Belinda Ryan

Responsible Lending guidance in turmoil following decision by the Federal Court in the Westpac case

August 15, 2019 by Belinda Ryan

1. The Case

The decision of the Federal Court of Australia in Australian Securities and Investments Commission v Westpac Banking Corporation (Liability Trial) [2019] FCA 1244 handed down on Tuesday, 13 August 2019 has set the “cat amongst the pigeons” and embarrassingly comes only days before the next round of ASIC public consultations on how Regulatory Guide 209 (Responsible Lending) should be updated.

While it is really too early to assess the full impact of the decision on the responsible lending practices of lenders, one thing is clear and that is that the responsible lending guidebook will need to be substantially rewritten.

2. The First case on Responsible Lending

The first and the most important issue to be mentioned is that as far as the Federal Court is concerned, this is the first case on “responsible lending”

At paragraph 92 of the Judgement we note the following comments:

92: For completeness, I should note that ASIC submitted that its construction was supported by a number of decisions of this Court…

…I do not accept that any of these cases is of assistance. ASIC v Cash Store was an undefended case. There was no debate about the issue which is presently before the Court.

…Accepting in ASIC’s favour that there are various brief remarks in these judgments which are consistent with its proposed construction, the short fact is that none of these statements results from a contested hearing or any process of analysis by the Court: cf. CSR Limited v Eddy [2005] HCA 64; 226 CLR 1 at 11-12 [13]-[15] per Gleeson CJ, Gummow and Heydon JJ.

In my opinion, these decisions have no value in the present contest.

3. Westpac Saves $35 million

In November 2018, the Federal Court refused to accept a proposal made jointly by ASIC and Westpac to resolve proceedings brought by ASIC proposing that the Court impose a civil penalty of $35 million on Westpac for contravening the National Consumer Credit Protection Act 2009 (NCCP Act) in assessing the suitability of home loans for customers in the period between 12 December 2011 and March 2015.

In his reasons for refusing to make the orders the parties had proposed, The Honourable Justice Perram said that the conduct expressed in a declaration proposed by the parties was not conduct that “could possibly be a contravention of section 128”

By this judgement, Westpac has saved itself $35 million plus legal costs.

4. Issues on which the case was decided

The case was decided on narrow issues.

4.1. Taking Declared Living Expenses into account in the credit assessment process

The first issue in contention was whether Westpac, in using an automated decision system (ADS) to conditionally approve home loan applications, had taken into account the “declared living expenses” of applicants. It was not about “all” expenses or income – only “declared living expenses”. The case did not touch on “verification” of expenses nor whether a loan met the customer’s “requirements or objectives”.

4.2 Determining affordability of loans with an Interest Only Period

The second issue decided by the Court was whether an assessment of unsuitability in relation to interest only loans requires the credit assessment to be made by reference to the level of repayments due after interest only period had ended (i.e. on principal and interest repayments) rather than on repayments averaged over the whole term of the loan. The Court rejected ASIC’s submissions in this regard and found in Westpac’s favour that averaging was acceptable.

4.3 Royal Commission acknowledged limitation of scope of case

The Royal Commission acknowledged that “verification was not considered in the case”.

I observe that the Statement of Agreed Facts filed by the parties for the purposes of the application determined by Perram J said nothing at all about ‘verification in accordance with section 130’ (as mentioned in section 128(d)) and nothing about the operation of section 130(1)(c) requiring a licensee, for the purposes of section 128(d), to take ‘reasonable steps to verify the consumer’s financial situation’.

5. The Court’s decision

5.1 The 1st Issue – taking Declared Living Expenses into account in the credit assessment process

The Court ruled that Westpac had sufficiently taken into account the declared living expenses of loan applicants in conducting the credit assessment. ASIC’s claim that Westpac had not taken into account the declared living expenses of loan applicants failed on the facts.

The Court further decided that ASIC’s assertions as to the way in which NCCP Act operated were not correct.

In the Westpac loan application process, customers’ “declared living expenses” were taken into account along with a range of other matters which did not invalidate the credit assessment made.

Specifically, one of the assessment rules under the ADS was the “70% Ratio Rule”. Under that rule, the customer’s situation was analysed in terms of “risk of default”.

ASIC submitted that:

Credit risk to the bank, on the one hand, and the inability of the consumer to meet the financial obligations under the credit contract, on the other, were not identical matters…….. the fact that a credit provider reached the conclusion that there was no credit risk in the case of a consumer did not ‘necessarily mean that it met the standard in the legislation’. (Paragraph 25)

In response the Court stated that:

I do not accept that a rule whose purpose is to gauge the risk of default is not also a rule with respect to the ability of the consumer to meet their financial obligations under the credit contract …… (Paragraph 25)

It seems that the emphasis has shifted back to lender considerations as a consequence of this Judgement.

