Since the beginning of the new financial year, there have been many industry changing developments in the banking sector. Implementation of the recommendations of the Royal Commission in to Banking Industry are well underway, and the Court threw a spanner in the works at ASIC in the Westpac case, throwing industry guidelines into responsible lending into turmoil.
ASIC have also been busy, moving to ban unsolicited sales of life insurance and severely limiting marketing and offering consumer credit insurance, as well as moving against short term lenders with the new Product Intervention Powers.
Many of these developments are ongoing, and it will be interesting to watch as they continue to evolve.
This edition provides a brief snapshot as to the current state of developments. We will continue to provide in-depth analysis as these issues evolve, however please don’t hesitate to contact us if you require any further information.
In this edition:
1. APRA fines Westpac $1.5 million for late filing of returns.
2. AFCA Statements of Approach on various topics
3. Cash Transactions for more than $10,000 in aggregate to be criminalised from 1 January 2020 for businesses
4. ASIC consults on how to exercise its new Product Intervention Powers
5. ASIC’s inaugural use of its Product Intervention Powers – Blitzes a lender engaging in dodgy lending
6. ASIC still unhappy about Consumer Credit Insurance (CCI) – will ASIC intervene?
7. ASIC moves to ban unsolicited telephone sales of direct life insurance and consumer credit insurance
8. Reforms to Debt Administration Agreements showing potential to reshape the debt administration industry
9. Responsible Lending guidance in turmoil following decision by the Federal Court in the Westpac case
10. ASIC Issues an Enforcement Update for the first half of 2019
11. House of Representatives Standing Committee on Economics to inquire into progress made by relevant financial institutions in implementing the recommendations of the Royal Commission
12. Open Banking Laws are finally passed by parliament
13. Legislative Agenda for implementation of the recommendations of the Royal Commission released
14. Extending Unfair Contracts Terms to insurance contracts
15. The Bill to abolish Grandfathered Commission Arrangements introduced to Parliament and ASIC investigates
16. Draft Legislation released to implement mortgage broker recommendations made by the Banking Royal Commission
17. AFCA now has power to “name and shame” Financial Firms” involved in complaints.
18. Scope of Referrer Exemption – ASIC takes National Australia Bank to court
19. ASIC releases its Corporate Plan for 2019 to 2023
1. APRA fines Westpac $1.5 million for late filing of returns.
In a sign that APRA is taking a tougher approach with institutions under its supervision, on 8 August APRA announced that it had issued infringement notices on Westpac Banking Corporation (Westpac) and two of its subsidiaries for failing to meet their legal obligations to report data to APRA under the Financial Sector (Collection of Data) Act 2001 by the relevant deadlines.
2. AFCA Statements of Approach on various topics
Any Financial Firm that has a complaint referred to the Australian Financial Complaints Authority (AFCA) needs to be aware of the guiding principles that AFCA follows in dealing with complaints. AFCA continues to update guidance notes previously issued by its predecessor FOS.
These can be viewed on the AFCA website. AFCA Approach documents that are particularly important to note include:
- Financial difficulty series – our power to vary credit contracts
- Financial difficulty series – dealing with common financial difficulty issues
- Mortgagee sales
And another hot topic one at present – Financial elder abuse
One notable omission is the guidance previously issued by FOS on the topic of Responsible Lending. No doubt this guidance note will be incorporated after the current ASIC review of responsible lending is concluded and RG 209 updated. Still, the FOS guide on approach to responsible lending is useful to refer to in the interim.
3. Cash Transactions for more than $10,000 in aggregate to be criminalised from 1 January 2020 for businesses
On 26 July 2019, the Government released an exposure draft of the Currency (Restrictions on use of Cash) Bill 2019 the Use of Cash) Bill 2019 and a proposed exemptions Instrument for public consultation.
If enacted, it is proposed that the new laws will apply to general businesses from 1 January 2020 and certain AUSTRAC reporting entities from 1 January 2021.
Importantly, the new laws will not affect authorised deposit taking institutions (ADIs) who will continue to report under existing AUSTRAC rules.
Treasury has provided a useful summary as to how the new prohibition will work:
What transactions are covered by the cash payment limit?
The limit applies to all cash transactions equal to or in excess of $10,000, except for those that meet the conditions specified in the draft Currency (Restrictions on the Use of Cash—Excepted Transactions) Instrument 2019.
What are examples of exempt transactions?
