In this issue
- Royal Commission releases its final report
- Mutual sector announces review of Customer Owned Banking Code of Practice
- Banks have until July 2019 to comply with new Banking Code of Practice
- AFCA and the status and scope of codes in relation to financial firms
- Additional disclosure obligations for mortgage brokers, aggregators and other intermediaries
1. Royal Commission releases its final report
As everyone would be aware, the Final Report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was released by the government on Monday 4February 2019.
We propose to make limited comment on this issue at this time (only in relation to the topics covered in this newsletter) – most other issues will be fully canvassed in the press and via other channels.
2. Mutual sector announces review of Customer Owned Banking Code of Practice
On 21 January 2019, the Customer Owned Banking Association (COBA) announced it had appointed former Australian Securities and Investments Commission official Phil Khoury to conduct the review of the Customer Owned Banking Code of Practice (the Mutual Sector Code).
The last time the Mutual Sector Code was fully revised was in 2014. COBA has a commitment to review the Code every five years.
COBA is the industry body representing many Mutual Banks, Credit Unions and Building Societies in Australia.
Mr Khoury is also the person who reviewed the Code of Banking Practice in 2017.
It is most likely changes made to the code will address similar issues to those addressed in the Banking Code, especially given the fact that any revisions to the Mutual Sector Code will have to be approved by the Australian Securities and Investments Commission. We expect there will be some differences as business lending does not feature as a major part of the lending activities of the mutual sector.
Mr Khoury intends to release an issues paper shortly and will be seeking submissions. It was anticipated that the review will be completed mid-2019. However, the recommendations of the Royal Commission, if adopted by government, will most likely play havoc with the timing of this review.
3. Banks have until July 2019 to comply with new Banking Code of Practice
The revised Banking Code of Practice was released on 31 July 2018 following a lengthy review and approval process.
A period of grace until 1 July 2019 was given for signatory banks to comply with the new code and that date is fast approaching.
Everyone involved in the finance sector needs to be aware of the provisions and requirements of the provision of the revised Banking Code. It sets out concrete new rights and protections for consumers, small business and guarantors.
For example in the area of dealing with consumers.
Under the revised Banking Code, banks are required to:
- abolish fees and commission on lenders mortgage insurance and provide a fact sheet on the key policy features if a customer requires the insurance.
- delay offering add-on insurance for credit cards and personal loans.
- send customer reminders when an introductory credit card offer is about to end
- implement measures to assess a customer’s ability to repay their entire credit card limit within five (now three years)
- engage in proactive contact with customers deemed at risk of financial difficulty & have measures to help them
- commit to take extra care with vulnerable customers and to train staff to help.
- actively promote affordable banking products
- assist people on low incomes to pick the right accounts for them (low or no fee accounts for pensioners and concession)
- give customers lists of direct debits and recurring payments making it easier to switch.
ASIC has played a lead role in developing this final version of the code.
If government accepts the recommendations of the Royal Commission the Banking Code will have to be amended further: One example is set out below.
Recommendation 1.8 – Amending the Banking CodeThe ABA should amend the Banking Code to provide that:
- banks will work with customers:
– who live in remote areas; or
– who are not adept in using English,
to identify a suitable way for those customers to access and undertake their banking;
- if a customer is having difficulty proving his or her identity, and tells the bank that he or she identifies as an Aboriginal or Torres Strait Islander person, the bank will follow AUSTRAC’s guidance about the identification and verification of persons of Aboriginal or Torres Strait Islander heritage;
- without prior express agreement with the customer, banks will not allow informal overdrafts on basic accounts; and
- banks will not charge dishonour fees on basic accounts.
4. The status and the scope of codes in relation to financial firms and their customers
The provisions of the codes apply to subscribers to the code and the provisions of the codes ,in our view, form part of the contract made between subscribers and their customers.
In resolving complaints the external dispute resolution provider (the Australian Financial Complaints Authority) has regard to applicable Codes of Practice in resolving complaints (Rule A.14).
In hearings before the Royal Commission, Counsel assisting often cited breach of applicable codes of practice by financial firms as evidence of misconduct.
We recall that, at various points during evidence before the Commission, financial firms would state they did not subscribe to a code of practice and should not therefore be judged by the standards of such code. Such submissions tended to fall on deaf ears – the suggestion being made that the relevant code of practice was an indication of ‘good industry practice’.
This aspect was referred to in Background Paper 4 Everyday Consumer Credit -Overview of Australian Law Regulating Consumer Home Loans, Credit Cards and Car Loans by Jeannie Paterson and Nicola Howell of Melbourne Law School, published in March 2018 at the request of the Commission.
At page 15 of the report there is discussion about the application of the Code of Banking Practice (COBP) to Financial Firms that do not subscribe to the Code.
The most likely avenue for redress for a subscribing bank’s failure to comply with a provision of the COBP is through the Financial Ombudsman Service (‘FOS’ – the relevant External Dispute Resolution (EDR) Scheme for most banks). In deciding how a dispute against a subscribing bank should be resolved, FOS can take the provisions of the COBP into account.
The COBP can also be relevant for disputes against institutions that do not subscribe to the COBP, as FOS also takes into account the COBP in determining a dispute against a non-subscriber, if it takes the view that provisions in the COPB represent ‘good industry practice’. For example, in the context of responsible lending, FOS notes:
‘… we consider that industry codes reflect good industry practice, so we expect all FSPs – even if they have not subscribed to the codes – to make sure their lending guidelines are in line with the codes’ required standards.