5.2 Determining affordability of loans with an Interest Only Period

The Court rejected ASIC’s submissions and found in Westpac’s favour that averaging was acceptable

6. The Analysis of the Court – the 1st Issue

The Court could have stopped there – findings that the alleged breaches of responsible lending obligations were not proved on the “facts”, but the Court went much further.

What makes this case so interesting and important is how the Court interpreted the requirements of the responsible lending obligations contained in the NCCP and the implications that flow from that interpretation.

6.1 Credit Assessment

The crux of the issue as far as the Court was concerned was whether Westpac has complied with its responsible lending obligations in conducting its credit assessments.

The Court said that there were basically 2 questions that Westpac had to answer when conducting a credit assessment pursuant to section 129 of the NCCP relating to the Assessment of unsuitability of the credit contract. These questions were determined by the provisions of section 131(2).

The 2 questions to be answered are:

whether the consumer will be unable to comply with their financial obligations under the contract (i.e. make the repayments) (Question 1)
whether the consumer, whilst able to afford the repayments, will not be able to do so without being placed in circumstances of substantial hardship (Question 2)

6.2 ASIC argued that credit provider in performing a credit assessment must base that on the consumer’s financial information

ASIC argued differently. ASIC tried unsuccessfully to roll the obligation to make reasonable inquiries about a consumer’s financial situation (under section 130) into the credit assessment process.

ASIC argued that it was mandatory that the credit assessment be based on the results of the inquiries about the consumer’s financial circumstance (certainly in relation to “declared living expenses”)

That proposition was considered problematic by the Court (paragraph 60) and was ultimately rejected by the Court.

6.3 The Process by which the Court arrived at its conclusion on the 1^st Issue

This is the way the analysis progressed:

ASIC accepted that a credit provider did not need to take into account all of the information gathered under its enquiry process about the consumer’s financial position (paragraph 65).

However, ASIC argued that the credit provider at a minimum needed to assess the individual consumer’s financial situation as a whole (paragraphs 65 and 67).

The Court noted that ASIC’s argument (with regard to gathering information about the financial situation of a consumer) does not identify what a credit provider is to do with the financial information it has gathered. (paragraph 69).

ASIC conceded that what the credit provider did with the information about the financial situation of the borrower was ‘legitimately up to the lender’ (paragraph 69).

The Court agreed that it was mandatory that the credit provider ‘must at least conduct an assessment of the consumer’s financial situation with a sufficient understanding of the consumer’s income and expenses’ (paragraphs 70 and 71).

But, the Court then goes on to ask what is it that the credit provider is actually meant to be doing with the information obtained?

The Court concluded that the only statutory purpose for which the financial information is collected is to answer the 2 questions that need to be answered in the credit assessment process (paragraph 70).

The Court concludes that it is unable to discern why information about a consumer’s declared living expenses is a mandatory matter that must be considered as part of the credit assessment process in answering Question 1 (paragraph 73).

The Court acknowledged that “stated living expenses” of a borrower were not immutable. A borrower could adjust their expenses in order to be able to afford the loan repayments – give up gym memberships, not take an overseas holiday etc. (paragraphs 74 and 78)

The Court provides a worked example in relation to answering Question 1 (whether the consumer will be unable to comply with their financial obligations under the contract (i.e. make the repayments))

74:

A worked example illustrates the problem. Let it be assumed artificially that a consumer with a monthly after-tax income of $4000 has three declared living expenses of food ($1200 per month), utilities and internet ($200 per month) and gym memberships ($200 per month). The declared living expenses are therefore $1600 per month and the consumer will have a surplus of $2400 per month. If the consumer proposes to take out a home loan which will require monthly repayments of $2500 the outgoings will then be $4100 per month as opposed to the after-tax income of $4000 per month. The consumer will therefore have a shortfall of $100 per month.

75:

But this does not tell one that the consumer cannot afford to meet the repayments. One reason this is so is because the consumer may choose to discontinue their gym memberships and meet the repayments in that way. The problem for ASIC’s argument is that the mere fact that there are living expenses is not necessarily relevant to whether a consumer will be unable to comply with their loan obligations because it is always possible that some of the living expenses might be foregone by the consumer in order to meet the repayments.

77:

Without additional information, I do not consider that it is possible to accept that the consumer’s declared living expenses tell one anything about their capacity to meet the repayments under the loan…

The Court reaches a similar conclusion in relation to the relevance of “declared living expenses” in relation to Question 2 (whether the consumer, whilst able to afford the repayments, will not be able to do so without being placed in circumstances of substantial hardship):

78:

Here the issue is not whether some or all of the declared living expenses can be done without but the even more complex question of whether, if done without, this would give rise to circumstances of substantial hardship. Again, one cannot say that as a matter of necessity this can be discerned from the declared living expenses by themselves.

