1. Among other things, Division 1 of Part 6 of the Code permits the government consumer agency (here, the Director of Consumer Affairs Victoria) to apply to the court for an order imposing a civil penalty on a credit provider which has breached a key requirement of the Code. The effect of s8 of the Consumer Credit (Victoria) Act 1995 is that exclusive jurisdiction under this Division is given to VCAT which is 'the court' in this context. Section 100 sets out what are the key requirements of the Code. Section 15(B) is one of these.
2. Section 102(2) of the Code provides -

(2) Penalty orders. The Court may make an order, in accordance with this Division, requiring the credit provider to pay an amount as a civil penalty, if it is of the opinion that the credit provider has contravened a key requirement.

1. Section 102(3) requires the Tribunal, if and only if required to do so by the credit provider, to have regard to prudential standing. No such requirement has been made by AFD.
2. Section 102(4) provides -

(4) Other matters to be considered. The Court, in considering the imposition of a civil penalty, must have regard to the following -

(a) the conduct of the credit provider and debtor before and after the credit contract was entered into;

(b) whether the contravention was deliberate or otherwise;

(c) the loss or other detriment (if any) suffered by the debtor as a result of the contravention;

(d) when the credit provider first became aware, or ought reasonably to have become aware, of the contravention;

(e) any systems or procedures of the credit provider to prevent or identify contraventions;

(f) whether the contravention could have been prevented by the credit provider;

(g) any action taken by the credit provider to remedy the contravention or compensate the debtor or to prevent further contraventions;

(h) the time taken to make the application and the nature of the application;

1. Section 105(1) provides -
   • (1) On application being made by a credit provider or the Government Consumer Agency for an order, the maximum civil penalty that may be imposed by the Court for a contravention of a key requirement relating to a contract affected by the application is an amount calculated so that the total civil penalty for all contraventions of the requirement in Australia (as disclosed by the credit provider) does not exceed $500000.
2. Section 105(2) requires the Tribunal, for the purposes of determining a civil penalty, to determine the appropriate amount of penalty for disclosed contraventions of the key requirement in all jurisdictions and to determine the amount payable in each jurisdiction proportionately according to the amount of contracts in that jurisdiction affected by the disclosed contraventions. The effect of s105(3), in relation to this application, is that the Tribunal's order relating to an amount payable in a jurisdiction other than Victoria has no effect in Victoria and has the effect in that other jurisdiction that the law of that jurisdiction provides. This is why the order I have now made will need to be registered in accordance with the laws of other jurisdictions to be effective in those jurisdictions. But it is clear that the aim of s105 is to allow civil penalties to be determined on a national basis without the need to begin proceedings in every jurisdiction in which the Code applies. Application in one jurisdiction is enough.
3. The combined effect of s106 of the Code, s38 of the Consumer Credit (Victoria) Act 1995 and Part 5A of the Credit (Administration) Act 1984 is that civil penalties ordered to be paid in respect of credit contracts to which the Consumer Credit (Victoria) Code applies and on the application of the Director of Consumer Affairs Victoria must be paid into the Consumer Credit Fund.
4. Here, breach of only one provision of the Code is concerned. The maximum total penalty for this breach under s105 is $500,000.
5. Section 102 makes it clear that the imposition of a civil penalty is discretionary. Section 102(4) lists various factors which the Tribunal must take into account. At the end of the list, the Tribunal is required to take into account other factors that it considers relevant. There is no reason why, under this last paragraph, the Tribunal should not take into account factors similar to those taken into account by courts and tribunals under the civil penalty regimes applying under the credit legislation which preceded the Uniform Consumer Credit Code. In doing this, however, one must remember that the credit legislation was significantly different from the Code.[1] Factors considered relevant in other civil penalty cases include -
   • The effect of the civil penalty in punishing the credit provider for past conduct and deterring the credit provider and other credit providers from engaging in that conduct in the future, and the effect of the civil penalty in promoting a culture of compliance with the Code.
   • The seriousness of the breach of the Code including the number of contracts affected, whether the breaches were single or multiple and, if multiple, whether they concerned different kinds of conduct, and the period over which the breaches occurred.
   • The relevance and importance of the provision breached in the context of the Code.
   • The culpability of the credit provider including whether there have been previous breaches of the same kind.
   • Other losses incurred by the credit provider as a result of the breach (for example, by way of the payment of compensation or costs).
6. Each case is different and must be determined on its own facts.
7. I now make findings on all the evidence before me. It is convenient to group the findings under headings which relate to each of the factors in s102(4). In the headings, I mention the factors in a summary way.

