

(c)    Category C3: $110,000 to $165,000 for contraventions of ss 117(1)(c) and 115(1)(d), plus $110,000-$165,000 for contraventions of ss 130(1)(c) and 128(d);

(d)    Category C4: $550,000 to $775,000 for contraventions of ss 116 and 115(1)(c), plus $110,000-$165,000 for contraventions of ss 129 and 128(d);

(e)    Category A5: $225,000 - $412,500 for contraventions of ss 113(1) plus $220,000-$330,000 for contraventions of s 126(1).

20    The lesser penalties for the category C3 contraventions were said to reflect the shorter period and therefore smaller number of contraventions involved and the fact of some slight improvement in compliance.

21    It is appropriate to consider whether, and the extent to which, the contravening conduct should be regarded as the same single course of conduct and penalised as one offence in relation to each category of contravention, on the principle that a contravener should not be penalised more than once for the same conduct: Registrar of Aboriginal and Torres Strait Islander Corporations v Matcham (No 2) [2014] FCA 27; (2014) 97 ACSR 412 at [195]-[198]. The “course of conduct” principle recognises that where there is an interrelationship between the legal and factual elements of two or more contraventions, care must be taken so that the contravener is not punished twice for what is essentially the same conduct: Matcham (No 2) at [199]; Construction, Forestry, Mining and Energy Union v Cahill (2010) 269 ALR 1; [2010] FCAFC 39 at [39] and [41] per Middleton and Gordon JJ and per Moore J agreeing at [1]; Royer v Western Australia [2009] WASCA 139 at [22] per Owen JA; Australian Securities and Investments Commission v Australian Property Custodian Holdings Ltd [2014] FCA 1308 at [37] per Murphy J. The Court is not obliged to utilise the principle but it is necessary to ensure that the penalties in aggregate are just and appropriate to the circumstances of the case.

22    I agree with ASIC that there should be a differentiation in period in the imposition of penalties because after 6 March 2012, TCS purported to put into place changes to its processes and practices that would comply with the Credit Act. In one sense the conduct in the second period was even more egregious because the scale of the contraventions after 6 March 2012 reflects a continued gross lack of attention to, and disregard of, legal obligations and a failure to put into place practices and procedures that did comply with the responsible lending obligations. The corrective action was inadequate to address the systemic wholesale failures in process and prevent future contraventions. Despite the corrective action taken by TCS there were continued multiple breaches of the same responsible lending provisions of the Credit Act. TCS should separately be penalised for its continued substantial breaches of the Credit Act after ASIC had brought the deficiencies in process to TCS’s attention.

23    I agree also with the submission for ASIC that TCS’s breaches of Part 3-2 by reason of its “knowing involvement” in AFA’s breaches (s 169 of the Credit Act) are of a different type to its breaches of Part 3-1 of the Credit Act. The contravening conduct in this context arises from TCS’s “involvement” in AFA’s breaches of the requirements imposed on AFA under Part 3-2 of the Credit Act and that contravening conduct should attract the imposition of a separate penalty.

24    Taking these matters into consideration, I consider that it is appropriate to fix penalties on TCS in respect of the Part 3-1 Credit Act contraventions by reference to the five classes of contravention identified by ASIC. Each class represents a separate and different contravention of the statutory requirements under the Credit Act and in my view the same penalty is called for in relation to each class of contravention, giving due recognition to the specific separate statutory requirements imposed under the Credit Act that were breached. The contraventions in each category should be treated as a single course of conduct and penalised as one offence. The contraventions in the first period warrant the maximum penalty in the amount of $1.1 million in respect of the systemic and wholesale failure of compliance with the statutory obligations.

25    TCS’s contraventions during the second period were serious and reflective of a continued disregard of TCS’s responsible lending obligations, despite or notwithstanding ASIC bringing the noncompliance to the attention of TCS. The changes that TCS made were largely ineffectual in ensuring compliance with the responsible lending obligations. Ordinarily taking steps to rectify the contravening conduct and cooperating with the appropriate authority are matters that can carry some weight in fixing the penalty but I do not think that TCS’s co-operation is a weighty factor given the extensiveness of the contraventions that continued. However, due weight does need to be given to the fact that the contraventions essentially involved the same systemic failures of process, and the need to ensure the aggregate penalties overall are just and proportionate in all the circumstances. In my view an appropriate penalty would be 30% of the maximum penalty of $1.1 million in respect of each category.

26    TCS’s accessorial contraventions warrant the imposition of significant penalties. Under the business arrangement with AFA, TCS undertook the full servicing of the payday loans that AFA funded and in undertaking that role had the additional responsibility to ensure that its practices and procedures complied with the Part 3-2 requirements. Taking into account that the contraventions were interrelated with the Part 3-1 contraventions, there should be some reduction but I do not think that it should be a very substantial reduction given the nature and seriousness of the contraventions and duration over which they occurred. In my view an appropriate penalty would be 50% of the maximum penalty of $1.1 million in respect of each category in the first period and 15% of the maximum penalty of $1.1 million in respect of each category in the second period.

27    I consider the aggregate penalties overall to be just and proportionate in all the circumstances having regard to the widespread and significant nature, extent and duration of the contravening conduct: Matcham (No 2) at [197].

28    The penalties to be imposed on AFA in respect of its Credit Act contraventions should be by reference to the same five classes of contraventions in the two periods. I consider there to be a significant public interest in imposing the same penalties on AFA in relation to its breaches in each category as the penalties imposed on TCS for its Part 3-1 contraventions, having regard to AFA’s total disregard of its statutory obligations and abdication of its responsible lending obligations to TCS without supervision. As AFA outsourced the whole of its activities to TCS, its conduct is as egregious as TCS’s contravening conduct. It is relevant that there was no evidence before the Court to indicate that AFA took any steps to ensure that TCS was complying with the responsible lending obligations. It is also relevant that AFA did not acknowledge any deficiencies in process and, indeed, in a letter dated 22 October 2012 to ASIC, was still continuing to maintain that its outsourcing model was fully compliant with the Credit Act. AFA did not cooperate in any meaningful way with ASIC and there is no evidence to indicate that it took any steps to implement change or to show contrition for its widespread contraventions of the Act.

29    Finally, it is necessary to fix the penalties to be imposed on TCS for its contraventions of s 12CB of the ASIC Act. The findings in the liability judgment were that the CCI was sold by TCS to slightly more than two thirds of its loan customers, including to unemployed customers despite the fact that they were unlikely ever to receive a benefit from the insurance because unemployed persons were ineligible to claim for the main components of the coverage, namely disablement and involuntary employment. Further that the CCI was unsuited to the needs of most customers and most unlikely ever to confer a benefit, a fact that must have been known to TCS. Over the period between 14 August 2010 and 16 March 2012, of the 268,903 credit contracts entered into, TCS sold 182,838 CCI policies. These factors again make it appropriate to impose the maximum penalty, for which purpose the course of conduct in respect of the sales of insurance should also be treated as arising from the same conduct and penalised as such. In so concluding, I take into account that TCS has not previously been found by the Court to have engaged in any similar conduct but given the seriousness and extent of the unconscionable conduct engaged in, the maximum penalty is warranted.

30    ASIC will be directed to provide minutes of orders giving effect to these reasons. AFA will also be ordered to pay ASIC’s costs of the proceeding. I note that a costs order is not sought against TCS.

Associate:

Dated:    19 February 2015