The Legalwise Seminars Inaugural Credit Law Symposium was held in Sydney on 8–9 September 2016 at the Swissotel and was attended by lawyers, finance professionals, representatives of the Federal Govern- ment Treasury, the Australian Securities and Investments Commission (ASIC) and the Credit and Investments Ombudsman (CIO).
Day 1 of the symposium focused on the credit law regulatory landscape and day 2 focused on the regulatory issues posed by applications of new technology in the financial services sector. This article is a summary of the issues discussed on the first day of the symposium.
Spotlight on regulatory issues: an ASIC perspective
Presented by: Christopher Green, Senior Manager, Deposit-takers, Credit and Insurers and Regional Commissioner — Tasmania, ASIC
Christopher set out ASIC’s current areas of concern in relation to the provision of credit.
Christopher raised poor organisational culture in the financial services industry as a key risk. ASIC is concerned that some financial services providers may not be seeking to put consumers first, not acting on consumer feedback or ensuring that products and services meet the needs of their intended consumers.
ASIC believes that organisations should have controls in place to:
- support the organisation’s culture;
- modify the organisation’s reward structures and staff training programs to encourage staff to act in consumers’ interests; and
- provide a safe environment for whistleblowers.
ASIC is presently concerned about whether lenders and mortgage brokers are complying with their obligations in relation to interest-only loans, especially as interest-only loans cost more in nominal terms and are more unlikely to meet the requirements of borrowers.
The findings of Report 445: Review of Interest-only Home Loans (Report 445) were discussed. Report 445 sets out ASIC’s findings from a review of home loans with an interest-only period during the initial part of the loan.
The review analysed the practices of 11 lenders who offer this type of loan and found instances of practices which placed the lenders at risk of breaching their responsible lending obligations. It was found that often lenders failed to consider whether an interest-only loan will meet a consumer’s needs, specifically in the medium to long term.
Christopher expressed ASIC’s concern over the practice of flex commissions, which are arrangements in which an intermediary (typically either a car dealer or a finance broker) is responsible for setting the interest rate payable by the consumer and earns their commission by charging a margin over the base rate charged by the lender (Arrangements).
Consumers can experience “buyer fatigue” by the time they consider finance options — exhausting their energy after focusing on choosing the car, choosing the optional extras and negotiating the sale price of the car. Buyer fatigue can contribute to poor decision-making and may result in the consumer choosing the dealership’s finance option without proper research and consideration.
ASIC considers that such Arrangements potentially breach s 47(1)(a) and (b) of the National Consumer Credit Protection Act 2009 (Cth) (NCCP) as the intermediary has an interest in charging the consumer as high a rate as possible.
While such arrangements are not prohibited under the NCCP or the National Credit Code (NCC), ASIC proposed an industry-wide solution to regulate flex commissions by a class order.
The class order will either prohibit flex commissions outright or impose a cap on the amount of flex commission that may be earned by an intermediary. At the time of writing, no such class order has been made.
Christopher expressed ASIC’s concern over add-on insurance in the car market.
Like in the above (flex commissions), Christopher raised the possibility that buyer fatigue is a factor in combination with an information overload from the car dealership. This can result in consumers purchasing add-on insurance without fully understanding what it is they had purchased and having a poor recollection of the insurance policies they purchased. This conclusion was reflected in ASIC Report 470: Buying Add-on Insurance in Car Yards: Why it Can Be Hard to Say No.
In Report 492: A Market that is Failing Consumers: The Sale of Add-on Insurance through Car Dealers, which was released on 12 September 2016 after the symposium, ASIC identified that add-on insurance products were being designed in a way that may offer poor value to consumers. This was achieved through low- value policies as well as overlapping and (in many cases) unnecessary cover. It was found that in some circumstance, insurance policies were being sold to consumers who were unlikely to need them — eg, selling income protection insurance to a consumer who is not employed.
Christopher offered commentary about financial technology (fintech) applications. ASIC is of the view that technology-based operators must operate within the current regulatory framework and is reluctant to grant exemptions.
Christopher disclosed that the proposed regulatory sandbox will likely be small in size, similar to the UK’s operating equivalent to ASIC’s proposed sandbox. This means that the licence exemption will be restricted to a few eligible fintech firms at any time.
Update on external dispute resolution (EDR) from the Credit and Investments Ombudsman (CIO)
Presented by: Tim Gough, Deputy Ombudsman — CIO
The CIO processes approximately 400 complaints per month, about 25% of which relate to financial hardship.
This suggests that, consistently with ASIC’s concerns highlighted above, credit providers might not be fulfilling their responsible lending obligations.