78:

The fact that the consumer spends $100 per month on caviar throws no light on whether a given loan will put the consumer into circumstances of substantial hardship. Nor for that matter does knowing that the consumer spends $500 per week on basic food items. For that to be relevant to the hardship question posed by s 131(2)(a) one would need to know at least the following matters:

(a)          that the loan repayments would require the consumer to cut their budget by a certain amount, say for the sake of argument, $200 per week;
(b)          that the $200 would have to be cut from the amount the consumer spent on food (i.e. $500 per week); and
(c)          if the consumer cut the amount spent on basic food from $500 per week to $300 per week then this would place the consumer in circumstances of substantial hardship.

79:

With those additional facts, one may be able to say that the declared living expenses must necessarily be relevant to the second … questions

As a consequence, the Court concludes that declared living expenses by themselves do not necessarily have to be relevant to the credit assessment process. If declared living expenses do not necessarily have to be relevant to the answering the 2 questions then it cannot be said that declared living expenses must be taken into account in performing an assessment of unsuitability. (paragraph 80)

In conclusion (and as a final blow), the Court states that:

82:

The policy of the statute that unsuitable loans should not be made is explicitly and directly given force by ss 131 and 133. Given that statutory fact, what purpose can be served by prescribing how a credit provider goes about the assessment process? Sections 131 and 133 make that the problem of the credit provider. A credit provider may do what it wants in the assessment process, so far as I can see; what it cannot do is make unsuitable loans. ASIC’s argument creates a whole new range of implied rules which appear altogether unnecessary in light of ss 131 and 133.

7. The case as a test of HEM?

This case was hailed to be a test of use of HEM (Household Expenditure Measure) – it was not.

At paragraph 36:

36:

Both parties made oral and written submissions about the HEM benchmark but by the trial’s conclusion it was of marginal relevance. This is because, as finally articulated, ASIC’s case did not turn on the fact that Westpac had used the HEM benchmark but instead on the alleged fact that it did not use any of the consumer’s declared living expenses in answering the s 131(2)(a) Questions. Indeed, ASIC accepted that it was lawful for Westpac to use the HEM benchmark to answer those questions. What it could not do was to answer them without taking into account any of the consumer’s declared living expenses.

8. Classic Quotes

There are a number of classic quotes used in the judgement which already have consumer advocates up in arms on the basis that the Judge is out of touch with the average punter. Mind you they are great quotes and should be acknowledged.

76:

…I may eat Wagyu beef everyday washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare…

78:

The fact that the consumer spends $100 per month on caviar throws no light on whether a given loan will put the consumer into circumstances of substantial hardship.

71:

I do not, however, accept ASIC’s contention that all of the financial circumstances of the consumer can be such a mandatory matter. ……………… Questions of whether the consumer could in absolute terms afford the repayments; so too, the fact that the consumer takes an annual first class holiday to the United States is not relevant to assessing whether the repayments will put the consumer into circumstances of substantial hardship.

Far from being out of touch, The Honourable Justice Perram is thinking deeply about how the responsible lending rules might apply to him.

For me, it might be the difference between a bottle of “Wirra Wirra Church Block” and a bottle of “Jacobs Creek”. For my kids, it might be the difference between “plain label” and “branded products” at the supermarket.

While the rules around responsible lending affect us all in different ways – the rules around responsible lending do still affect us all, each in our own way.

For the consumer lobby to argue about the validity of this judgement as they appear to already be doing is really not helpful.

9. Our view back in 2016

Back in 2016, we thought that the distinction between “ability to meet repayments” and “credit risk” was thought to be a feature of the new responsible lending regime, which required lenders to go further. Refer to our article published in January 2016 – Responsible Lending Obligations: Saving Borrowers from Themselves

In that article we commented that:

Saving borrowers from themselves

Traditionally the credit assessment process for lenders was aimed at avoiding losses to lenders. Initially, this was done by way of ensuring there was sufficient equity in any security so that moneys lent could be recovered in circumstances of default. Now, lenders look at the credit assessment process in terms of capacity of the borrower to repay the amount lent from their own resources rather than realisation of any security. That was always the case in relation to unsecured loans – the difference now is it applies to secured loans as well. But, it does not really matter how robust a lender’s credit assessment procedures are, a lender can still fall foul of the responsible lending obligations set out in the National Credit Act.

Why is this so?

This is so because credit assessment procedures are no longer about protecting the position of the lender – instead, the responsible lending provisions under the National Credit Act are all about protecting the borrower – “saving borrowers from themselves”.

