The Australian Securities and Investment Commission (ASIC) alleged that the purchase and sale of diamonds was a pretence as there were no diamonds involved in the transaction and consumers had no intention of buying or selling diamonds.
Rather, ASIC believed the diamond purchase and sale contracts created by the Fast Access Finance group of companies (FAF) were designed to camouflage what, in reality, were loan transactions to which the National Consumer Credit Protection Act 2009 (National Credit Act) applied.
Under the diamond purchase contract model used by the FAF companies, a consumer wanting to borrow, for example, $500 would “purchase” four diamonds at a price of $250 per diamond from an FAF company, with payment of the $1,000 purchase price being deferred and paid in a number of future instalments.
Under the diamond sale contract, signed at the same time as the diamond purchase contract, the consumer would “sell” the same diamonds at a price of $125 per diamond and would receive the $500 proceeds of the sale.
ASIC reported that the practical effect of the contracts was that the consumer would receive $500 but would incur a $1,000 debt to the FAF company and therefore pay an additional charge of one dollar for every dollar borrowed. Also, ASIC claimed the diamond contracts, created by the FAF group, were devised with the intention of avoiding consumer credit legislation, in particular the 48 per cent per annum interest rate cap that previously applied in Queensland.
In general terms, a small amount loan is where the amount borrowed is $2,000 or less and the term is between 16 days and one year. From 1 July 2013, only the following fees can be charged on small amount loans:
• a monthly fee of 4 per cent of the amount lent
• an establishment fee of 20 per cent of the amount lent
• government fees or charges
• enforcement expenses, and
• default fees (the lender cannot recover more than 200 per cent of the amount lent).
The corporate watchdog alleged that the FAF companies were also seeking to avoid the requirement to hold a licence for their lending activities.
ASIC’s deputy chairman Peter Kell said, “When ASIC identifies business models or schemes that are intended to avoid obligations imposed by the consumer credit legislation, we will take action.
“ASIC is committed to maintaining the integrity of the credit industry and the licensing system by ensuring businesses conduct themselves within the confines of the laws, which are intended to protect consumers. Payday and small amount lenders can expect ASIC to take action where they engage in this type of avoidance behaviour,” Kell said.
ASIC has sought civil penalties orders against the companies, as well as compensation for six consumers. It alleged the FAF companies engaged in unlicensed credit activities in contravention of section 29 of the National Credit Act. The court may impose a penalty of up to $1.1 million for each contravention of section 29.
The proceedings are listed for a hearing in the Federal Court in Brisbane on 20 September 2013.
UPDATE: Wednesday 14 August, 4pm
Since first publishing our story, Fast Access Finance’s (FAF) legal representative, Robert Legat, has made the following statement.
“Fast Access Finance’s method of operation was not in breach of the NCCP Act or the National Credit Code – the transactions offered by Fast Access Finance stores were not transactions to which the Act or Code applied.
“Fast Access Finance stores in Queensland ceased providing consumer credit loans in July 2008 due to state laws which made that business unsustainable,” he said.
Legat claimed that ASIC had not given FAF an indication of how many companies it alleges have breached the Act.
“Fast Access Finance ceased actively trading in diamonds in April 2012. We are currently considering our response to ASIC’s application.
“ASIC’s claims are completely false. The diamonds were real, the transactions were real and we had independent valuations done to support the prices,” Legat said.
He added that FAF commenced selling diamonds in August 2008, more than one year before the Act was introduced into law.
“At all times second-hand dealer licences were held, as required by state law,” he said.
According to Legat, FAF was investigated in 2008 by Queensland Fair Trading, which found that the company was not breaching any laws, including the Queensland Consumer Credit Code.
Legat said that FAF ceased actively trading in diamonds in April 2012, predominantly due to ASIC’s pressure.
“Despite request and enquiry, ASIC did not tell us what they thought we were doing wrong until we were served with court documents,” he said.