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Banking and Finance Update – September developments


In this issue:

  • ASIC finally approves the Australian Financial Complaints Authority rules

  • ASIC reminds financial firms about the need to join AFCA by 21 September 2018 but then gives a limited extension

  • ASIC releases report on reverse mortgage lending in Australia

  • Royal Commission sharpens focus on life insurance industry

  • ASIC prescribes three year period for credit card responsible lending assessments

  • ASIC to update Regulatory Guide 209 (responsible lending)

  • Westpac admits to breaching responsible lending obligations when providing home loans and a $35 million civil penalty

  • Royal Commission releases its interim report


   

Written by






Richard Williams, Partner

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ASIC finally approves the Australian Financial Complaints Authority rules

As has been mentioned in previous updates, Australian Financial Complaints Authority (AFCA) will be the new one-stop-shop for external dispute resolution services.
ASIC announced in a media release issued on Wednesday 12 September 2018 that it has finally approved the complaint resolution scheme rules for the new AFCA together with the terms of reference of the AFCA independent assessor. ASIC's approval of the AFCA rules came in the nick of time, given that it was a statutory requirement for financial firms to join the AFCA scheme by 21 September 2018.

ASIC reminds financial firms about the need to join AFCA by 21 September 2018 but then gives a limited extension 

On Thursday 20 September 2018 ASIC reminded credit licensees that the deadline for becoming a member of AFCA was 21 September 2018 and that those licensees who did not, would find themselves in breach of the credit laws.

ASIC also indicated it was drafting an instrument to allow an extended period for financial firms to join AFCA.The deadline mainly affects financial firms whose EDR scheme is the Credit and Investments Ombudsman (CIO). Members of CIO do not have to have their membership transferred to AFCA.The concession to be granted by ASIC will deal with members of the CIO scheme. We understand that members of a CIO scheme must:

  • maintain membership of the CIO scheme in the transitional period
  • apply for membership to the AFCA scheme as soon as possible
  • make sure they have become a member of AFCA by 1 November 2018.

If a member of the CIO scheme does not maintain its membership during the transition period and/or is not a member of AFCA on 1 November 2018; their authorisation will become invalid, and they will need to cease engaging in credit activities. 

Separate relief has been given to licensees and credit representatives in relation to their obligation to notify ASIC of the details of their own or their authorised representatives', AFCA memberships. Under this relief, the notification due date is extended from 1 November 2018, to 30 November 2018.

ASIC releases report on reverse mortgage lending in Australia 

In August 2018 ASIC released a report and media release concerning its review of reverse mortgage lending in Australia (report 586). ASIC made seven findings as a result of the extensive research it conducted, in particular:

  1. Reverse mortgages help older Australians achieve their immediate financial objectives
  2. The enhanced consumer protections have eliminated the risk of negative equity
  3. Some borrowers may not recognise the impact of equity erosion on their possible future needs
  4. Options for borrowers are limited due to lack of competition
  5. Lenders have a role in reducing the risk of financial elder abuse
  6. Some loans might not protect other residents in the home
  7. Contracts contain potentially unfair terms.
A particularly interesting finding, and one likely to impact lenders, is that some borrowers may not recognise the impact of equity erosion on their possible future needs. Use of the equity in a family home is a common way to enable a person to pay for the admission bond on an aged care facility, or to pay for medical expenses. A reverse mortgage can result in the erosion of equity in the family home and limit or effectively remove this payment option.

In consumer research conducted, it was surprisingly found that no borrowers expressed concerns in relation to such matters. However, ASIC suggests that credit licensees need to consider this scenario as part of its obligation to take 'reasonable steps to enquire into a borrower's future needs and objectives'. 

The report further suggests that if a proposed loan makes it difficult for a borrower to meet their long-term needs, then the loan may be unsuitable. This particular finding is likely to translate into additional guidance by ASIC in Regulatory Guide 209 – watch this space.The other finding of interest is that some loans might not protect other residents in the home. This is the situation where there might be no tenancy protection for a non-borrower spouse.

Given the fact that older Australians who borrow via a reverse mortgage are required to obtain both independent legal advice and financial advice we regard this finding very surprising – it indicates to us that the legal and financial advisers do not understand this product which is itself a real concern.

This report will dovetail in with the recently announced Royal Commission into Aged Care and no doubt there will be reforms in this area.

Royal Commission sharpens focus on life insurance industry

The Royal Commission into Misconduct into the Banking, Superannuation and Financial Services industry (Royal Commission) has focused in recent weeks on the life insurance industry. With all the focus being on those public hearings, two reports issued by ASIC on this subject in late August 2018 perhaps might not have been accorded the mention they deserve. 