If lenders and credit assistants do not recognise this paradigm shift they will continue to get into trouble in the area of compliance with responsible lending provisions. And that trouble will not only come from ASIC. More and more now it is the external dispute schemes that are leading the charge in this area.

If one were to take a cynical view on matters one could form the view that in order to comply with responsible lending obligations nothing a prospective borrower says on the loan application is to be accepted on face value.

It seems now that the distinction we identified at that time might not be all that significant.

10. The recommendations of the Royal Commission

Recommendation 1.1 of the report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was:

Recommendation 1.1 – The NCCP Act

The NCCP Act should not be amended to alter the obligation to assess unsuitability.

That recommendation was predicated in part on the fact that at the time of issue of the Report of the Royal Commission the subject Westpac Case had not yet been decided. As a consequence, the Report made the following observations about the pending case (starting at page 54):

It is necessary for me to say something about two developments relating to benchmarks that followed the Interim Report.

First, in November 2018, Perram J of the Federal Court refused to accept a proposal made jointly by ASIC and Westpac to resolve proceedings brought by ASIC alleging that Westpac had contravened section 128 of the NCCP Act.

The parties proposed that the Court impose a civil penalty of $35 million on Westpac for contravening the NCCP Act in assessing the suitability of home loans for customers in the period between 12 December 2011 and March 2015. 19 Westpac had used the HEM in its assessment of the loan applications.

In his reasons for refusing to make the orders the parties had proposed, Perram J said that the conduct expressed in a declaration proposed by the parties was not conduct that ‘could possibly be a contravention’ of section 128…

The proceedings remain undetermined and, absent some different agreement being reached and resulting in final orders disposing of the proceeding, await trial and judgment. That being so, it would not be right for me to offer any view about the conclusions reached by Perram J or to say anything at all about the reasons that have been published. At the time of writing, the proceedings between ASIC and Westpac remain on foot and may well go to trial.

The court processes must play out without commentary from me.

If the court processes were to reveal some deficiency in the law’s requirements to make reasonable inquiries about, and verify, the consumer’s financial situation, amending legislation to fill in that gap should be enacted as soon as reasonably practicable.

Let’s see what view the Government takes on any perceived “deficiencies revealed by the law by this judgement.

11. The Way Forward

The way forward is unclear.

How can ASIC in all honesty continue with its prescriptive guidance as to how to comply with responsible lending obligations in the light of the decision of the Federal Court? In particular at paragraph 82:

82

The policy of the statute that unsuitable loans should not be made is explicitly and directly given force by ss 131 and 133. Given that statutory fact, what purpose can be served by prescribing how a credit provider goes about the assessment process? Sections 131 and 133 make that the problem of the credit provider. A credit provider may do what it wants in the assessment process, so far as I can see; what it cannot do is make unsuitable loans. ASIC’s argument creates a whole new range of implied rules which appear altogether unnecessary in light of ss 131 and 133.

The way forward will be revealed with time.

Legislative change could be on the table, but it is unclear whether that would gain traction given the current economic environment.

12. What should Lenders now do?

In the interim, lenders would be unwise to unwind their current practices and procedures around responsible lending – it is certainly not open slather.

“Steady as she goes” is the best advice.

Starting Out on the Right Foot

August 12, 2019 by Belinda Ryan

Strategies for start-ups to enhance value and reduce risk

So you’ve decided to start up a new business.

You’ve:

decided upon the vision, values and goals;
assessed the competition and resources challenges;
identified your target customer base and sought feedback from them (and your suppliers), to identify what is likely to work and what isn’t, and
prepared your business plan.

What next? What strategies can you employ from the outset to maximise value, protect your business and enable it to respond best to the challenges all startups face?

Having advised many new businesses (the good, the bad and the ugly) over three decades, here are my thoughts:

1. Find the right advisers

It’s important to invest the time at the outset to find the right advisors (most commonly, in accounting, financial land legal) to guide your business as it grows.

This is about more than choosing the most well-known name your budget allows. It’s about finding someone who understands you, your business and what you want to achieve. Getting that fit right in the beginning will give you access to real wisdom, and save time and significant expense over the journey.

2. Choose a suitable business structure

Various options are available – your advisers can help you choose the best.

If you are starting the business with a view to selling in the future, a structure which is likely to be the most attractive to a potential buyer will avoid the discount and/or restructuring costs
of a poor structure.

It’s likely that a company structure will be the most suitable option for the trading entity, rather than a discretionary trust or a unit trust.

3. Seek out appropriate funding

Finding the right investors/financiers scan be tricky – some demand too much in return.

