ASIC to prosecute for failing to comply with an AFCA determination

Last Friday, ASIC announced it has commenced prosecution proceedings against Lightspeed Finance Pty Ltd (“Lightspeed”) and its director for failing to comply with an AFCA determination.

In April 2019, the Government introduced the Treasury Laws Amendment (AFCA Cooperation) Regulations 2019. This requires all AFSL and ACL holders to co-operate with AFCA before, on or after 6 April 2019.

For lenders and brokers, it did so by inserting into the National Consumer Credit Protection Regulations a new Regulation 11A. There’s a similar requirement covering AFSL holders. I believe many licencees probably missed this new Regulation as it appears to have received little publicity at the time.

What does Regulation 11A require you to do?

Regulation 11A states:

Obligation of licencees – co-operation with AFCA

  1. For the purposes of paragraph 47(1)(m) of the Act, a licensee must comply with the obligations in subregulation (2).
  2. The licensee must take reasonable steps to cooperate with AFCA in resolving any complaint under the AFCA scheme to which the licensee is a party, including by:
    1. giving reasonable assistance to AFCA in resolving the complaint; and
    2. identifying, locating and providing to AFCA any documents and information that AFCA reasonably requires for the purposes of resolving the complaint; and
    3. giving effect to any determination made by AFCA in relation to the complaint.
  3. Subregulation (2) does not apply to superannuation complaints (within the meaning of Chapter 7 of the Corporations Act 2001).
    Note: For provisions relating to superannuation complaints, see Division 3 of Part 7.10A of the Corporations Act 2001.

Licence holders should note the provisions of sub-section 2(c) in particular.

What does ASIC allege Lightspeed has done or not done?

According to ASIC’s Media Release 21-075MR, in December 2018, following a Lightspeed client complaint, AFCA made its first determination.

Lightspeed is a broker that arranged a home renovations loan for a client and his partner that were unemployed. Little wonder they subsequently defaulted on their loan.

AFCA found Lightspeed accepted a business purpose declaration from the client when it knew this wasn’t true. It advised the client that “they could obtain refinance at the end of the loan term.”

It’s interestingly that ASIC notes “[t]he lender was not a member of AFCA at the time of making the loan”. So, at this stage, there appears to be no action being considered against the lender.

On 12 July 2019, AFCA made a second determination in favour of the client and reduced the client’s liability further.

AFCA’s determination required Lightspeed to repay the loan debt (including interest) owed by the client to a lender. The client would then repay Lightspeed the initial loan amount. Both determinations were accepted by the client and so were binding on Lightspeed under AFCA’s rules.

ASIC now alleges “Lightspeed failed to give effect to both AFCA determinations and that Mr Fitzpatrick was knowingly involved in these breaches”.

Beware the penalties involved

Aside from the repayment of the debt, this may prove to be an expensive exercise for Lightspeed and its director. Even if it manages to retain its broker ACL, it will come likely at a cost. This may involve expensive audit reports and additional supervisory costs.

This will be additional to civil offence penalties of $10,500,000 for a company and $1,050,000 for an individual.

First prosecution for this type of failure to comply?

This appears to be the first prosecution of a licencee failing to act as AFCA directed. That ASIC intends prosecuting signals industry that it will not tolerate any failure to comply with an AFCA determination. Equally, it might show that AFCA itself will not take action against a licencee’s failure to comply with its determinations. If so, it raises intriguing questions. Although related, there is a disconnect between ASIC’s prosecution under Regulation 11A and to AFCA enforcing its own Rules and compelling Lightspeed to pay the lender.

ASIC starting to target directors and senior managers?

We note ASIC is also seeking to prosecute the director of Lightspeed in this instance.

We are aware of other instances currently being considered by ASIC for what appears to be a prosecution. In at least one, it appears ASIC may attempt to prosecute the directors and other senior managers involved besides the company.

With the recent announcement by ASIC (see Media Release 21-066MR) that it is to prosecute Westpac for CCI (Consumer Credit insurance) failures, it will be interesting to see whether ASIC similarly goes after senior bank staff and the bank’s directors for this latest indiscretion by the bank. It’s not as though the banks haven’t known about ASIC’s concerns with this product. ASIC published a report on it as far back as 2011 echoing the UK regulator’s concerns with its equivalent product, PPI (Payment Protection Insurance).

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