The CIO has observed that credit providers are failing to make sufficient inquiries about borrowers and failing to properly utilise and respond to information they collect. It has also observed a gap between credit providers’ policies and their actual practices. It was also suggested that credit providers may be unduly hasty in enforcing debts and failing to offer hardship assistance to borrowers when they might be entitled to it.
Concern was also expressed about credit repair services. The CIO is of the opinion that credit repair service providers provide a legitimate service in disputing and removing incorrect default listings, but it considers it problematic that they are charging significant fees for something that should be available for no charge to consumers.
The CIO is also concerned that some credit repair service providers may be causing accurate default listings to be removed, which compromises the integrity of the credit reporting system and is not in the public interest.
Guidance from the Treasury
Presented by: James Kelly, Principal Adviser, Financial System Division, Australian Government — The Treasury
An update was provided about the Treasury’s financial systems program implemented in response to the Financial System Inquiry (FSI), which was concluded with the release of the FSI final report on 7 Decem- ber 2014.
Of the 44 recommendations made in the FSI, the federal government announced 48 actions.
In response to the FSI, the Treasury has set out an agenda for improving the financial system in the following ways:
- strengthen the resilience of the financial system;
- improve the efficiency of the superannuation sys- tem;
- stimulate innovation in the financial system;
- support customers of financial products being treated unfairly; and
- strengthen regulator capabilities and accountability.
James raised that, when implementing new policies, consultation with the industry is crucial to gain the relevant facts and competing interests.
Availability and use of data
In response to the FSI, the federal government seeks to consider policies to increase the availability and use of data in the public and private sector.
Increasing the sharing of data in the financial services sector would greatly assist licensees in satisfying their responsible lending obligations. However, this must be balanced with other interests such as privacy, security and intellectual property.
The Productivity Commission is undertaking a review of the costs and benefits of data availability and use. An issues paper was released in April 2016. Submissions were due by July 2016. The draft report will be released in November 2016 for a period of public consultation and post-draft submissions from members of the industry. The final report to government will be issued on 21 March 2017.
James discussed the review currently being conducted on the financial system’s EDR and complaints structure. The review is being carried out by an expert panel comprised of Professor Ian Ramsay, Ms Julie Abramson and Mr Alan Kirkland.
The expert panel is reviewing the CIO, Financial Ombudsman Service and the Superannuation Com- plaints Tribunal and is considering the role, powers, governance and funding arrangements of these bodies. The expert panel will also consider the extent of gaps and overlaps between each body.
Ultimately, the expert panel will determine whether any changes to these bodies are necessary to deliver effective outcomes for its users and look at the merits of establishing a “one-stop-shop” EDR body, which could adjudicate on consumer complaints and award compensation.
The expert panel released an issues paper7 on 9 September 2016 and invited submissions from the public and stakeholders in the financial services industry. Submissions closed on 7 October 2016.
A final report is to be submitted to the Minister for Revenue and Financial Services by the end of March 2017.
Presented by: Tony Coburn, Consultant, Herbert Smith Freehills
The Office of the Commonwealth Attorney-General released the Report on the Statutory Review of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 and Associated Rules and Regulations (Report). This Report provides some guidance on the future form the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act) and associated rules will take.
Stored value cards
The Report highlights concerns about the risks associated with stored value cards. The current regime does not apply if the monetary value of a stored value card is $1000 or less (if value can be withdrawn in cash) or $5000 or less (if value cannot be withdrawn in cash).
Tony raised the 2015 Paris terrorist attack as a primary example of prepaid stored value cards providing low-value, high-volume anonymous access to funds for individuals to finance terrorism. The terrorists responsible for the 2015 Paris attack, which resulted in the deaths of 130 civilians, used prepaid money cards with small amounts on them to fund the attack.
New service for cashing cheques
Tony raised that it is likely a new designated service of cashing cheques will be introduced. It is asserted in the Report that the use of cheques is an established method of tax evasion and money laundering.
Scope of the AML/CTF Act
There is a move to widen the scope of the AML/CTF regime to apply to designated non-financial businesses and professionals, including lawyers, accountants and real estate agents.
The Australian Transaction Reports and Analysis Centre (AUSTRAC) identified the following five pri- mary methods of money laundering using services provided by lawyers:
- conducting transactions on behalf of clients;
- using lawyers’ trust accounts or investment accounts;
- recovering fictitious debts on behalf of clients;
- facilitating the buying and selling of real estate; and
- forming corporate structures for the client.
The extension of the regime to the legal profession is aimed at preventing lawyers from being manipulated by clients to launder money.