All cash deposits and withdrawals from your bank account with an authorised deposit-taking institution (ADI), exchanging foreign currency and all consumer to consumer transactions such as selling a second-hand car but excluding real property transactions.
What happens if you break the limit?
From 1 January 2020 it will be a criminal offence to make or accept a payment from businesses that includes $10,000 or more of cash. It is also offence to make or accept a cash donation equal to or in excess of $10,000. The maximum penalty is up to two years imprisonment and/or 120 penalty units ($25,200).
How does the cash payment limit apply to payment plans?
The cash payment limit will apply to the total price of a single supply of goods or services, regardless of whether the price is split into a series of payments over time.
4. ASIC consults on how to exercise its new Product Intervention Powers
In August 2018 we analysed the then proposed new Product Intervention Powers to be granted to ASIC. The legislation was passed by Parliament and is now law.
ASIC has recently consulted as to how it proposes to exercise its powers – refer CP 313 issued in late June 2019. The consultation period only recently ended on 7 August.
Two issues we noted when reading the consultation paper were:
- ASIC is required to consult with “affected parties”. It proposes to do so, not directly but by publishing a consultation paper!
- Two examples were given of circumstances in which ASIC might have used its product intervention powers, one of which related to automatic rollover of term deposit. This demonstrates that the power can and will be used against mainstream lenders, not only just fringe lenders.
A draft regulatory guide is attached to the consultation paper.
5. ASIC’s inaugural use of its Product Intervention Powers – Blitzes a lender engaging in dodgy lending
ASIC didn’t even wait until the consultation period on how to exercise its new Product Intervention Powers had ended before it actually exercised its power in relation to a particularly objectionable lending operation. Mind you we don’t blame them – we thought these types of lending practices had ceased over a decade ago.
On 7 July 2019, ASIC released a consultation paper (CP 316) on the first proposed use of its new product intervention power. In the words of ASIC – “On this inaugural occasion, ASIC is looking to address significant consumer detriment in the short term credit industry”
ASIC has been ‘gunning’ for this lending model for a while. ASIC took another lender (Teleloans Pty Ltd) using this model to the Federal Court back in 2018 but unfortunately lost. However, ASIC might have lost the battle but it appears it won the war – Teleloans Pty Ltd was deregistered as a company on 18 June 2019.
| Case study 1: Impact of default fees |
| Consumer A was on a Centrelink Newstart allowance when she obtained short term credit through Cigno for $120. Under the contract: • Cigno charged a $90 financial supply fee; • Cigno charged $5.95 in weekly account keeping fees; • GSSF charged a credit fee of $6; and • the total amount to be repaid was $263.60, by four fortnightly payments of $66 (with the fourth payment being $65.60). Consumer A could not afford the repayments and immediately defaulted. She was charged various dishonour fees and ongoing weekly account-keeping fees. As a result, Consumer A became liable to repay $1,189 on the original amount of $120 (or 990% more than she borrowed). |
The issue being addressed is a scheme utilised by a company by the name of Cigno to advance small amount of short term credit to consumers relying upon exemptions contained in the National Credit Code which had the effect of rendering the credit provided – unregulated. The loans would take 2 or so weeks to be processed, but consumers were able to engage the services of another company to expedite the process, but for a fee. The imposition of the additional fee resulted in the consumer paying far more than would otherwise be permitted if the loan were regulated – as illustrated in the example above.
6. ASIC still unhappy about Consumer Credit Insurance (CCI) – will ASIC intervene?
On 11 July 2019 ASIC released yet another report REP 622 on CCI products finding that there are still unacceptable sales practices, poor product design and significant remediation costs in CCI sold by major banks and lenders.
ASIC might be inclined to use its new Product Intervention Powers to address its concerns, a possibility canvassed in media release, MR 19-180.
ASIC notes that it is addressing the problems identified in the following ways:
- undertaking investigations into the suspected misconduct of several entities involved in the CCI product market, with a view to enforcement action. The defendants to ASIC’s future action will be publicly identified at the time proceedings commence;
- shortly consult with all interested participants and consumers with a view to completely banning the practice of unsolicited outbound sale of CCI by telephone, and
- ASIC’s work has led to a significant remediation program expected to exceed $100 million paid to over 300,000 consumers.
- ASIC has stated that it expects all CCI lenders to incorporate a four-day deferred sales model for all CCI products across all channels, not just those entities that subscribe to the Banking Code of Practice.