Conduct of the credit provider and debtor (s102(4)(a))

1. The debtors' conduct did not contribute to what I have found to be AFD's breaches of s15(B) of the Code. It is clear from the evidence that AFD did not wish to disclose the interest free holdbacks or high risk holdbacks to its borrowers. But the evidence is also clear that it did not wish to flout or recklessly ignore the Code. I am satisfied that, generally speaking, AFD had a culture of attempting to comply with the Code. This extended to its senior management. It provided relevant training to its staff and introducers. It employed a Code-compliance manager who had access to its chief executive officer. It provided regular training and refresher training to its staff and management. It conducted internal and external audits. It regularly obtained legal advice to attempt to ensure that it was compliant with the Code.
2. However, in connection with the credit contracts relating to courses supplied by NII and Capital, there was at least one respect in which AFD should have made, but did not make, further enquiries arising out of the legal advice given to it. This concerns legal advice given to AFD's predecessor in this part of the business (FAI Finance Corporation, 'FAI') in December 2001. That advice was reiterated to AFD during 2002. The advice was that the holdbacks did not breach s15(B) of the Code. But the advice expressly stated that it assumed that the prices of the goods or services supplied by the suppliers to customers would be the same, whether or not the customer borrowed to pay those prices. Mr Gray's evidence is that AFD only knew the prices of courses paid for by loans from AFD, and even then only knew of these prices after the loan was finalised. But it concedes that it did not check whether the assumption on which the legal advice given to it was predicated was correct and (if the assumption was incorrect) obtain fresh legal advice.
3. After the Tribunal's decision in July 2004, AFD altered its arrangements with its introducers in an attempt to ensure that its contracts with its introducers were wholly separate and independent from its credit contracts. It obtained legal advice (although in guarded terms) that the alterations were consistent with the principles in the VCAT decision and the provisions of the Code. I accept Mr Gray's evidence that these alterations put AFD at a disadvantage to its competitors in the same industry, who continued to follow the old practice of retaining holdbacks.
4. AFD appealed VCAT's decision, first to the Supreme Court, then the Victorian Court of Appeal, and finally the High Court. But in each case, it was given leave or special leave to do so. It did so having obtained legal advice that it had prospects of success. There is no suggestion that it appealed in circumstances where its case was unarguable.
5. This civil penalty application applies to contracts entered into by AFD between February 2002 and November 2003. On the evidence, AFD altered its business practice after VCAT's decision, and implemented this alteration in November 2004. It ceased lending in September 2006, and I accept Mr Gray's evidence that it does not intend to resume this kind of lending.
6. In the related Supreme Court proceeding,[2] the Supreme Court approved a settlement between the parties. That case also concerned the holdbacks as I have described them. Under the settlement scheme, and for those who opted in to the settlement, AFD released the affected debtors from any continued liabilities to it. For those who did not have continuing liabilities (that is, whose debts had been paid out), each was entitled to a share in a settlement pool of $500,000 provided by AFD. I note that the Supreme Court proceeding concerns the contracts under which NII was the supplier, and not contracts under which Capital was the supplier. However, almost all the contracts involved in the VCAT proceeding (2318 out of 2334) were contracts under which NII was the supplier.
7. AFD has incurred very substantial costs in connection with the VCAT proceeding and the related Supreme Court proceeding. In the Supreme Court proceeding, under the settlement scheme, AFD has released $2,090,893.19 of debt. As at 31 July 2008, AFD's costs in connection with the Supreme Court proceeding have been $1,482,802. As well as providing the settlement pool of $500,000, it has paid to Slater & Gordon $750,000 in respect of costs. In the VCAT proceeding (including the Director's initial investigation, the VCAT application and the subsequent appeals), as at 31 July 2008, AFD's costs were $935,596.06. AFD's senior management and other staff have together worked for some 5000 hours on the Supreme Court proceeding, and some 1000 hours on the VCAT proceeding.
8. There is no evidence before me to indicate that AFD has compensated any of the debtors under the credit contracts in relation to which Capital was a supplier.

1. I am satisfied that AFD's conduct which constituted the breach of the Code was deliberate. AFD intended that the holdback should not be disclosed to borrowers. The conduct was not inadvertent or accidental. But I am not satisfied that AFD intended to breach the Code or that it flouted or recklessly ignored the Code. It acted on legal advice from recognised experts in the field that the Code was not breached. When it became clear from VCAT's decision that the Code had been breached, it changed its practice.

