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Banking and Finance Wrap up - Spring 2014

It is reassuring to know that the regulators keep on giving even during the holiday season!

It has been a busy time with legal developments in Banking and Finance law as well as in other related areas.



ASIC to investigate interest only loans
Foreign investment in residential real estate report tabled in Parliament 
Financial products – ASIC class order clarifies fee and cost disclosure requirements
ASIC Continues crack down on pay day lending avoidance models 
Beware misleading advertising on home loans
APRA outlines further steps to reinforce sound residential mortgage practices
ACCC and ASIC release guide for consumers dealing with debt collectors



Australia's New Regulatory Benchmark: ASIC's 2014-15 Strategic Outlook
China Free Trade Agreement: What's crucial for Australian importers and exporters



NSW VOI requirements for paper base mortgages commences 1 January 2015
Australia's New Franchising Code of Conduct - commences 1 January 2015



ASIC to investigate interest only loans

ASIC states that it will look at the conduct of lenders in particular with regard to how they are complying with important consumer protection laws, including their responsible lending obligations.

The problem with interest only loans is that while repayments are initially lower, that will only be in the initial interest only period.  Judgement day comes when the loans revert to principal and interest repayment and increase in amount.
Regulators are concerned that some borrowers are choosing interest only loans solely on the basis is that that is the only way they can afford to buy the home they want to live in or alternatively, in the case of an investment property, to minimise the differential between rental income received and interest payments made.

Figures quoted recently indicated that some 45% of new loans appeared to be interest only rather than principal and interest.
Interest only loans raise a raft of responsible lending and in particular suitability issues. They only work longer term if house prices and wages rise, but interest rates do not.

And yet this trend towards favouring interest only loans is against a background where there is a dawning reality that the assumption that wages will always rise may no longer hold true. " When The Sleeper Wakes". – The Economist in an article "The Future Of Jobs – The Onrushing Wave", published on 18 January 2014 said:

"Yet some now fear that a new era of automation enabled by ever more powerful and capable computers could work out differently. They start from the observation that, across the rich world, all is far from well in the world of work. The essence of what they see as a work crisis is that in rich countries the wages of the typical worker, adjusted for cost of living, are stagnant. In America the real wage has hardly budged over the past four decades. Even in places like Britain and Germany, where employment is touching new highs, wages have been flat for a decade. Recent research suggests that this is because substituting capital for labour through automation is increasingly attractive; as a result owners of capital have captured ever more of the world’s income since the 1980s, while the share going to labour has fallen"

Click hereto see full article in The Economist.

Click here to review for media release from ASIC.

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Foreign investment in residential real estate report tabled in Parliament

As stated in the media alert the report makes 12 recommendations, including the following:

  • Retaining the current framework applying to foreign purchases of Australian housing to encourage foreign investment in new dwellings and increase housing supply;
  • Improving the internal processes at Treasury and the Foreign Investment Review Board (FIRB) and removing barriers to enable adequate audit, compliance, and enforcement of the foreign investment framework;
  • Applying a modest administrative fee to the current screening of foreign purchases of residential real estate to better resource FIRB;
  • Introduction of a civil penalty regime for breaches of the foreign investment framework;
  • Requiring that penalties now apply to all third parties who knowingly assist a foreign investor to breach the framework;
  • Requiring that any capital gains from the sale of an illegally held property be forfeited to the Government;
  • Requiring that properties that have a certificate that allows sales off‐the‐plan overseas, must be marketed in Australia for the same period of time;
  • Amending the Migration Act so that the Department of Immigration must inform FIRB when a temporary resident departs Australia upon expiry of their visa; and
  • Establishing a national register of land title transfers that records the citizenship and residency status of all purchasers of residential real estate.

A full copy of the report can be accessed here (click here).

What the Government will do about implementing the recommendations in the report remains to be seen. The Government will no doubt be sensitive to how any tightening of requirements will be perceived overseas. It has been suggested that the release date of the report was deferred until after G20 meetings had concluded, which if correct, would be a sign of the degree of sensitivity on this issue.   

On the home front we query whether the recommendations of the report will go far enough to allay the concerns of the Australian public about the extent of foreign investment in domestic real estate and the difficulties that creates for citizens in being able to afford to buy a home.

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Financial products – ASIC class order clarifies fee and cost disclosure requirements

As stated in the Media release, the class order addresses issues such as:

  • Disclosure of costs of investing in interposed vehicles;
  • Disclosure of indirect costs;
  • Removal of doubt that double counting of some costs for superannuation products is not required; and
  • The appropriate application of the consumer advisory warning.

The new class order will apply to all PDSs' for relevant products from 1 January 2016 and apply to periodic statements that must be given to product holders from 1 January 2017.

(Click here to review media release and class order CO14/1252).

