Andrea Beatty, Consulting Principal at Keypoint Law, recently joined Ashleigh Tesluk of Legalwise Seminars to discuss the biggest challenges affecting the credit law regulatory landscape and Fintech.
You can hear directly from Andrea on day 1 of the upcoming Credit Law Symposium as she chairs the full day, and also on day 2 as part of the panel discussion - Fintech: Ethics Culture and Values.
Andrea, can you tell us a bit about yourself and Keypoint Law?
I have been involved in the banking & finance sector as a Financial Services Regulatory lawyer for more than 25 years’. I am recognised in Chambers Asia Pacific 2016 and listed in Australia’s ‘Best Lawyers’ every year for the past 6 years. I am a former partner of K&L Gates and Mallesons Stephen Jacques, and author of the leading consumer law text ‘Annotated National Credit Code’ published by Lexis Nexis. 5 editions have been published since 1996 and I am currently working on the 6th edition.
For years I wanted to establish my own financial services consultancy. I have now set up my own incorporated practice with the back end support of Keypoint Law, which has been recognised as “Australian Boutique Law Firm of the Year” at the 2016 Australasian Law Awards. It has also achieved entry into the “Legal Innovation Index” for Australia in acknowledgement of its differentiated approach to the provision of legal services.
On a personal note, I am obsessed with animals and animal welfare – I adore my dogs and horses and I am also a keen Hawthorn AFL fan. All my dogs, horses and Hawthorn frequently appear in my PowerPoint seminar presentations. Their relevance is debatable but I hope that cute animal or sports shots break the monotony of my seminars.
In your opinion, what are the 3 big changes/challenges that will or have affected the consumer credit regulatory landscape over the last 12 months?
The 3 big changes/challenges in consumer credit are: Extending scope of the Unfair Contract Terms Law (UCTL), Increase in ASIC powers and additional funding by Government, and Cultural factors.
Extending scope of the Unfair Contract Terms Law (UCTL)
Banks and lenders will be significantly affected by the increase in scope of the UCTL, which provides protections for consumers from credit lenders, being extended to include Standard Form Small Business Contracts (SFSBC). ASIC expects businesses to review their SFSBCs to remove any “unfair terms” before the UCTL comes into effect. For more information, see my article titled Update: unfair contract terms – small business published in the Lexis Nexis Financial Services Newsletter (2016 Volume 15 No 5).
Increase in ASIC powers and additional funding by Government
In response to the ASIC Capability Review (commissioned in July 2015), the government has announced reform measures to equip ASIC with stronger powers and increased funding to increase ASIC’s data analytics, surveillance capabilities and its ability to combat misconduct - particularly in the areas of financial advice, responsible lending, life insurance and breach reporting. ASIC’s data management systems will also be ‘modernised’. The increased funding will be offset by increased levies for the financial sector.
The Government will also introduce an industry funding model for ASIC, to commence in the second half of 2017. This means that the costs of regulation will be covered by the entities that have created a need for it, rather than the tax payer. For further information, see ‘Fit for the future: a capability review of the Australian Securities and Investments Commission’, released April 2016.
Responsible lending is creating issues when looking at lending to non-Australian residents for say, residential investment loans and other credit products. Cultural factors can also influence the types of documents and information that can be produced to satisfy the responsible lending criteria.
What are the 3 big changes/challenges that have affected Fintech over the last 12 months?
The 3 big changes/challenges I have seen in Fintech are: Regulatory Sandbox Licensing Exemption proposed by ASIC, Cost of Compliance, and Unrealistic expectations of ASIC from Fintech firms.
Regulatory Sandbox Licensing Exemption proposed by ASIC
The current Australian Credit License (ACL) and Australian Financial Services License (AFSL) regulatory regimes are complex, time consuming and expensive to comply with – this is providing an impediment to Fintech start-ups. Currently there is no ‘pilot licence’ allowing a Fintech start-up to test the market with its Fintech technology prior to engaging in the full blown licensing and regulatory regime. It’s all or nothing.
ASIC has released a consultation paper to seek feedback on a proposed regulatory sandbox licensing exemption (RSLE). This exemption will provide an industry-wide licensing waiver for limited financial services provided to a capped number of retail clients for a period of 6 months. The purpose of the RSLE is for eligible businesses to test their products in the market without being initially subject to the standard regulatory mechanisms. The key being that they are expensive and time consuming to comply with. The time factor alone to obtain regulatory approval is a significant impediment to the development of successful Fintech initiatives.
The primary Challenge for ASIC is balancing the interests of Fintech start-ups with the interests of consumers to ensure rigorous consumer protection. The RSLE must be flexible enough to reduce the initial burden on Fintech start-ups whilst effectively protecting consumers. The UK has already established its own version of a regulatory sandbox. The Financial Conduct Authority’s version of the RSLE in the UK only has a limited number of places available, making eligibility for it competitive. However, currently there is no indication that this will occur in Australia.
Cost of Compliance
Australian financial services law is complex. Compliance is expensive. Many participants in financial services under estimate the cost of financial services compliance. In addition, ASIC may impose licensing conditions or enforceable undertakings requiring audits of operations. This is an additional cost to establishing financial services and credit ventures. It can cause surprises to the particular licensee that is subject to those conditions.