1. AFD submits that it is objectively unlikely that the debtors under the credit contracts affected by this proceeding suffered any loss or detriment. I accept its evidence that it kept a complaints log in which it recorded complaints from its debtors, and that none of the debtors under these credit contracts complained to it about the holdbacks. In my view, this is hardly surprising, since the holdbacks were not disclosed to the debtors.
2. I agree with the Director's submission that the proper way to approach whether the debtors under these credit contracts have suffered loss or detriment is this. AFD's failure (in breach of the Code) to disclose the holdbacks meant that the debtors did not understand the true nature or cost of the transaction they were entering into. Without this information, they could not make meaningful comparisons with other financial products or decide whether it would be better to pay for the courses in cash or to approach the supplier for a discount. With this information, they might have decided not to borrow from AFD at all. It is this which constitutes detriment to the borrowers.
3. As far as the credit contracts in relation to which the supplier was NII are concerned, I am satisfied that virtually all the borrowers have had the opportunity to opt in to the settlement scheme in the Supreme Court proceeding and either have their liabilities to AFD released or to have a share of the settlement pool. There are some exceptions (for example, those who are bankrupt or in respect of whom there has been a judgment either for or against them). As far as concerns the 16 credit contracts in relation to which Capital was the supplier, there is no evidence that any compensation has been paid to those debtors.

1. See my comments under s102(4)(b). AFD's legal advice was that it did not breach s15(B) of the Code. However, when the Director began to investigate this matter and applied to VCAT in November 2003, it could be said that AFD became aware of the possibility of breach. When VCAT handed down its decision in July 2004, the fact of the breach became clear.

Systems to prevent or identify breaches (s102(4)(e))

1. I am satisfied that AFD had in place systems to prevent or identify potential Code breaches. I have mentioned that it had a compliance manager, the extent of its training of its staff, and its audits and its obtaining of legal advice. But it seems that those systems did not contemplate that the legal advice might have been incorrect or might have been based on an assumption that was incorrect.

Whether breach could have been prevented (s102(4)(f))

1. See my comments under s102(4)(e). Of course, AFD could have prevented the breach if it had disclosed the holdbacks to its borrowers. But its legal advice was that this non-disclosure did not breach s15(B) of the Code.

Action to compensate debtors, to prevent further breach and remedial action (s102(4)(g))

1. See my comments under s102(4)(a). AFD altered its practices after the VCAT decision was handed down to try to comply with the principles in that decision and with s15(B). I note that its legal advice concerning this altered practice was that it would not breach s15(B), but that the legal advice was subject to the express warning that it is impossible to state any conclusion about the operation of the Consumer Credit Code with confidence, that the apparent simplicity of the language of the Code was deceptive, and that there was a scarcity of authoritative determination on the Code's interpretation.[3]
2. AFD has ceased this kind of lending.

Time taken to make the application and nature of application (s102(4)(h)

1. This is an application made by the Director and not AFD or a debtor or guarantor. Since AFD did not disclose the holdbacks to its debtors, it is not surprising that a debtor has not made the application. It was submitted for AFD that, given the legal advice it obtained, it did not need to make an application. The Director did not submit that AFD ought to have made such an application.
2. I would point out that they may be a number of reasons why a credit provider might apply under Division 1 of Part 6 of the Code to have the Tribunal determine whether or not it has breached the Code and whether or not a civil penalty should be imposed. One reason might be to deal with a class of possible breaches as a whole, rather than being faced with a series of applications under the Division from individual debtors. The effect of the Division is (with one exception which is not relevant here) that, if a credit provider applies, individual debtors under the affected credit contracts cannot then later apply. Another reason might be to have the position decided in a certain and final way, so that the credit provider could determine in what way to carry on its future credit business. Given these considerations, I am not prepared to say that there was no need for the credit provider to apply.