Don’t give it away! Try to source funding which doesn’t require you to give up a share of your business (i.e. loans from friends and family may be a simpler and cleaner option than issuing equity).
Similarly, as much as possible, avoid giving personal guarantees for the business’ obligations.

4. Select the right bank

Don’t just go straight to the bank you’ve used as a consumer. Find one that understands your business and with which you feel comfortable.

Some banks offer incentives for new business customers – find those relevant to your business.

5. Ownership rights

If you plan to own the business with others, agreeing at the outset on how ownership relationships will function will save time and expense if disagreements arise later (e.g. an owner unexpectedly decides to exit the business and demands to be paid their “fair share”).

Like a marriage, no one starts a business with others expecting the ownership relationship to break down. But if it does, having a written agreement to point to when issues arise and owners
aren’t willing to cooperate is crucial.

For example, if your business is structured as a company, these rights can be set out in a Shareholders’ Agreement covering issues such as:

how are decisions made?
how do we decide if we want to allow a new owner on board?
if I want to leave, to whom can I sell my share and how is the price set?

6. Manage employment risks

Investing in reliable employment agreement templates for both ordinary and management staff will help manage risk (and the cost if things going wrong) as you take on more staff. These
days, the cost of this investment represents real value in the medium term.

Preparing a basic but appropriate employee handbook containing your internal policies, will provide new starters with a clear understanding of what is expected and reduce your risk.

Depending on your business, you may also need to address OHS compliance.

Research/seek advice which awards or agreements will apply to employees in your industry to ensure you are providing the proper pay rates and conditions.

7. Understand regulatory requirements

Depending on the nature of your business and where it is based, different licences, permits, registrations and certificates may be required.

Understanding the regulatory requirements which apply (here and possibly also overseas) will improve your business planning and avoid future compliance issues. Government and industry
websites and your advisers can help you with this.

8. Branding and marketing

Your business name can be one of your most valuable assets – it is your identity with your customers, differentiating you from competitors.

If you want to trade under a different name from your company name, you’ll need to register a business name and potentially a trade mark as well, so only you can use it.

Before deciding on a name and checking availability for registration, check if your preferred name is available as a web address and social media profiles.

Do a web search to check for any similar sounding names or initials both here and overseas and check their reviews to minimise any reputation risk by association.

If you have a designed logo to identify your brand, this is also something to consider protecting with a trade mark.

9. Protect IP

Intellectual property is increasingly valuable and so important to protect. Usually, this means registering a trade mark so only you can use its identifying features. It may also mean ensuring that you own the copyright in developed software or key marketing material.

If you have developed something novel that may be able to be patented, take great care not to generally disclose this, as it may preclude patent registration.

It is important to understand how intellectual property can be created, owned and protected and a helpful guide can be accessed here.

10. Consider appropriate insurance cover

Insurance cover is a key tool for protecting your business and minimising exposure to risk.

This can include insuring your main commercial risks, insuring your income and insuring against relevant liabilities.

The right insurance broker will help you identify possible risks and assess whether insurance is a sensible solution.

11. Maintain business records and protect privacy

Financial and tax records must be properly maintained and stored for well after the relevant financial year. Your accountant can help.

Legal documents such as company records, key contracts and employment agreements should also be safely maintained.

If your business involves handling your customers’ “personal information”, understanding your privacy law obligations will help avoid complaints and protect your reputation.

12. Make it “owner-proof”

From the start, set up your business so that dependence on you is minimised. Your exit value depends on this – a buyer will only pay good money to the extent that they are confident the
business will operate profitably without your involvement.

So establish systems across the business to build this separation and, as far as possible avoid anything (key relationships, name, technical competency, brand etc) that relies on your ongoing
involvement.

These strategies are just a small, but important, selection of things you should do to ensure you get the most out of your startup, making the foundations the most secure and avoiding unnecessary headaches (and the costs that come with them) in the future.

ASIC Public Hearings on Responsible Lending Reforms to take place next week

August 8, 2019 by Belinda Ryan

ASIC has announced it will hold public hearings in Sydney on 12 August 2019 and Melbourne on 19 August 2019 in response to its proposal to update guidance on responsible lending.

When ASIC released consultation paper CP 309 in February 2019 setting out its proposals to update its guidance on Responsible Lending contained in RG209, it is obvious that it did not expect the extent of the reaction from industry or the number and extent of submissions. In total, 72 submissions were received. ASIC had originally proposed to release its responses to submissions in August or September 2019.

This is an unusual step for ASIC to take and reflects the importance of this issue. As ASIC explains:

On this occasion, ASIC has decided to use its hearing power to help it develop its regulatory guidance on responsible lending obligations. The application of these obligations is critical to the making of appropriate credit decisions, and we are aware that our guidance on these obligations is a matter of significant public interest.

