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February 21, 2012

Case note: when is a loan unconscionable?

In Australian Securities and Investments Commission v Australian Lending Centre Pty Ltd (No 3) [2012] FCA 43 the Federal Court of Australia upheld ASIC's claim that Australian Lending Centre Pty Ltd and Sydney Lending Centre Pty Ltd engaged in unconscionable and misleading conduct in certain transactions between 2005 and 2008 by having its clients sign broking contracts for business loans when they knew the clients wanted personal loans.

Apart from the business loan issue, the transactions examined involved asset lending (when a borrower had no capacity to meet the repayments on the loan and that the loan had no identified exit strategy) and borrowers who had special disadvantage or a disability.

ASIC alleged that the conduct was unconscionable in equity so that it was entitled to declarations that the defendants had been involved in contraventions of section 12CA of the Australian Securities and Investments Commission Act 2001 (Cth) (‘the ASIC Act’) which prohibits conduct in relation to financial services which is unconscionable within the meaning of the ‘unwritten law’. It also alleged that it was entitled to declarations that section 12CB had been infringed which prohibits conduct which is ‘in all the circumstances, unconscionable’.

Justice Perram observed that:

"In my opinion, it is not, without more, unconscionable to offer to arrange a loan for a person who is financially distressed. But where, as here, that offer contains within it an attempt to lock the client into a business loan arrangement and thereby inappropriately increase the risk of the Code’s non-application the conduct involved may properly be described as involving an unfair tactic."

Justice Perram also considered the applicability of the ASIC Act to unadvanced loans:

"It is apparent from the way in which the expression ‘financial product’ is used in s 12BAB (which defines the concept of ‘provide a financial service’) that the products involved include not only those which presently exist but also those which will in the future exist. For example, s 12BAB(8) makes clear that arranging for a person to apply for, or acquire, a financial product will be ‘dealing’ in the financial product and by reason of s 12BAB(1)(b) that, in turn, will be the provision of a financial service. .... I accept, therefore, ASIC’s pleaded case that ALC was providing a financial service because it was providing ‘financial product advice’ (s 12BAB(1)(a)) and also providing ‘a service that is otherwise supplied in relation to a financial product’ (s 12BAB(1)(g)). As to the former, ‘financial product advice’ is defined in s 12BAB(5) to mean ‘a recommendation or a statement of opinion, or a report of either of those things, that: (a) is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products...’. "

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Posted 21st February 2012 by David Jacobson in legislation, responsible lending