In media release 18-250MR, issued on 30 August 2018, ASIC announced the release of two reports concerning direct life insurance:

Reforms have been proposed and if implemented, may give ASIC an opportunity to intervene directly with regard to the design and distribution obligations in relation to financial products.  See our previous article on this issue.

Federal Treasury recently provided a report to the Royal Commission covering the issue of reforms to general and life insurance.  Refer to background paper 27 – reforms to general and life insurance. What struck us after reading that report was how limited the consumer protections are in this area. The Treasury report analysed various issues such as:

  • penalties for breaches of duty of utmost good faith;
  • application of unfair contract terms for insurance products;
  • improving claims handling;
  • design and distribution obligations and product intervention powers; and
  • limiting remuneration for life insurance advice.

This report also contains information on the reforms currently being considered by Treasury in order to improve disclosure and transparency and other matters.

Reforms are very likely in this area, including in our view, some increased limitations on direct selling of life insurance products. 

ASIC prescribes three year period for credit card responsible lending assessments

In media release 18-257MR released on Wednesday, 5 September 2018, the Australian Securities & Investments Commission (ASIC) announced that it had finally prescribed a three year period for credit card responsible lending assessments.

While a three year period was previously indicated by ASIC as being its preferred position, it is good to have certainty in this regard ahead of the new responsible lending obligations coming into effect on 1 January 2019.

The effect of the rule is that when a credit provider makes an assessment as to the affordability of a credit card, the credit provider must assess the application on the basis that the consumer will be required to repay the credit limit granted within a three year period, taking into account not only fees and charges on the proposed credit card account, but also credit card accounts held by the consumer with other credit providers. 

The new rules will not only impact credit card providers, but all lenders, because every lender, when considering the issue of affordability for a loan, will be required to take into account any other credit card liabilities of a consumer. The assumption that has to be made is that those other credit card liabilities will have to be repaid within a three year period. 

ASIC to update Regulatory Guide 209 (Responsible Lending)

We recently attended the 28th Annual Law Conference on the Gold Coast. At that conference a statement was made by ASIC that it is currently considering releasing an amended and updated Regulatory Guide 209 to provide, amongst other things, further guidance on how credit providers should deal with the new prescribed three year period for credit card responsible lending assessments.

ASIC has already provided some general further guidance on the assumptions to be made when assessing whether or not a consumer can repay a credit limit within three years (in report 590).

Such guidance is likely to be further solidified by proposed amendments to Regulatory Guide 209. Importantly, ASIC is indicating that Regulatory Guide 209 is likely to become more prescriptive.

Westpac admits to breaching responsible lending obligations when providing home loans and receives $35 million civil penalty

No update would be complete without at least a brief reference to the recent settlement of the ASIC civil penalty proceeding against Westpac in the Federal Court of Australia in regard to the now agreed failure by Westpac to comply with its responsible lending obligations in relation to home loan lending between 2011 and 2015.

What strikes us about this case is how major lenders did not really understand the extent of their responsible lending obligations in the first years after the National Consumer and Credit Protection Act 2009(Cth) became law on 1 July 2010. Responsible lending obligations applied to Authorised Deposit Taking Institutions as from 1 January 2011.

This is similar to the situation that arose in 1988 when the Credit Acts became law with resulting automatic loss of credit charges where there were errors in contract documentation or procedures – a fact that was not fully appreciated until some years later. How history repeats itself.

The banking industry did attempt to address responsible lending obligations by commissioning the Melbourne Institute to develop the Household Expenditure Measure, as a substitute for the often used expense measure – Henderson Poverty Index, but did not fully appreciate what was required after that.

ASIC found that lenders must:

  • have regard to a consumer's declared expenses in assessing an application for credit and do not use a benchmark (Household Expenditure Measure) in substitution.
  • when granting interest only loans, highlight increased repayment requirements once the interest only period has ended.

This is all pretty obvious to everyone in the year 2018, but obviously was not to some (most) lenders back in 2011.

Royal Commission releases its interim report

And finally…As everyone would be aware, the Financial Services Royal Commission's interim report, was tabled by the Government on Friday the 28th September 2018 and is now available on the Royal Commission's interim report page.

We will not make any further comment on this issue at this time – it is already being fully canvassed in the press and via other channels. 



Disclaimer: The information contained in this e-alert/update is not advice and should not be relied upon as legal advice. Hunt & Hunt recommends that if you have a matter that is legal, or has legal implications, you consult with your legal adviser.


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