The Federal Court has imposed record penalties totalling $18.975 million against failed payday lender The Cash Store (TCS) and its loan funder, including fines for the sale of “useless” consumer credit insurance.

The court says TCS and loan funder Assistive Finance Australia failed to comply with the Credit Act, and TCS engaged in unconscionable conduct over sales of the cover from 2010-12.

It has imposed the maximum penalty of $1.1 million on TCS for sales of the insurance.

In total it has levied the largest civil penalty obtained by the Australian Securities and Investments Commission (ASIC).

The court heard policy terms for the insurance, provided by Accident & Health International Underwriting, which is half-owned by CGU, rarely provided effective coverage for the loans.

Accident & Health International MD David Epper says the company is reviewing the judgement.

“The judgement as we understand it is primarily about The Cash Store and Assistive Finance Australia’s conduct under the National Consumer Protection Credit Act,” he told insuranceNEWS.com.au.

“We share the court’s concern about The Cash Store’s unconscionable conduct in the way it sold the insurance cover underwritten by Accident & Health International.”

TCS, which is in liquidation, collected more than $2.27 million in premiums and paid out $25,000 in claims.

It retained $1.3 million in commission, marketing and distribution fees.

Insurance was sold for 182,838 credit contracts and claims were made on 110 policies, of which only 43 received a settlement or were likely to.

TCS generally charged customers a premium of 3.38% of the loan amount.

Accident & Health International calculated the premium to be 1.37% of the loan.

The insurance was sold to unemployed people who were unlikely to obtain any benefit because they were ineligible to claim for disablement and involuntary unemployment – the main components of the cover.

Loans were for up to 36 days, for amounts up to about $2200. Many customers were financially vulnerable people on Centrelink benefits.

Although the cover provided limited value, TCS “actively encouraged its employees to overcome customers’ objections in their efforts to sell the insurance policy”, the judgement says.

TCS told ASIC its policy was not to explain details of the cover to borrowers.

An expert’s report by actuary Martin Fry says the ratio of claims to premiums was 1.1%, compared with an industry average of 20.7%. He says the likelihood of most insured events occurring between one and 36 days was very low.

The court says there was a systemic failure by TCS to comply with obligations under the Credit Act to assess whether loans would be unsuitable for consumers.