1. The Code distinguishes between key requirements and other requirements of the Code. The civil penalty provisions of Division 1 of Part 6 apply only to key requirements. Section 15(B) is one of them. To this extent, I agree with the Director's submission that, in the context of the Code, key requirements are provisions of the Code for breach of which there are statutory consequences which do not apply to other provisions.
2. Most of the key requirements concern disclosure. A key objective of the Code is truth in lending - disclosures which allow debtors to make fully informed choices and to allow them to understand fully the transaction into which they are to enter. Section 15(B) is a fundamental disclosure requirement. It concerns not just fees or charges but the very loan itself - how much is to be lent and to whom that amount is to be paid. It is true, as AFD submits, that the conduct which breaches s15(B) can be more or less grave, but this does not affect the importance of s15(B) in the context of the Code.
3. AFD concedes and I agree that its breach was serious. It failed to disclose key information to its debtors - information which affected their choices and their understanding of the transaction. It stated incorrectly that the whole of the amount of credit was to be provided to the introducer. This statement had the potential to mislead debtors about the true nature of the transaction.
4. The breaches were systemic. They affected all the credit contracts entered into by AFD in relation to the introducers NII and Capital, in the period to which this proceeding relates. That period is relatively long - from February 2002 to November 2003.
5. While the total number of contracts affected is not in the hundreds of thousands, and the amounts involved are not in the hundreds of thousands or millions, the amounts involved and the number of contracts affected are substantial. This is the more so because AFD is (as the parties agree) a relatively small credit provider.
6. I did not find that there were breaches of multiple provisions of the Code. Only one provision was breached. All breaches arose out of the same kind of conduct, and not out of diverse kinds of conduct.
7. I do not agree with the Director's submission that I should, in determining civil penalty, take into account that AFD retained the high risk holdback to guard itself against the risk it took in lending to people who did not meet its standard lending guidelines. The civil penalty is imposed for breach of the disclosure requirement of the Code, not for inappropriate lending practices.

1. It is common ground that the civil penalty will have little deterrent effect on AFD. AFD has ceased lending. However, on the evidence, it seems that other suppliers of goods and services and perhaps lenders offer discounted interest rates or interest free products or services and retain holdbacks. This civil penalty will help to deter these practices in the future and will, in my opinion, promote better compliance with the Code. I accept that this deterrent effect will be somewhat weakened because of the passing of time. It has been more than four and a half years since VCAT's initial decision was made.

Other losses to AFD in connection with the holdback arrangements

1. In addition to the civil penalty, AFD has expended very large sums in costs in this proceeding and in the related Supreme Court proceeding, has agreed to pay the Director's costs in this proceeding, has paid costs of Slater & Gordon in the related Supreme Court proceeding, has provided a settlement pool in that proceeding and has released the liabilities to it of most of the debtors whose credit contracts involved the holdbacks.

1. It was submitted for the Director that I should also take into account what was said to be AFD's limited discovery in this proceeding and its reluctance to produce its legal advice. AFD submitted that it had conducted the proceeding in a frank and fair way, had not relied on privilege where it could have done, and had not contested primary facts unnecessarily. It conceded that, when Mr Gray said in his affidavit dated 20 October 2008 that all proper enquiries as to the legal advice obtained by AFD had been made, the statement was strictly incorrect because Clayton Utz had not been asked to produce its file. This omission was rectified just before the hearing of oral submissions.
2. While in this respect AFD did not behave properly, it has in my view in all other respects conducted the proceeding in a frank and fair way. There may be instances where a credit provider has conducted a civil penalty proceeding in such an outrageous way that its conduct of the proceeding should be taken into account in imposing a civil penalty. However, as I have said, a civil penalty is imposed for breach of the Code, and it is a credit provider's conduct in breaching the Code and the factors in s102(4) that must be the primary considerations. Generally speaking, costs will compensate for any disadvantage caused by the credit provider's conduct of the proceeding. Here, the credit provider has agreed to pay the Director's costs. I do not take AFD's conduct in the proceeding into account in relation to the civil penalty.

1. Having considered all the relevant factors, I consider that the amount of civil penalty agreed between the parties is appropriate to impose. The amount of civil penalty which I have allocated between the various jurisdictions in my orders is determined by applying to the total civil penalty a percentage figure for each jurisdiction. That percentage is the percentage representing the proportion of contracts between AFD and debtors ordinarily resident in that jurisdiction to the total number of contracts affected by this proceeding. A table showing those numbers is an appendix to my reasons.

[1] Compare for example GE Limited v Various Respondents (2000) ASC 155-036; Avco Financial Services Ltd v Abschinski (1994) 2VR 659

[2] See Hall and Askin v Australian Finance Direct Ltd No 2023 of 2004

[3] See exhibit 32 to the affidavit of Peter Gray sworn 20 October 2008