- ASIC has also stated that it expects lenders and insurers to design and offer products with significantly higher claims ratios and will continue to collect and publish data to measure improvements
Realistically, the days of CCI are numbered. The 4 day deferred sales model has already had a major effect in the ability to sell the product. If CCI cannot be sold at the time a loan taken out, the likelihood of being able to sell it later is remote.
7. ASIC moves to ban unsolicited telephone sales of direct life insurance and consumer credit insurance
In late July 2019 we released an article on the proposal by ASIC 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.
8. Reforms to Debt Administration Agreements showing potential to reshape the debt administration industry
On the 1 August 2019, we released an article on the recently introduced reforms to Debt Administration Agreements and their potential to reshape the debt administration industry.
9. Responsible Lending guidance in turmoil following decision by the Federal Court in the Westpac case
On the 15 August 2019 we released an article on 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 and commented that it had set the “cat amongst the pigeons” with regard to responsible lending obligations and ASIC’s proposal to issue fresh guidance on this issue.
10. ASIC Issues an Enforcement Update for the first half of 2019
On Sunday 18 August ASIC released its update on enforcement for the first half of 2019.
A different format has been taken in this report by ASIC and it is light on detail when compared to earlier reports.
The main takeout from the report is that in the first half of 2019, 77 new investigations have commenced, no doubt some of those related to the outcome of the recently released report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
This links in with comments made by ASIC deputy chairman (enforcement) Daniel Crennan, QC, to The Australian Financial Review that on top of the 13 referrals from the commission, the regulator was looking at “three times as many” case studies with a view to legal proceedings. Mr Crennan is quoted as saying that “there are a very large number of investigations on foot and there will be cases being issued in coming weeks, which are the result of those investigations’’.
11. House of Representatives Standing Committee on Economics to inquire into progress made by relevant financial institutions in implementing the recommendations of the Royal Commission
On the 2 August 2019, the Government announced that the remit of the House of Representatives Standing Committee on Economics had been extended to include assessing the progress made by financial institutions in implementing the recommendations of the Royal Commission. Other financial instructions and industry associated services associations are also expected to be included in that review.
12. Open Banking Laws are finally passed by parliament
In a previous article we reported on the progress towards implementation of Open Banking, noting that while Treasury Laws Amendment (Consumer Data Right) Bill 2019 (Cth) was introduced into Parliament in February 2019, unfortunately the legislation failed to pass before the election and the bill lapsed in April 2019.
The legislation has now passed Parliament and on 12 August 2019 The Treasury Laws Amendment (Consumer Data Right) Act 2019 received Royal Assent and commenced operation the next day.
13. Legislative Agenda for implementation of the recommendations of the Royal Commission released.
On 19 August 2019, the Federal Treasurer, The Hon Josh Frydenberg MP, released the “Implementation Roadmap” detailing the timetable for implementing the reforms recommended in the Financial Services Royal Commission’s Final Report. The Roadmap has been issued by Federal Treasury.
The implementation roadmap is a detailed and comprehensive document.
The legislative agenda for 2019, 2020 and beyond is breathtaking in its scope. We have extracted that part of the Roadmap and it can be viewed on our website.
14. Extending Unfair Contracts Terms to insurance contracts
On 30 July 2019, the Federal Treasurer, The Hon Josh Frydenberg MP, released an exposure draft of the Treasury Laws Amendment (Unfair Terms in Insurance Contracts) Bill 2019 which will extend the unfair contract term regime to insurance contracts. This is implementing recommendation 4.7 of the Banking Royal Commission.
The consultation period on the exposure draft of the legislation ended on the 28 August 2019.
The legislation when passed will apply to new insurance contracts entered into or renewed after the date the legislative changes take effect.
15. The Bill to abolish Grandfathered Commission Arrangements introduced to Parliament and ASIC investigates
On the 1 August 2019, the Government introduced the Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration) Bill 2019 into Parliament which is proposed to facilitate the phasing out of grandfathering of conflicted remuneration by 1 January 2021. This is implementing recommendation 2.4 of the Banking Royal Commission. Prior to the introduction of this legislation, there was a consultation conducted by Federal Treasury in February this year.
In a related but separate move, in media release 19-218MR ASIC announced on the 21st August 2019 that it is investigating the extent to which grandfathering is being voluntarily ended by the industry and whether the benefits are being passed on to affected clients. ASIC has been directed by the Treasurer to conduct this investigation.
