Need to know
- Financial counsellors describe Cigno loans as the most harmful in Australia
- In July 2023, ASIC won a legal battle against Cigno's 'continuing contract model' loans
- Cigno clients with these types of loans should stop paying and seek a refund
Borrowing money you'll have to pay back many times over is a trap that's all too easy to fall into.
Lenders bound by the national credit laws wouldn't be able to get away with such extortionate rates. That's where the bottom feeders of the industry come in – payday lenders.
Their products – payday loans – are so named because many people resort to them to make it through to the next payday. They're also known as short-term credit contracts or small amount loans.
It's a form of predatory lending that allows people to access money quickly, with many payday lenders conducting few – if any – checks on whether they're able to pay it back. For many consumers, the instant credit turns a short-term cash shortage into a long-term debt crisis.
Two of the most rapacious payday loan operators on the market, Cigno and subsidiary BHF Solutions, have been responsible for making people's financial troubles worse for a long time
But sometimes accessing money on these terms can seem like the only option.
Two of the most rapacious payday loan operators on the market, Cigno and subsidiary BHF Solutions, have been responsible for making people's financial troubles worse for a long time.
On the plus side, one of their most punishing business models was recently declared illegal in Federal Court.
But it's likely just the latest battle in a grinding war with the Australian Securities and Investments Commission (ASIC) that's been going on since at least 2020, when Cigno was approving payday loans for about 1000 customers a day.
The legal victory in July came as especially good news to Melbourne's Consumer Action Legal Centre, which has been helping customers break free of the Cigno debt cycle for years.
"We still hear weekly from Cigno clients, who are on Centrelink or very low incomes, with legacy loans, who have been lured into financially harmful debt cycles," says Consumer Action CEO Stephanie Tonkin.
It all starts with a need for just enough to get by, Tonkin says.
"The persistent problem is that these clients start with very small loans, only then to be confronted with eye-boggling demands for interest and penalty fees that they will never be able to pay off."
Here are some examples of those eye-boggling demands, revealed in earlier court proceedings:
- A woman named Leah took out a $200 Cigno loan and 38 days later owed $377. Cigno's fees in this and other loans taken out by Leah were roughly equivalent to an 800% annual interest rate.
- Over a five-and-half month period in 2020, $46.7m in Cigno loans incurred $61.1m in fees.
Financial counsellors describe Cigno loans as the most harmful in Australia.
How does Cigno get away with it?
Because many payday lenders are unlicensed and unregulated, they're exempt from the rules governing lenders under the National Credit Act and National Credit Code. They're not allowed to charge interest, just fees, but for borrowers that's a matter of semantics – they amount to the same thing.
The credit laws stipulate, among other things, that lenders have to do credit checks, provide an external dispute resolution option and offer hardship relief for people who can't pay. They also place caps on fees.
Cigno and BHF Solutions have dodged these constraints by seeming to stay just within the bounds of ASIC's complicated payday lending rules, which limit how much payday lenders can charge. But that hasn't always worked.
In September 2019 the regulator wielded its product intervention powers against Cigno, BHF Solutions and other payday lenders for engaging in a tricky manoeuvre that bypassed the rules.
The lenders remained compliant by keeping fees to no more than five percent of the loan amount (for loans up to 62 days) and capping equivalent annual interest (in the form of fees) at 24%.
The regulator wielded its product intervention powers against Cigno, BHF Solutions and other payday lenders for engaging in a tricky manoeuvre that bypassed the rules
But then they tacked on significant upfront, ongoing and default fees under a separate contract. All up, the total charges under that Cigno lending model could add up to almost 1000% of the original loan amounts, meaning a $200 loan could blow out to a $2000 debt.
ASIC placed an 18-month ban on that tactic, which Cigno unsuccessfully tried to overturn in court.
Cigno pivots to keep high fees going
Very shortly after the product intervention order went into effect, Cigno and BHF Solutions rejigged their lending model to get around it.
But the rejigging wasn't enough.
ASIC took Cigno and BHF to court in May 2020 on the grounds that the new lending model also charged higher fees than were allowed.
A number of court cases ensued, including an initial loss and then a win on appeal by ASIC. Then an unsuccessful attempt by Cigno and BHF to appeal the win to the High Court.
Finally, in July 2023, the Federal Court ruled that the new model Cigno and BHF cooked up after the 2019 ASIC intervention order was also in violation of lending laws.
First Nations communities have been especially hard hit by Cigno's punishing fee structure.
'Still chasing people for debts'
Tom Abourizk, a senior policy officer at Consumer Action, tells CHOICE that Cigno is well known among financial counsellors.
Ater the big four banks, which together control an approximate 80% share of the market, counsellors hear from distressed Cigno customers the most.
"That's a pretty startling statistic when you think about the fact that they're completely unregulated," Abourizk says.
They're the most harmful loans we've seen, and we are still receiving calls about themConsumer action senior policy officer Tom Abourizk
And while one of Cigno's lending strategies has been abolished, they're still very much in business.
"They're still collecting for some of the other lending models that weren't subject to the injunction, still chasing people for debts. They're the most harmful loans we've seen, and we are still receiving calls about them."
Because Cigno operates without a license, they have no obligation to report information to ASIC. So it won't be easy for the regulator to monitor whether they're still collecting on the loan model that's now prohibited.
Meanwhile, some of its other models "are probably on similarly shaky legal grounds", Abourizk says, adding that for people getting calls about Cigno debts, "we strongly encourage them to get in touch with a financial counsellor on the National Debt Helpline before they pay another cent".
First Nations communities badly affected
Martina Kingi, a financial counsellor with the Indigenous Consumer Assistance Network (ICAN), describes Cigno as an "extremely predatory" lender whose opaque fee structure means clients have money continually drained from their bank accounts without understanding what they're being charged for.
If a client is successful in blocking a Cigno transaction, the payday lender executes the debit using a different Cigno account.
"Then there's this money coming out of their account, but they wouldn't even know who it was that was taking it. There's no clear communication from Cigno."
ICAN's financial counsellors hear from distressed Cigno clients more than from any other credit provider.
Kingi says it's "very easy" to get a Cigno loan, especially since there are no checks to make sure the client can afford one. Trying to contact Cigno to discuss payments, on the other hand, is far from easy.
The same goes for getting a refund, even when a client is clearly entitled to one.
"It's hit and miss, and debt collection activity has ramped up a lot. They contact clients without us knowing," Kingi says.
Stop paying, demand a refund
ASIC Deputy Chair Karen Chester also welcomed the court's July decision.
"ASIC took this case to stop a harmful lending model, one which circumvented Australian credit laws and regulations and charged excessive fees and charges to many vulnerable consumers," Chester says, adding that the regulator expects Cigno and BHF Solutions to contact affected customers and stop charging them fees.
Financial Counselling Australia, also affiliated with the National Debt Helpline, advised us that customers with Cigno loans taken out between 18 October 2019 and 14 April 2020 under the continuing contract model "should not pay anything more and ask for a refund of fees and charges".
Consumer Action has created an online letter-generating tool to facilitate customer disputes with Cigno.
Alternatives to a payday loan:
- no-interest loans for essential goods and services from The Good Shepherd and The Salvation Army
- Centrelink advance payment
- many state government and community organisations provide rebates and vouchers for phone and utility bills
- under the National Energy Retail Law, utility providers are required to offer hardship support
- NSW also provides an Energy Accounts Payments Assistance scheme.
Stock images: Getty, unless otherwise stated.