The Law Council of Australia has opposed the proposed extension on the grounds that it is undesirable, unjustifiable and would impact legal professional privilege.
However, Tony proposed that from a policy perspec- tive, he believes that a positive duty to identify clients and to apply suspicious activity tests to transactions may in fact protect the legal profession from inadvertent manipulation by criminals in circumstances where the lawyer is conducting transactions on behalf of a client and forming corporate structures for a client.
Lawyers in England and Wales are already subject to AML/CTF obligations and are supervised for compli- ance by the Solicitors Regulation Authority (SRA). The SRA is an independent regulatory body created by the Law Society (UK).
Tony raised that one of the largest challenges to the AML/CTF regime is digital currency, virtual currency, e-currency and cryptocurrency. A digital currency is an electronic mode of transferring, storing and trading value.
The Report recommends the following:
- AUSTRAC to closely monitor new payment types and systems for AML/CTF risks;
- ensuring digital wallets are captured by the AML/ CTF regime;
- expanding the definition of “stored value” to include convertible digital currencies that are not backed by a physical thing; and
- regulating the activities of digital currency exchange providers.
Content of AML/CTF programs
Several recommendations were made in the Report following a review of how AML/CTF programs function in practice.
A significant recommendation is to establish a positive reporting obligation on reporting entities to report a serious breach of AML/CTF obligations. Tony raised that this amendment should allow for any pecuniary penalty that may apply to a self-reported breach to be reduced or waived where appropriate.
The Report recommends that the AML/CTF rules be amended so that programs of reporting entities must include the following principles:
-obligation for reporting entities to include information provided by AUSTRAC or other relevant authorities on high “money laundering and terrorism financing” (ML/TF) risks into their assessment;
- elaborate on the roles and functions of the AML/ CTF compliance officer;
- periodic review of the AML/CTF program must be genuinely independent; and
- ongoing responsibility on reporting entities to identify, mitigate and manage ML/TF risks that are posed by new technologies.
Responsible lending — panel discussion
The panel included:
- Katherine Lane, Principal Solicitor, Financial Rights Legal Centre;
- Peter White, CEO, Finance Brokers Association of Australia;
- David Cornwell, Partner, Piper Alderman; and
- Christian Mikula, Senior Specialist Deposittakers, Credit and Insurers, Regional Commissioner — ACT, ASIC.
Katherine opened the panel discussion by raising that current responsible lending practices are in her view not being properly undertaken by some lenders. A prime example being in ASIC Report 445 where it was found that living expenses were not being properly considered, instead some lenders were only using benchmarks.
Katherine posed the question of what to do with consumers who have no idea about their expenses. Christian responded by setting out the following strategies:
-have various categories of expenses rather than a lump sum in the loan application process; and
-compare the expenses information provided by the applicant against the applicant’s bank statements.
The panel agreed that having the applicant’s bank statements is the key way to determining the loan applicant’s actual expenses.
The panel discussed how long lenders should give customers to review or read the loan contract. The panel concluded that a set amount of time is not currently regulated — the time required to review a loan contract is dependent on how complex the loan contract is. Ultimately, the applicants must at least have enough time to understand the key features of the loan contract.
In response to a question from the audience about whether ASIC conducts spot checks, Christian confirmed that ASIC undertakes random surveillance and each year ASIC follows-up on a sample of annual compliance certificates.
Credit code reporting
Presented by: Frances Russel-Matthews, Head of Legal and Company Secretary, Experian Australia Credit Services Pty Ltd Frances explained that there are, at present, three types of data streams:
- negative data;
- partial data; and
- comprehensive data.
Lenders utilise negative data, which includes information on loan defaults, personal insolvency, serious credit infringements and court proceedings.
Bureaus have partial data, which includes name of credit provider, type of credit, repayment terms, date opened/closed and the maximum credit available.
Comprehensive data includes an applicant’s positive credit history data such as loan repayment history information. Australia is currently transitioning to comprehensive credit reporting.
Frances raised that the benefits of comprehensive credit reporting will be realised over time as businesses will have access to greater periods of consumers’ loan repayment history.
The positive impact of comprehensive credit reporting is significant. Examples of the benefits can be found in countries since comprehensive credit reporting and the use of positive data was adopted. In the US, there was increased acceptance rates and enabled an increase of up to 40% in access to credit among younger, poorer and “undeserved” borrowers. In Japan, there was a 34% reduction in the probability of more than 60 days delinquencies. In Argentina, default rates decreased by nearly 50% from 3.81% to 2.98% at constant target accept rate, when using comprehensive data rather than solely negative data.