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ASIC continues crack down on pay day lending avoidance models

In an ASIC media release issued on Wednesday 22 October 2014, ASIC reported on how it had intervened in the activities of two so called "pay day lending" companies and persuaded them to change their business model.

Two businesses involved were Cash Loan Money Centres and Sunshine loans. What these companies had been doing is instead of lending money to customers, they structured the deal as a sale and leaseback arrangement. In effect that avoided the interest rate caps that apply to lending arrangements.

Deputy Chairman of ASIC, Peter Kell is quoted as saying:

"Where we see business models or arrangements being used which are designed to avoid obligations imposed by the consumer credit legislation we will take action".

What is interesting to us is that there are in fact no "anti-avoidance" provisions per se contained in the National Credit Code. Proposals to introduce a comprehensive range of anti-avoidance measures into the National Credit Code were abandoned by Governments more than 12 months ago.

However, it is always open to courts, and for that matter ASIC, to regard convoluted lending/leasing schemes to be in the nature of "shams". A recent example of this was in relation to a lending operation in Queensland which was structured as a diamond trading scheme. In that circumstance the Queensland Civil Administrative Tribunal struck down the arrangement on the basis it was, amongst other things, "a sham". That matter is currently the subject to civil penalty proceedings brought by ASIC in the Federal Court and it will be interesting to see the outcome of those proceedings.

In the meantime, lenders need to be aware that if they artificially structure lending arrangements to avoid the provisions of the National Credit Code this will be frowned upon by ASIC and most likely will then be subject to their investigation and intervention. And we must not forget that ASIC has within its "armoury" the ability to take action based upon the prohibition against engaging in "misleading or deceptive conduct". A wolf dressed in sheep's clothing is still a wolf!

Click here to view ASIC media release

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Beware misleading advertising on home loans

However, the desire of marketing departments for differentiation from the pack needs to be tempered with the realisation that ASIC is ever vigilant in this area.

A recent example was notified by ASIC on Monday 27 October 2014. The National Australia Bank (NAB) agreed to run advertisements correcting earlier claims about its home loan interest rate that ASIC considered to be misleading. Early in October NAB published an assertion that it had "had the lowest standard variable rate for more than 5 years" in various newspapers.

Unfortunately the NAB failed to qualify its claims to make it clear that this was only true when the comparison was made of the four major banks. The claim was untrue outside the major banks. It was clear that the NAB had not had the lowest standard variable rate on home loans over the past 5 years when all lenders were taken into account.

ASIC's intervention in this regard is the latest of a long list of similar interventions in relation to other advertisements.

Click here to read ASIC media release.

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APRA outlines further steps to reinforce sound residential mortgage practices

APRA is also looking at mortgage lending practices. In a media release issued on 9 December 2014 it announced it had written to Authorised Deposit Taking Institutions (ADI's) outlining further steps it would take to reinforce sound residential mortgage lending practices.

The approach being taken by APRA and ASIC has been developed following discussions with other members of the Council of Financial Regulators.

Click here to read the APRA media release.


ACCC and ASIC release guide for consumers dealing with debt collectors

Some years ago ASIC and ACCC released Regulatory Guide 96 - Debt Collection Guideline: For Collectors and Creditors.  That is now the bible for anyone involved in collection activities.

Now ACCC and ASIC have released a separate guide for consumers. This new guide is designed to help consumers, in trouble with debt, understand their options so they know how to deal with collectors and creditors.

It is not only consumers who should read this guide. Lenders and collection agents would be well advised to read the guide themselves to make sure they are aware of what the regulators are telling debtors.

Click here to read the media release issued Friday 5 December 2014.


Australia's New Regulatory Benchmark: ASIC's 2014-15 Strategic Outlook

Promoting investor and financial consumer confidence will stimulate changes to the regulatory environment in Australia. With a renewed focus on financial product design, distribution and disclosure, Australia's financial services and market regulator will adopt a 'detect, understand and respond' approach to non-compliance Read more

China Free Trade Agreement: What's crucial for Australian importers and exporters?

We recently published an article on the China Free Trade Agreement. We thought our Banking and Finance clients might want to read about this important development. Read more

NSW VOI requirements for paper base mortgages commences 1 January 2015

Just a reminder that the Verification of Identity Requirements (VOI) for paper based mortgage transactions in NSW commence on 1 January 2015.  Click here to view our earlier article on this issue.

Australia's New Franchising Code Of Conduct

From 1 January 2015 a new Franchising Code of Conduct will apply to most franchise agreements, resulting in new disclosure requirements, fines for non-compliance and parties' conduct being subject to an obligation to act in good faith. Read more







Penny Cable
Jill Milburn

Richard Williams
Neville Debney
Mary Nemeth

Rick Harley
Stefan Jury



Darren Miller
Marcus Easthope

Antony Logan


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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