16. Draft Legislation released to implement mortgage broker recommendations made by the Banking Royal Commission
On 26 August 2019, the Federal Treasurer, The Hon Josh Frydenberg MP, released an exposure draft of the National Consumer Credit Protection Amendment (Mortgage Brokers) Bill 2019 for consultation. This is implementing recommendations 1.2 and 1.3 of the Banking Royal Commission.
Federal Treasury will consult on the exposure draft legislation. The consultation period ends on 4 October 2019.
The provisions of the draft of the legislation are described by Treasury in the following terms:
The exposure draft Bill requires mortgage brokers to act in the best interests of consumers when providing credit assistance. The bill and regulations make changes to mortgage broker remuneration by: requiring the value of upfront commissions to be linked to the amount drawn down by borrowers instead of the loan amount; banning campaign and volume-based commissions and payments; and capping soft dollar benefits. Furthermore, the regulations limit the period over which commissions can be clawed back from aggregators and mortgage brokers to two years and prohibit the cost of clawbacks being passed on to consumers. Entry into force of the reforms is scheduled for 1 July 2020.
A principles based approach to the issue of “best interests duty” is proposed under the draft legislation. However, with respect to the issue of “conflicted remuneration” and other issues, a more prescriptive approach is indicated. Regulations proposed to be made sets out additional criteria relating to issues around conflicted remuneration.
It is expected that there will be serious engagement by broker associations in connection with the proposed legislation during the consultation period.
ASIC is leaving nothing to chance on this issue. In what is to our mind a somewhat clumsy step, on Thursday 29 August 2019, ASIC released a report REP 628 examining consumer experiences and expectations in looking for a home loan.
Media Release (19-232), summaries the thrust of the report succinctly – “ASIC research highlights the importance of reforms for mortgage brokers and home lending”. We suspect ASIC is preparing for pushback from the mortgage broking industry.
17. AFCA now has power to “name and shame” Financial Firms” involved in complaints.
In a sign that AFCA is taking a more aggressive approach, ASIC has approved a change to the ACA Rules to permit AFCA to name Financial Firms the subject of complaints.
ASIC, in Media Release 19-224MR (ASIC approves AFCA rule change enabling the naming of firms) issued on 26 August 2019, explained the rationale thus:
ASIC’s view is that naming firms in determinations can help identify conduct or market problems within firms or affecting specific products or services, as well as highlighting where firms have done the right thing. It will also enhance transparency and accountability of firms’ performance in complaints handling and of AFCA’s own decision-making.
To support the new Rules, AFCA will shortly be issuing updated operational guidelines which set out examples of the circumstances in which a determination naming a financial firm would not be published. This includes where naming may expose confidential information about a firm’s systems or policies.
This reform appears to bring AFCA into line with its UK equivalent, the UK Financial Ombudsman Service which had had the power to name Financial Firms since 2013.
In a somewhat ominous development, ASIC noted in its media release that transparency in relation to number and type of complaints might be extended to Internal Dispute Resolution processes:
Naming firms in AFCA determinations is part of a broader set of reforms aimed at increasing transparency in financial services. This includes Parliament giving ASIC power to collect and to publish internal dispute resolution (IDR) data at firm level.
18. Scope of Referrer Exemption – ASIC takes National Australia Bank to court
Real estate agents, lawyers and others may refer loan applicants to lenders without being required to be credit authorised in certain limited circumstances. Basically, a referrer can refer a person to a lender for a loan by merely passing on name and contact details of the consumer and a brief explanation of the type of credit sought.
Under the National Australia Bank (NAB) “Introducer Program” which operated between 2013 and 2016, the NAB pushed the limits and it is likely NAB will now have to pay the price.
The proceeding issued by ASIC in the Federal Court of Australia seeks the imposition of a civil penalty on NAB.
ASIC has sensibly limited the scope of its application – only alleging breaches by 16 bankers accepting loan information and documentation from 25 unlicensed introducers in relation to 297 loans. The application could have been far more extensive.
Comment has been made that ASIC is “looking for a quick win” – whether this is the case will no doubt be revealed in due course.
The last article we wrote on the scope of the “referrer” exemption under the National Consumer Credit Protection Act 2009 was back in 2010. It appears timely to update our prior guidance on this issue.
19. ASIC releases its Corporate Plan for 2019 to 2023
On Wednesday 28 August 2019, ASIC issued a media release advising release of its Corporate Plan for the next four years – 19-229MR.
We may comment further on the corporate plan at a later date.
