banking

Reforms to Debt Administration Agreements showing potential to reshape the debt administration industry

August 1, 2019 by Belinda Ryan

The Bankruptcy Amendment (Debt Agreement Reform) Act 2018 (Cth) was designed to and is already having a major impact on the debt administration industry in Australia following its commencement on 27 June 2019.

The aim of the legislation is to tighten up regulation of the debt administration industry and place additional restrictions on such agreements, including limiting the duration of any agreement to a maximum term of 3 years.

Until now, debt administration agreements entered into under Part IX of the Bankruptcy Act 1966 (Cth) have proved an effective way for debtors to deal with unmanageable debt burdens. Between 2007 and 2016, new debt agreements increased from 6,560 to 12,640 per year. Over the same period, new bankruptcies declined from 25,754 to 16,842 per year.

It is therefore surprising that the recently implemented reforms have not attracted more attention. Part of the reason for this is probably that these reforms have taken so long to come to fruition and that most updates concerning these reforms were written back in 2018.

However since the legislation commenced, many of our clients have noticed that there has been a move away from formal Part IX debt administration arrangements and a significant number of “informal debt agreements” are now being proposed.

Registered Debt Administrators (or their related corporations) who hold a credit licence authorising them to provide “credit assistance” can readily to avail themselves of this option and effectively bypass the new reforms.

The changes seem make such agreements less profitable for debt administrators and make it more difficult to make proposals acceptable to creditors when the maximum term of an agreement is now only 3 years.

The maximum 3 year term of a debt agreement brings them into line with the period of bankruptcy which is also 3 years.

What then are the changes recently implemented?

The explanatory memorandum explains the intent to the legislation in these terms:

The Bill will effect a comprehensive reform of Australia’s debt agreement system. ………….

Significant measures in the Bill make provision for:

- the types of practitioners authorised to be debt agreement administrators
- registration, deregistration and the obligations of debt agreement administrators
- formation, administration, variation and termination of debt agreements
- protections against debt agreements that cause financial hardship or have other defects, and
- powers of the Inspector-General in Bankruptcy (Inspector-General) with respect to debt agreements and debt agreement administrators.

It is intended that the measures in the Bill will boost confidence in the professionalism of administrators, deter unscrupulous practices, enhance transparency between the administrator and stakeholders, and ensure that the debt agreement system is accessible and equitable.

Some of the more significant reforms include:

Nature of reform	More Details
length of debt agreements	Maximum three years, Except where debtor owns and has equity in real property, in which case, maximum 5 years. Ability to extend existing debt agreements up to 5 years if debtor circumstances deteriorate
Impose maximum payment to income ratio	This ratio has not yet been prescribed. The reforms are designed to prevent a debtor from giving the Official Receiver a debt agreement proposal if the total proposed payments under the agreement exceed the debtor’s yearly after-tax income by a prescribed percentage (the payment to income ratio)
Asset Threshold	The reforms double the maximum asset threshold – now currently $231,467.00 as at 27 June 2019 (note that debt threshold is currently $115,733.80)
Reimbursement of expenses	Greater transparency around seeking reimbursement of expenses
Proposals to vary debt agreements	Administrator has duty to ensure that certificate to vary debt agreement is correct.
Undue hardship to debtor	Official Receiver can refuse to accept an agreement proposal if they reasonably believe that complying with the agreement would cause undue hardship;
Voting by related parties prohibited	Often debt administrators are related to credit providers. Related credit providers will not be allowed to vote on proposal made
Insurance	Debt Administrators required to obtain and maintain adequate and appropriate professional indemnity and fidelity insurance;
Disclose Relationships	Debt Administrators required to disclose details of any broker or referrer relationships, including details of payments made;

These reforms have the potential to reshape the debt administration industry. It will be interesting to review how the changes have impacted the industry after the reforms have been in place for 12 months.

Open Banking – Open Everything

May 22, 2019 by Marianne Nash

Much has been written about the move towards ‘Open Banking’ in Australia and the impact it will have for both banks and their customers.

It is opportune to review and examine where we are at in Australia regarding implementation of this major new initiative. Especially given the fact that one of the core pieces of legislation, The Treasury Laws Amendment (Consumer Data Right) Bill 2019 (Cth), failed to pass through Parliament before the election.

The heading says it all; eventually consumers will be able to request that their data be given to accredited persons. This is the ‘consumer data right’.

The first cab off the rank is the banking sector. Next will be the energy sector. Telecommunications is proposed to follow and then other sectors.

