In this issue
- Implementation of reforms recommended by the Banking Royal Commission
- Spotlight on Internal Dispute Resolution processes and procedures
- Government announces review of financial counselling sector and funding arrangements
- ASIC consults on updating its responsible Lending Guidance
- New laws introduce harsher penalties for breach of corporate laws
- Senate Economics References Committee releases report on Credit and Financial Products
There has been a scramble by both the Government and the Labor opposition to announce what they propose doing in relation to implementing the reforms and their timing. Labour released its full response on 22 February 2019 – the Government’s response has been staggered.
In addition, Australian Securities and Investments Commission (ASIC) and the Australian Prudential and Regulation Authority (APRA) have put out a number of media and other releases on changes in their approach to supervision and enforcement.
We are currently finding two sources particularly useful in finding out exactly what is going on. These are the websites of –
These matters are being fully canvassed elsewhere and we don’t propose to comment further at this time until concrete steps are taken to put the recommendations into effect.
In December 2018, ASIC released a report (Report 603) on the results of its research on customer experiences of Internal Dispute Resolution processes and procedures across the financial services sector: Report 603, The consumer journey through the Internal Dispute Resolution process of financial service providers.
ASIC states that in conducting the research, it sought to better understand the experience of people thinking about or making a complaint to a financial services firm.
In the Media Release accompanying release of Report 603, ASIC stated the Key Findings of its research were:
- 17% of Australians considered making a complaint to a financial firm in the preceding 12 months (‘the considerers’)
- 8% went on to make a complaint (‘the complainants’)
- almost half of those who did not make a complaint reported that they did not think it would make a difference or it was not worth their time, and
- 18% of complainants dropped out or withdrew their complaint before it was concluded.
ASIC states that common obstacles encountered by complainants include:
- difficulty in finding the firm’s contact details to make a complaint
- IDR process not explained well at first contact,
- feeling that they had not been listened to or heard, and
- passed around to too many people or strung along.
Only 45% of complainants who received an unfavourable outcome received an explanation of the decision.
Regulatory requirements for Internal Dispute Resolution processes and procedures
The requirements for Internal Dispute Resolution processes and procedures are set out in Regulatory Guide 165, Licensing: Internal and external dispute resolution.
Part B of RG 165 covers the requirements for IDR processes and procedures. See paragraphs RG 165.56 to RG 165.137, which cover 19 pages of the Regulatory Guide.
In addition, in designing and implementing IDR processes and procedures, Financial Firms must have to have regard to the Australian/New Zealand Standard AS/NZS 10002:2014 “Guidelines for complaint management in organizations”, – another 61 page document.
What are financial firms doing wrong in relation to IDR?
We suspect that not enough attention has been given by Financial Firms to their IDR processes and procedures and the regulatory requirements.
IDR policies are required to be developed as part of the licence application process. We suspect that for many Financial Firms once the IDR policy has been prepared it might escape being regularly reviewed and updated.
We commonly encounter situations where Financial Firms do not fully understand what is classed as a complaint and what is not. ASIC takes the view that the definition of the expression “complaint” in Standard AS/NZS 10002:2014 is the appropriate definition.
Effective IDR processes are critical for Financial Firms, especially to avoid issues being referred by customers to the Australian Financial Complaints Authority with all the attendant costs and expenses.
What is ASIC proposing to do in relation to IDR processes and procedures?
Initially, ASIC is:
- requesting that each financial firm assess whether its processes and procedures need to be reformed, and
- proposing to conduct onsite visits.
ASIC is also proposing to conduct a review of Regulatory Guide 165. This review will consider, amongst other matters:
- the definition of ‘complaint’ i.e. what triggers the IDR process;
- requirements for complaints that are resolved immediately or within 5 business days
- maximum IDR timeframes across all complaints including superannuation related complaints, and
- giving of written reasons for decisions made.
Finally, ASIC will be looking at requiring financial firms to report IDR performance data to ASIC on an ongoing basis. ASIC notes in its media release that it has new powers to publish the IDR data on a firm-by-firm basis.
As if the government doesn’t have enough on its plate currently, the Treasurer, the Hon Josh Frydenberg MP, announced on the 7th February 2019 a review of the financial counselling sector with particular emphasis on adequacy of funding arrangements.
The announcement draws on observations made in the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry by Commissioner Hayne that “The desirability of predictable and stable funding for the legal assistance sector and financial counselling services is clear and how this may best be delivered is worthy of careful consideration.”
The review will be led by the Department of Social Services in consultation with Treasury and the Department of the Prime Minister and Cabinet.