FOS has also confirmed its view that, where a bank or other financial services provider has subscribed to an industry code, non-compliance with that code is a breach of the contract with the customer, and the customer may be entitled to compensation for any loss suffered.
Our prediction is that the various codes of practice will become the standard by which conduct will be judged whether or not a financial firm is actually a subscriber to a particular code of practice. This was the position taken by FOS and we understand also the position of the Australian Financial Complaints Authority. Whether and how this principle is applied more generally remains to be seen.
The report of the Royal Commission clarifies and addresses this issue. If government accepts recommendation 1.15 then there will be Enforceable Code Conditions:
Recommendation 1.15 – Enforceable code provisions
The law should be amended to provide:
- that ASIC’s power to approve codes of conduct extends to codes relating to all APRA-regulated institutions and ACL holders
- that industry codes of conduct approved by ASIC may include ‘enforceable code provisions’, which are provisions in respect of which a contravention will constitute a breach of the law
- that ASIC may take into consideration whether particular provisions of an industry code of conduct have been designated as ‘enforceable code provisions’ in determining whether to approve a code
- for remedies, modelled on those now set out in Part VI of the Competition and Consumer Act, for breach of an ‘enforceable code provision’
- for the establishment and imposition of mandatory financial services industry codes.
Recommendation 1.16 – 2019 Banking Code
In respect of the Banking Code that ASIC approved in 2018, the ABA and ASIC should take all necessary steps to have the provisions that govern the terms of the contract made or to be made between the bank and the customer or guarantor designated as ‘enforceable code provisions’.
5. Additional disclosure obligations – mortgage brokers, aggregators and other intermediaries – too little and too late – it appears.
In response to the 2016 ASIC report “REP 516 – Review of mortgage broker remuneration” an industry body, the Combined Industry Forum (CIF), was established to develop and oversee reforms to the mortgage broking industry and provide better consumer outcomes.
The CIF consists of representatives from banks, customer owned lenders, aggregators and brokers, consumer groups, the Australian Banking Association (ABA), the Customer Owned Banking Association (COBA), the Mortgage & Finance Association of Australia (MFAA), the Finance Brokers Association of Australia (FBAA) and the Australian Finance Industry Association (AFIA).
Some of the recommended reforms have already been implemented. The latest reforms came into effect on 1 January 2019. These changes provide that:
5.1. Policy and procedural changes
- Broker commissions to be paid on amount of credit drawdown, excluding fund held in an offset account. This applies to both upfront and trailing commissions.
- Ensure any sponsorship opportunities to an aggregator event are made available to the entire lender panel and ensure that the aim of any event is to increase education
- Ensure that the ability for a lender to join an aggregator panel is not contingent on the level of sponsorship agreed to be provided by the lender
- Restrictions on lenders and aggregators providing entertainment and hospitality to brokers and establishment of a register of entertainment and hospitality benefits paid
- Ensure that all conferences and professional development events are “educational”
5.2. Additional disclosure requirements for credit guides:
- Include in credit guides notice that a register of entertainment and hospitality benefits paid is maintained by the financial firm and may be inspected by customers.
- Brokers must disclose access to lender tiered servicing programs, if applicable.
- Disclosure of ownership structure of the entity providing the credit guide where a situation of ‘Significant Influence’ (as guided by AASB 128) exists
- Brokers must publish in their credit guide their top six lenders by percentage of business referred and update that information annually. Currently, all brokers are required to do is to list their top six lenders – they do not have to specify which lenders are getting what percentage of their business.
These changes are mandatory for members of all bodies that are members of CIF. The reforms have been adopted by virtually all major players in the industry.
The effect of these reforms are likely to be dwarfed by the recommendations of the Royal Commission with regard to brokers, if adopted by government – see recommendations 1.2 to 1.6 below. Hence our comment – “too little – too late”
Recommendation 1.2 – Best interests duty
The law should be amended to provide that, when acting in connection with home lending, mortgage brokers must act in the best interests of the intending borrower. The obligation should be a civil penalty provision.
Recommendation 1.3 – Mortgage broker remuneration
The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending.
Changes in brokers’ remuneration should be made over a period of two or three years, by first prohibiting lenders from paying trail commission to mortgage brokers in respect of new loans, then prohibiting lenders from paying other commissions to mortgage brokers.
Recommendation 1.4 – Establishment of working group
A Treasury-led working group should be established to monitor and, if necessary, adjust the remuneration model referred to in Recommendation 1.3, and any fee that lenders should be required to charge to achieve a level playing field, in response to market changes.
Recommendation 1.5 – Mortgage brokers as financial advisers
After a sufficient period of transition, mortgage brokers should be subject to and regulated by the law that applies to entities providing financial product advice to retail clients.
Recommendation 1.6 – Misconduct by mortgage brokers
ACL holders should:
- be bound by information-sharing and reporting obligations in respect of mortgage brokers similar to those referred to in Recommendations 2.7 and 2.8 for financial advisers; and
- take the same steps in response to detecting misconduct of a mortgage broker as those referred to in Recommendation 2.9 for financial advisers.
To our mind the recommendations extracted above may well not be adopted by government. Already a major campaign is underway by the broking industry to resist implementation of these recommendations. Having said that, it is also clear to us that even if the recommendations of the Royal Commission are not fully adopted in relation to finance broking there will still be some fundamental changes to the broking industry.
In our view the most likely step government will take is to refer these recommended reforms off to a ‘Treasury-led working group’ for them to consider – as per Recommendation 1.4 (Establishment of working group).
Lots will be happening in the broking space in the next six months!