Frances deduced that benchmarks, in isolation — regardless of how big the customer base may be where information can be drawn from — is not the solution. Instead, it is more effective to utilise specific data in combination with having a conversation with the loan applicant, rather than having copious amounts of data.
Presented by: Narelle Smythe, Partner, Clayton Utz
What to think about when an investigation begins
ASIC has a range of compulsory document-gathering powers. These powers are used when ASIC suspects an entity has contravened the law.
Narelle raised that when a client receives a notice for documents from ASIC, she always considers the following:
- Is the form of the notice valid?
- Is the scope of the notice so broad that it is cumbersome?
- What documents is the notice catching? Can it be sensibly confined?
- What is ASIC ultimately after?
Narelle set out that there was a clear distinction between a notice for voluntary production and a notice compelling the production of documents. If the client was to comply with a notice for voluntary production, the client will be waiving the Privacy Act 1988 (Cth) and self-incrimination protections that it otherwise would have if it was compelled to produce.
It is imperative to carefully look at what data ASIC is requesting and what data the client has. The client must consider the time and impact the notice to produce will have on it, what resources the client has and what resources the client will require (eg, external lawyers, IT experts and/or forensic resources).
Dealing with ASIC
Narelle expressed that early engagement with ASIC and maintaining an open dialogue is crucial. A primary example of early engagement with ASIC is sending back a receipt of the notice to ASIC.
Narelle also recommends giving as much notice as possible to ASIC if the client requires more time to comply with the notice or if the notice needs to be confined because it cannot be complied with in its current form.
If the client does need to submit to ASIC an extension of time or to confine the notice, it is crucial to give carefully crafted and detailed reasons to justify why it is necessary in order to provide ASIC with a persuasive case as to why a notice is too broad or if an extension of time is required.
Producing to ASIC
Narelle recommends carefully reviewing documents that are planned to be disclosed to ASIC to check that the documents are not privileged and do not refer to other projects. This is to mitigate the risk of voluntarily waiving privilege. It is important to keep in mind that privilege is attached to the document as well as the content of the document.
It is imperative to keep a plan and a record of what has been done in relation to the client’s response to the notice as ASIC may require the client to disclose the record.
Future focus of regulation
Presented by: Steven Klimt, Partner, Clayton Utz and Daniel Tirado, Senior Corporate Counsel, Toyota Finance Australia Ltd
ASIC has raised its concern that the prohibition of flex commissions may result in transfer pricing by businesses through increasing their fees to consumers to compensate for the resulting loss of earnings if the prohibition was introduced.
The presenters stated that after gaining feedback from stakeholders, ASIC has indicated that a complete prohi- bition on flex commissions may not be necessary. ASIC’s primary concern has shifted to the arbitrary pricing of fees. ASIC has sought views from stakeholders on measures to prevent the arbitrary pricing of fees. We are yet to see any indication from ASIC of what measures it will take.
Unfair contract terms
The current unfair contract terms law (UCTL) that provides protections for consumers will be extended to include standard form small business contracts (SFSBCs) from the 12 November 2016 enforcement date.
A “small business contract” is one where:
- the contract is for the supply of goods, services (including financial services and products, including credit) or sale of (or grant of an interest in) land;
- at the time the contract was entered into, at least one party is a business employing less than 20 persons (including a not-for-profit business); and
- the “upfront price” payable is equal to or less than:
- $300,000 if the duration of the contract is less than 12 months; or
- $1 million if the duration of the contract is more than 12 months.
Section 24 of the Competition and Consumer Act 2010 (Cth) — Sch 2 prescribes the following three-part test to determine whether a term is deemed “unfair”:
- it would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
- the term is not reasonably necessary to protect the
Gabor Papdi, Paralegal, Keypoint Law
Jack McIntosh, Lawyer, Keypoint Law
legitimate interests of the party benefiting from itsinclusion; and
- the term would cause financial or other detriment to a small business if it were applied or relied on.
When determining whether a term is unfair, the courts will examine the transparency of the term in question as well as the contract as a whole.10 ASIC considers a term to be transparent if it is:11
- expressed in reasonably plain English;
- presented clearly; and
- readily available to any parties affected by the term.
If a court finds that a term in an SFSBC is unfair, there are various orders that can be made, including:
- determining that the unfair term(s) is void, making it unenforceable. However, the rest of the contract is still binding;
- determining that the entire contract is void;
- varying the unfair term(s) of the contract;
- refusing to enforce the unfair term(s) of the contract;
- refusing to enforce the entire contract;
- directing the party to refund the affected party or to return the affected party’s property; or
- directing the party to provide services, at its expense, to the affected party.