The Labor opposition has also announced plans to enhance the financial counselling sectors including funding the appointment of additional lawyers.
Further details will be provided when available.
ASIC notes that although the responsible lending laws have not changed since 2010, it is nonetheless timely to review and update the guidance in light of its regulatory and enforcement work since 2011, changes in technology, and the recent final report of the Royal Commission.
Consultation will take place over a three month period, with comments due by Monday 20 May 2019. Public hearings are contemplated in addition to the usual written submissions.
It is clear from the consultation paper that there will be a major overhaul of Regulatory Guide 209.
ASIC notes in the consultation paper that is proposing to update or clarify current guidance in relation to the following matters:
- forms of verification to clarify what kinds of information may be used
- provide a list of forms of verification readily available and make it clear that what are reasonable steps will change overtime
- what are reasonable steps to verify the financial information of a consumer
- use of benchmarks
- what constitutes making reasonable enquiries about a consumer’s requirements and objectives.
ASIC also notes that it considers it is appropriate to have Regulatory Guide 209 address the following new areas:
- clarify where the responsible lending obligations do not apply, e.g. small business lending
- clarify the role that compliance with responsible lending obligations has in mitigating the risk of loan fraud
- how negative repayment history information may be used and the effect this may have on the types of enquiries that should be made
- requirements for record maintenance as a means to demonstrate compliance with responsible lending obligations
- clarifying the purpose and the matters to be included in the written credit assessments – provide a model template.
The Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018 has now passed the Senate and will eventually become law. The legislation when enacted will introduce a significantly strengthened penalty regime for breaches of the Corporations Act 2001, ASIC Act 2001 as well as the National Consumer Credit Protection Act 2009 and Insurance Contracts Act 1994.
This follows significant increases made in 2018 to financial penalties under the Australian Consumer Law which took effect from 1 September 2018. Our earlier article on this topic
What this new legislation will do is not only increase both civil and criminal penalties but also expand the range of breaches of the law that attract civil and criminal penalties.
The changes are prospective, not retrospective.
Below we extract a summary of the changes to both criminal and civil penalties which was set out in the media release by the Treasurer, The Hon Josh Frydenberg MP.
|Maximum Criminal Penalties|
|5 years imprisonment and/or $42,000||15 years imprisonment and/or the greater of $945,000 or three times the benefit gained/loss avoided|
|$210,000||The greater of $9.45 million or three times the benefit gained/loss avoided or 10 per cent of annual turnover|
|Maximum Civil Penalties|
|$200,000||The greater of $1.05 million or three times the benefit gained/loss avoided|
|$1 million||$10.5 million or three times the benefit gained/loss avoided or 10 per cent of annual turnover
(capped at $525 million)
On Friday 22 February 2019 the Senate Economics References Committee released its report into its enquiry into credit and financial products targeted at Australians at risk of financial hardship.
The first that many Australians would have known about the issue of this report would have been when they noticed that shares in Afterpay went up 19.9% on Monday 25 February – obviously indicating that the “Buy now, pay later” sector was relieved that the recommendations of the Senate Committee were not as bad as had been expected for that sector.
The Committee made 20 recommendations, many of which were predictable, including a call for the Government to pass the National Consumer Credit Protection Amendment (Small Amount Credit Contract and Consumer Lease Referral Forms) Bill 2017 – previously released as an exposure draft by Treasury. That Bill has not progressed in the last 2 years.
The Committee also called for a review to identify necessary reforms to regulatory arrangements for medium amount credit contract products (MACCs) (being loans for amounts between $2,000 and $5,000, made by the non ADI sector).
Two of the recommendations that bear further mention are:
- Recommendation 8
That Government implement a new regulatory framework for all credit and debt management, credit repair and negotiation activities not currently licensed by the Australian Financial Security Authority. The regulation contemplated includes:
- – giving clients access to an external dispute resolution scheme;
- – licensing or authorising operators;
- – prohibiting upfront fees for service;
- – prescribing a scale of costs;
- – obliging providers to act in the best interests of clients at all times; and
- – banning unsolicited sales.
- Recommendation 9
This recommendation deals with the “buy now, pay later” sector. The recommendations are to:
– require providers to consider customers’ personal financial situation before extending credit;
– permit customers to have access to both internal and external dispute resolution schemes;
– make hardship provisions available;
– ensure that the products being financed are affordable and offer value for money; and
– ensure that there is proper disclosure of terms and conditions.
While it is important clients are aware of the release of this report, the report itself does not really advance matters much further. Most of the recommended reforms have either already been undertaken or are in progress. An example of this is the comprehensive report released by ASIC in late November 2018 on the rapidly growing buy now pay later industry.