We think public hearings will provide a useful and transparent way to robustly test with selected participants some of the main issues and views raised in the written submissions in response to Consultation Paper 309.

While the hearings will be open to the public and live streamed, appearance at the hearing is by invitation only. ASIC has already contacted those parties invited to participate in the hearings. ASIC has stated that it will update its “hearings page” with a list of participants for each hearing once the final list has been confirmed as well as an expected link to the live stream.

ASIC’s thought process behind its selection criteria for who has been invited to appear is explained thus:

We have selected from the submissions some parties that we consider will be able to provide additional views and perspectives on key issues that have been raised across a range of industry and consumer stakeholders.

At the public hearings, the acceptability of using the Household Expenditure Measure (HEM) to assess and verify expenses will no doubt be a topic of hot debate.

While it is clear that to do so is not in accordance with the requirements of the National Credit Act, it appears that relying on a HEM based benchmark may not necessarily lead to an adverse consumer outcome. It is interesting to note that at paragraph 56 of the Agreed Statement of Facts filed in the Federal Court proceeding in ASIC V Westpac Banking Corporation NSD293/2017 in September 2018, it was acknowledged that Westpac loans which were assessed using its Automated Decision Process did not result in a higher incidence of defaults or hardship applications. Paragraph 56 is extracted below.

Home Loans Conditionally Approved by the Automated Decision System during the Relevant Period have to date:

(a) had a lower rate of hardship applications than manually approved Home Loans originated during the Relevant Period; and

(b) had a similar rate of 60+ Days Delinquency to manually approved Home Loans originated during the Relevant Period.

Manual assessment may not be what it is cracked up to be!

For those involved in credit activities, these public hearings will be critical to follow.

Dumping duty assessments – A possible solution to unexpected dumping duties

August 5, 2019 by Belinda Ryan

With rates sometimes exceeding 100%, dumping duties are one of the key focus areas of the Australian Border Force and importers. Importers can face unexpected dumping duty bills that run into the millions of dollars and feel that they have no ability to fight the duty. For some importers, one way of lowering the cost of a dumping duty bill is to make an application for a dumping duty assessment. This does not involve arguing that the goods are not covered by the dumping duty notice, but rather is a claim that the rate is too high.

In some cases a dumping duty assessment could see a rate near 100% significantly reduced.

How can the rate change

Following a dumping duty investigation, the duties that are imposed on subsequent imports are referred to as interim dumping duties. This is because those duties are based on the historical information reviewed in the investigation, but may not be the correct rate for subsequent imports. Importers have the right to apply for a dumping duty assessment under which the actual dumping margin for those imports is determined. Realistically, an importer can only do this with assistance from the overseas supplier. Where this assistance is available, a dumping duty assessment can be a method of significantly reducing duty on past imports.

The actual rate may be significantly lower than the amount paid at import. This is because the importer may have been subject to an “all other importer” rate. This is not a rate for a specific exporter, but rather is a figure calculated by reference to data provided by other exporters and is designed to produce a very high duty rate. If an actual exporter is assessed and the margin based on their real data, the dumping margin may be a lot lower than the made up rate.

Strict timeframes

The catch is that an application for a dumping duty assessment must be made within 6 months of the end of relevant importation period. Each month period following the imposition of dumping duties is an importation period. For example, if dumping duties were first imposed on 1 January, the first importation period would be 1 January – 30 June. An application for a duty assessment for imports during that importation period would have to be lodged by 31 December.

The Anti Dumping Commission (ADC) has repeatedly said that complete applications for a dumping duty assessment need to be lodged prior to the due date. It asks for applications to be lodged well in advance of this date so that if there are deficiencies in the application, these can be cured by the due date. The ADC’s position was that a deficient application could not be cured after the due date, ending the right for a dumping duty assessment.

Whether this position was correct was considered by the Federal Court in Downer Utilities Australia Pty Ltd v Commissioner of the Anti-Dumping Commission [2019] FCA 1190. This case concerned an application for a duty assessment required to be lodged by 2 January 2018 and which was lodged on 29 December 2017. The lodgement was incomplete as not all required imports were listed and some listed figures were not totalled. The failure to total the relevant figures was due to a problem with the ADC electronic form.

The representative for Downer tried calling the ADC regarding the problems with the ADC form. However, due to the Christmas and New Year period, the ADC did not respond to the query.

The legislation give the ADC 20 days to review an application and form a view whether or not it is deficient. The issue in this case was, if a deficiency was identified in that 20 day period, did the ADC have an obligation to inform the applicant and allow them to correct the deficiency?

