Some lenders may be steering consumers into riskier financial products, review finds
The Australian Securities and Investments Commission (ASIC) has raised concerns that some lenders providing small amount credit contracts (SACCs) may be steering vulnerable consumers towards financial products with fewer protections.
A recent review examined lender practices following regulatory changes introduced under the Financial Service Reform Act 2022 (FSR Act). The reforms, implemented in 2022 and 2023, were designed to strengthen consumer protections and prevent lenders from circumventing regulatory obligations.
ASIC found that some small and medium credit providers may not be meeting their compliance requirements. Key concerns included lenders offering unsuitable contracts and failing to properly define and distribute their products within appropriate target markets. The regulator also warned against business models that could be structured to sidestep additional protections imposed on SACCs.
Lenders that have adjusted their products in response to the FSR Act must ensure they continue to meet regulatory obligations, including assessing a consumer’s financial needs before issuing credit. ASIC also emphasised the importance of setting appropriate review triggers in target market determinations to prevent products from being distributed outside of their intended market.
“Consumers who access these products are often financially vulnerable,” said ASIC Commissioner Alan Kirkland (pictured above). “That’s why people who use small amount credit contracts are subject to additional protections.
“ASIC has a strong record of taking enforcement action in response to lending practices that cause harm to vulnerable consumers. Lenders are on notice that if we detect serious breaches of the law, we will consider taking further action.
“We were disappointed to uncover that some lenders may be seeking to shift consumers into other forms of credit, some of which involve greater risk.”
ASIC has already taken legal action against several lenders in the small credit sector, including launching civil penalty proceedings against Ausfinancial, trading as Swoosh Finance, for alleged breaches of responsible lending obligations and design and distribution rules. The regulator also secured a $16 million penalty against Ferratum Australia (in liquidation) for multiple violations of the National Credit Act, including charging prohibited fees. It also pursued Federal Court action against Sunshine Loans for allegedly imposing amendment or rescheduling fees not permitted under the National Credit Code, though the company is appealing the decision.
Concerns about how financial institutions treat vulnerable customers extend beyond small credit lenders. Last May, the Banking Code Compliance Committee (BCCC) launched an investigation into how banks handle vulnerable customers and sought input from individuals who had dealt with banks while experiencing financial hardship.
ASIC stated that it will continue investigating business models that may be designed to bypass consumer credit protections and will take enforcement action where necessary.
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