ASIC has commenced proceedings against Oak Capital (Oak Capital Mortgage Fund Ltd and Oak Capital Wholesale Fund Pty Ltd) for allegedly engaging in unconscionable conduct to avoid the Consumer Credit Regime. This reflects ASIC's current focus on the private credit industry and appears to be the first time ASIC has targeted a specific private credit firm for its sales model and lending practices.

ASIC alleges that non-bank lenders within the Oak Capital corporate group, Oak Capital Mortgage Fund Ltd and Oak Capital Wholesale Fund Pty Ltd, engaged in the following prohibited conduct:

• established a sales model designed to avoid the application of the National Credit Code (Code) and the National Consumer Credit Protection Act 2009 (collectively, the NCC Regime);

• provided loans to companies rather than the individuals requiring the loan in circumstances where Oak Capital knew, or ought to have known, that the loan was for a domestic, personal or household purpose (such as a home loan) and thus would otherwise be captured by the Code;

• the company borrower did not benefit from, or have any genuine interest in, the loan and there was no reason for Oak Capital to consider that the company borrower would repay the loan;

• in most cases, the individuals seeking the loan provided their own homes as security despite the loans being directed through a borrowing entity.

ASIC has identified that from 7 March 2019 to 4 October 2023, Oak Capital made up to 47 loans totalling over $37 million which applied the above model which ASIC alleges was designed to avoid the application of the NCC Regime.

Even though the relevant Oak Group entities hold Australian Financial Services Licences in connection with the contributory mortgage investment funds they operate, which allow investors to select individual investments from a range of approved mortgage products, they do not hold an Australian Credit Licence.

The NCC Regime applies to loans to individuals where the loan is wholly or predominantly for a personal, domestic, or household purpose.

As a result of treating the relevant loans as unregulated loans made to a company, ASIC alleges that Oak Capital deprived its clients of important consumer protections, including responsible lending obligations, the right to make a hardship application, and protection from being charged excessive fees and interest.

These allegations are made more serious considering it is alleged by ASIC that Oak Capital utilised the above model to provide financial accommodation to people suffering from financial hardship who would have otherwise had the benefit of the consumer protection mechanisms under the NCC Regime if not for the structuring of the loan arrangements in the above manner.

Private lenders, despite legal structures which endeavour to characterise credit as commercial lending, who otherwise know, have reason to believe, or should have reason to believe if reasonable enquiries were undertaken, that credit was in fact to be applied wholly or predominantly for personal, domestic or household purposes, are not shielded from the operation of the NCC Regime and must hold an Australian Credit Licence.

All credit licensees are subject to responsible lending conduct requirements to not provide credit products and services that are unsuitable, either because they do not meet the consumers’ requirements or because the consumer does not have the capacity to meet the repayments, either at all or only with substantial hardship.

The enforcement of existing anti-avoidance provisions under the NCC Regime, which includes provisions in the National Consumer Credit Protection Act which prohibit entering into, beginning to carry out, or carrying out a scheme for an “avoidance purpose” in relation to Small Amount Credit Contracts, consumer leases or financial service product intervention orders, signals an emerging regulatory risk that should be 'on the radar' for members of the private credit industry who do not hold an Australian Credit Licence.

For any advice on the scope of the NCC Regime, particularly in the context of private credit, please contact our banking and finance team.