The ADC argued that the 20 day period was merely for it to screen the application, and that it did not have an obligation to inform applicants of deficiencies and even if it did, applicants could not cure those deficiencies after the due date.

The Court held that:

deficiencies could be cured in the 20 day screening period; and
the ADC had an obligation to inform Downer of the deficiencies (which were minor) and allow them the opportunity to correct these in that 20 day period.

The ADC’s rejection of the application in the circumstances meant that Downer was denied procedural fairness and Downer was able to have the decision set aside.

A more lenient approach?

The decision is important as previously the ADC has been very strict in its view that deficiencies could not be cured after the initial due date. Applicants who have had applications rejected due to deficient applications may have been denied procedural fairness.

The decision hopefully makes seeking dumping duty assessments easier for importers. Often an assessment is sought after an Australian Border Force audit results in an unexpected dumping duty liability. In these circumstances, the importer may only find out about the dumping duty liability near the due date for the dumping duty assessment application. This is likely to result in rushed applications that may have minor deficiencies. This decision is a clear message to the ADC that it cannot take advantage of minor deficiencies to deny a substantially compliant claim. Rather, the ADC must notify the applicant of the errors and allow them the opportunity to correct those errors.

Tips for the future

If significant dumping duty is payable, importers should quickly determine the due date for a dumping duty assessment. If the timeframe has not passed, the importer should speak to the exporter about whether that exporter will cooperate with a dumping duty assessment.

If there is a willingness to assist, the importer and exporter should be able to work together to determine a likely outcome of a dumping duty assessment application. The previous investigation report and associated documents will provide a good guide to the ADC’s methodology to calculating the dumping margin. The size of a likely refund can inform whether there is any merit in proceeding with a dumping duty assessment.

If the importer plans to proceed with an assessment, the importer should obtain a list of imports during the importation period. Not listing all imports can be a reason for the ABF to reject the application.

Of course, the best approach is to lodge the assessment application well before the due date. Importers have 6 months in which to lodge an application. Lodging early will allow the ADC time to notify the applicant of errors prior to the due date, enabling a compliant form to be lodged.

A dumping duty assessment is not the answer for all importers. However, it should be one of the options that is considered. As it is time sensitive, this option should be considered as early as possible.

Please contact Russell Wiese if you wish to discuss any demand for dumping duty or an investigation being undertaken by the Anti-Dumping Comission.

Reforms to Debt Administration Agreements showing potential to reshape the debt administration industry

August 1, 2019 by Belinda Ryan

The Bankruptcy Amendment (Debt Agreement Reform) Act 2018 (Cth) was designed to and is already having a major impact on the debt administration industry in Australia following its commencement on 27 June 2019.

The aim of the legislation is to tighten up regulation of the debt administration industry and place additional restrictions on such agreements, including limiting the duration of any agreement to a maximum term of 3 years.

Until now, debt administration agreements entered into under Part IX of the Bankruptcy Act 1966 (Cth) have proved an effective way for debtors to deal with unmanageable debt burdens. Between 2007 and 2016, new debt agreements increased from 6,560 to 12,640 per year. Over the same period, new bankruptcies declined from 25,754 to 16,842 per year.

It is therefore surprising that the recently implemented reforms have not attracted more attention. Part of the reason for this is probably that these reforms have taken so long to come to fruition and that most updates concerning these reforms were written back in 2018.

However since the legislation commenced, many of our clients have noticed that there has been a move away from formal Part IX debt administration arrangements and a significant number of “informal debt agreements” are now being proposed.

Registered Debt Administrators (or their related corporations) who hold a credit licence authorising them to provide “credit assistance” can readily to avail themselves of this option and effectively bypass the new reforms.

The changes seem make such agreements less profitable for debt administrators and make it more difficult to make proposals acceptable to creditors when the maximum term of an agreement is now only 3 years.

The maximum 3 year term of a debt agreement brings them into line with the period of bankruptcy which is also 3 years.

What then are the changes recently implemented?

The explanatory memorandum explains the intent to the legislation in these terms:

The Bill will effect a comprehensive reform of Australia’s debt agreement system. ………….

Significant measures in the Bill make provision for:

- the types of practitioners authorised to be debt agreement administrators
- registration, deregistration and the obligations of debt agreement administrators
- formation, administration, variation and termination of debt agreements
- protections against debt agreements that cause financial hardship or have other defects, and
- powers of the Inspector-General in Bankruptcy (Inspector-General) with respect to debt agreements and debt agreement administrators.

It is intended that the measures in the Bill will boost confidence in the professionalism of administrators, deter unscrupulous practices, enhance transparency between the administrator and stakeholders, and ensure that the debt agreement system is accessible and equitable.

