Payday loans

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 called for stronger powers to ban the sale of harmful financial products.

Cigno offers short-term loans (commonly called payday loans) for as little as $50 to people with what it calls “bad credit.” Her clients are said to be disabled retirees, teenagers, and people with mental illness or addiction.

He describes himself as an “emergency money specialist”, offering help to people who cannot get a loan from any other source. Consumer advocates call it a predatory lender, targeting desperate and vulnerable consumers.

Critics say Cigno traps its customers in a “debt spiral”, forcing them to take out new, higher loans to pay off 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 clients find themselves without enough money for food or rent.

In a 2019 consultation paper, ASIC found that Cigno’s fees were much higher than other troubleshooting business models.

The document included case studies of clients who ended up owing Cigno nearly 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 corporate regulator filed a lawsuit against Cigno in federal court, alleging that its 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 new power of intervention extended on the products in order to avoid such costly and endless legal battles.

In 2019, she was given the power to issue a product intervention order, prohibiting 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 order, in 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 separate “continuing credit” exemption under 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 issuing loans using the new model.

Consumer advocates say the transition was so smooth that some Cigno customers were unaware of the change, and that 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 didn’t issue that order until July 2022. That was partly because Cigno had challenged the first order in 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 it understands Cigno-related companies may have started issuing new loans, using the original loan model.

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

Still, Cigno continues to offer loans through its website.

This raised suspicions that it has 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.