Unrealistic expectations of ASIC from Fintech firms
ASIC senior executives make public statements from time to time saying ASIC supports and will facilitate Fintech innovation. However, at the ASIC operational coal face level, ASIC officers must follow the ACL and AFSL regulatory regimes. They are not in a position to invoke a discretionary approach to the legal systems underlying the ACL and AFSL regimes. This creates a mismatch in expectations with Fintech innovators often having unrealistic expectation as to the time required and ease for a license application to be processed by ASIC.
What is the one area that people have underestimated/not fully appreciated and why?
There are in fact three areas that I believe are currently not fully appreciated. These areas focus around ASIC and the Office of the Australian Information Commissioner (OAIC), External Dispute Resolution (EDR) Schemes and the changing regulation in the financial services sector.
ASIC and the OAIC
The high level of scrutiny and reviews by ASIC is often under-estimated in the financial services sector. Additionally, special attention needs to be paid to the increased powers of ASIC and the OAIC as well as the increased penalties that ASIC can place on businesses for breach of their license obligations and/or responsible lending practices.
The rise and increasing reach of EDR Schemes, such as the Financial Ombudsmen Service (FOS), the Credit and Investments Ombudsmen (CIO) and the Telecommunications Industry Ombudsmen (TIO), is not fully appreciated in the financial services and other industry sectors. In the ASIC Capability Review Factsheet titled ‘Improving Consumer Outcomes in Financial Services’ released on 20 April 2016, the Government supports the extension of FOS’s current jurisdiction to include a larger range of small business loans and believes reviewing current monetary limits and compensation caps to be advantageous. The Government also plans to establish a panel to assess the merits of better integrating current EDR Schemes to improve the handling of consumer complaints.
An area that is not fully appreciated in the financial services sector is the delicate balance banks and lenders must maintain in complying with the various obligations placed on them from several regulatory regimes, particularly those that have opposing purposes. A prime example of compliance with regulatory regimes with opposing purposes is the Responsible Lending Requirements (RLR) and the Australian Privacy Regime (APR). The RLR requires banks and lenders to collect additional information and ‘positive reports’ about consumers. However, banks and lenders must also comply with the APR, which seeks to safeguard the consumer by limiting the lender’s access to the consumer’s information.
In an Australian Law Reform Commission (ALRC) Report into the effectiveness of the APR (published in August 2008), the ALRC recommended that the categories of personal information that can be included in credit reporting information held by banks and lenders should be expanded. The reason for this recommended expansion in collectable personal information is to encourage more responsible lending practices.
What are some of the other big trends and developments you see ahead for this area over the next year?
Search engines impacting credit market
The danger posed by large online search engines to make a social judgement about a credit product – without fully understanding the global regulatory landscape - and influencing consumer choice through advertising bans on certain types of credit products. A prime example of this is Google, which brought into effect an advertising ban on Wednesday 13 July 2016. Google will no longer host ads for loans that last for under 60 days. Google has also banned ads in the US for credit products with annual percentage rates higher than 35%.
Phil Johns, Chief Executive of the National Credit Providers Association, has stated in an Article published 13 July 2016 in The Age, that “Google made the decision based on the industry in the US, which was less regulated than in Australia.” Google’s global advertising ban was based on a single policy, rather than adapting the ban to the regulatory landscape in each market.
Small business and investment lending
In the past few years, the National Consumer Credit Protection Act 2010 (NCCP) regime has been amended to regulate specific types of credit products such as reverse mortgages, small amount credit contracts and medium amount credit contracts. Prior to 2012, the National Credit Code (NCC) did not specifically distinguish between specific types of products offered by credit providers falling within the definition of ‘credit contract’ (Instead, the NCC distinguished between continuing and non-continuing credit contracts, consumer leases and real property mortgages or goods mortgages). In 2012 amendments changed this regulatory philosophy. The NCC now contains different applications of certain NCC provisions depending on whether a non-continuing contract is a:
- small amount credit contract (SACC);
- medium amount credit contract (MACC);
- “reverse mortgage” credit contract (RMCC); or
- a credit contract that is not an SACC, MACC or RMCC (ordinary CC).
the result is that the NCC effectively contains ‘sub-regulatory’ regimes for the products mentioned above.
It remains to be seen whether future enhancements to the NCC will contain specific regulatory provisions for other types of credit products – for example, small business and investment loans.
This is a departure from the NCC’s (and previously the Uniform Consumer Credit Code’s) original philosophy that as long as the NCC’s pre-contractual and contractual disclosure and other requirements were met then a credit provider was free to offer any type of credit product.
There has been much discussion about the regulation of small business credit and investment lending over the past few years. It remains to be seen whether reforms will be introduced to regulate those forms of credit. It has been a frequent topic of discussion and no doubt the debate will continue in the future. For a summary of the recent proposals to regulate small business and investment lending, see “Annotated National Credit Code”, 5th edition 2014, Lexis Nexis, section 6 in “overview of the NCCP Act regime at page xxi in the introductory pages.