Some of the more significant reforms include:

Nature of reform	More Details
length of debt agreements	Maximum three years, Except where debtor owns and has equity in real property, in which case, maximum 5 years. Ability to extend existing debt agreements up to 5 years if debtor circumstances deteriorate
Impose maximum payment to income ratio	This ratio has not yet been prescribed. The reforms are designed to prevent a debtor from giving the Official Receiver a debt agreement proposal if the total proposed payments under the agreement exceed the debtor’s yearly after-tax income by a prescribed percentage (the payment to income ratio)
Asset Threshold	The reforms double the maximum asset threshold – now currently $231,467.00 as at 27 June 2019 (note that debt threshold is currently $115,733.80)
Reimbursement of expenses	Greater transparency around seeking reimbursement of expenses
Proposals to vary debt agreements	Administrator has duty to ensure that certificate to vary debt agreement is correct.
Undue hardship to debtor	Official Receiver can refuse to accept an agreement proposal if they reasonably believe that complying with the agreement would cause undue hardship;
Voting by related parties prohibited	Often debt administrators are related to credit providers. Related credit providers will not be allowed to vote on proposal made
Insurance	Debt Administrators required to obtain and maintain adequate and appropriate professional indemnity and fidelity insurance;
Disclose Relationships	Debt Administrators required to disclose details of any broker or referrer relationships, including details of payments made;

These reforms have the potential to reshape the debt administration industry. It will be interesting to review how the changes have impacted the industry after the reforms have been in place for 12 months.

Hold the Phones! ASIC moves to ban unsolicited telephone sales of direct life insurance and consumer credit insurance

July 23, 2019 by Belinda Ryan

ASIC has proposed to ban unsolicited telephone sales of life insurance (including funeral insurance) and Consumer Credit Insurance (CCI) when sold with general or no advice. This proposed ban will even extend to financial advisers who make unsolicited telephone sales of direct life insurance where general or no advice is given.

As explained in its Consultation Paper 317 released on Thursday 19 July, the expression “life insurance” includes all ‘life risk insurance products’ as defined in sections 761A and 764A(1)(e) of the Corporations Act 2001. Specifically, it includes life insurance products including term life insurance, accidental death insurance, trauma, total and permanent disability insurance (TPD), funeral insurance and income protection insurance.

Direct telephone sales of these products are currently permitted if certain requirements are met as outlined in section 992A(3)(a)–(e) of the Corporations Act. Regulatory Guide 38 explains the scope and limits of the current exemptions.

In February 2019, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) recommended that the hawking of insurance and superannuation products should be prohibited and a legislated definition of ‘unsolicited’ should be introduced. The Government responded to this recommendation by committing to strengthen and clarify the prohibition on hawking in s992A, including defining ‘unsolicited’.

Rather than wait until the legislation is changed, ASIC intends to use modification power in s992B(1)(c) of the Corporations Act to implement this ban:

C1: We intend to use our modification power in relation to the hawking provisions in the Corporations Act to prohibit unsolicited telephone sales of life insurance (including funeral insurance) and CCI, when only general advice or no advice is given at the point of sale.

By using its modification powers now, ASIC’s proposed ban will provide interim protections to consumers ahead of broader law reform by the Government.

ASIC could have intervened by using its new “product intervention powers”, but has formed the view that use of its modification power is more appropriate.

ASIC’s rationale for the proposed changes is:

Imposing a ban on unsolicited telephone sales of direct life insurance and CCI would address the concerns raised in our reviews that current industry practices can result in consumers paying for life insurance and CCI policies that are not suitable for their needs. Such a ban would promote informed decision making and reduce consumer harms.

We consider that the proposed ban appropriately:
(a) ensures that consumers have an opportunity to consider their needs and the products available before taking out an insurance policy; and
(b) reduces the likelihood that consumers will be sold insurance products that are not necessary or suitable. (CP317 59-60)

ASIC is also seeking views on whether the prohibition on unsolicited telephone contact should be extended to other financial products provisions, such as other insurance and superannuation products, currently captured by the hawking provisions.

The timelines proposed for the Consultation process are:

Stage 1	18 July 2019	ASIC consultation paper released
Stage 2	29 August 2019	Comments due on the consultation paper Review submissions and make policy decision
Stage 3	December 2019	Consider changes to existing regulatory guidance Consult on possible draft instrument
Stage 4	March 2020	Finalise instrument

Things to watch out for:

The scope of the changes will to a large extent be determined by how ASIC updates Regulatory Guide 38 and in particular how ASIC defines the expression “unsolicited”. This will be especially relevant in the context of cross selling and requests by consumers that they be contacted to discuss provision of life insurance products.

One thing is certain – these changes if implemented will radically change how risk based life and other insurance products are sold in Australia.