Component Parts of Open Banking

To implement Open Banking in Australia there are a raft of areas where laws must be implemented and amended, and standards developed and implemented, including:

Legislate that customers effectively own/control the data that institutions hold about them and can direct that their data be provided to third parties
Determine the way institutions will deliver this information
Recipients need to be accredited and obliged to deal with the information in specified ways
Develop data standards to be observed when data is transferred
Amend Anti-Money Laundering law to address the risk of identity theft

The Consumer Data Right

Central to Open Banking is what is referred to as the ‘consumer data right’.

The Consumer Data Right requires that data which is held by a business about a consumer must be disclosed at the direction of the consumer to accredited third parties This right, the ‘CDR’, will be implemented by the Treasury Laws Amendment (Consumer Data Right) Bill 2019 (Cth).

The Consumer Data Right aims to give customers greater control over their own data and provides more choice about how consumers manage their money and from where they want to receive services. This is explained in the Explanatory Memorandum accompanying the Bill.

The Consumer Data Right will eventually apply across a wide range of business sectors

While the Consumer Data Right is currently most often talked about in the context of the banking sector, it has a much wider application.

At the beginning of a report delivered to the Government in December 2017 by Treasury, the wider scope of the Consumer Data Right was highlighted:

In the Forward –

Open Banking is part of the Consumer Data Right in Australia, a more general right being created for consumers to control their data, including who can have it and who can use it. Banking is the first sector of the Australian economy to which this right is to be applied and Open Banking is the way that this is to happen. More sectors of the economy are to follow and Open Banking needs to work together with them to form a single, broader framework.

In the Executive Summary –

Since the Review was given its original Terms of Reference, the Government announced that it will introduce a Consumer Data Right. The Consumer Data Right will provide consumers with rights to direct that a business transfer data on the consumer to a third party, in a usable machine-readable form. The announcement stated that implementation of the Consumer Data Right will be prioritised in relation to banking, energy and telecommunications data. Open Banking is the implementation of the Right in relation to banking data and that the design of the broader Consumer Data Right will be informed by the findings of the Open Banking Review.

Origins of Open Banking

Open banking has its genesis in the European Union.

In 2015, the Council of the European Union passed into law the Payment Services Directive 2 (‘the PSD2‘), which came into force in January 2018, with the intent it be adopted into the national laws of EU members.

The PSD2 requires banks to provide secure access, through application programming interfaces (‘APIs’) to a consumer’s account data when requested by the customer.

Open Banking was adopted by the UK after a report by the Competition & Markets Authority’s Retail Banking Market Investigation Report issued in 2016 (the ‘UK Report’) highlighted the difficulties faced by smaller banks trying to compete with larger banks. The UK Report is a comprehensive document – 766 pages in length!

The report identified the existence of various barriers to customers when searching and switching between banks. The report found that ‘a substantial proportion of customers [were] paying above-average prices for below-average service quality’.

The recommendations of the UK Report on Open Banking have now been implemented. It is now mandated that customer data held by Britain’s nine largest banks must, at the request of customers, be handed over to ‘regulated providers’.

The Retail Banking Market Investigation Order 2017 (UK) implements these changes. This Order was issued in exercise of a power contained in the Enterprise Act 2002 (UK).

The Open Banking Implementation Entity (‘OBIE’) was established and charged with the task of implementing the changes. In early 2019 the OBIE reported that it had identified that there are 67 regulated third party providers in the UK

Surprisingly, take up by customers of Open Banking in the UK has been slow. A report by PwC Australia titled, ‘The Future of Banking is open: How to seize the Open Banking Opportunity’ (2018) identified relatively low awareness by customers, coupled with minimal press coverage and a lack of marketing by banks as reasons why take up of the opportunities has been limited.

Development of Open Banking in Australia

In July 2017, the then Treasurer, the Hon. Scott Morrison MP commissioned a review to make recommendations on how best to implement Open Banking in Australia. The report (Open Banking Review Report) was delivered to the Government in December 2017.

The Open Banking Review Report highlighted the importance that Open Banking be ‘customer focused’ and should encourage competition to allow consumers to make better choices when researching products and services.

The review report made many recommendations on how best to implement Open Banking in Australia; some 50 recommendations in total.

Implementing Open Banking in Australia

Government and the regulators are initially working with the four major banks; Westpac, Commonwealth Bank, ANZ and NAB, to implement the open banking initiative. Other banks will follow in due course.

Timetable for Implementation

The timetable for implementation of Open Banking in Australia is as set below. However, the timetable has been changed a number of times and further changes are likely.

Data to be made available:

1 July 2019 – Testing of the open banking system will commence with product reference (generic) product data required to be shared by the four major banks.
1 February 2020 – The four major banks and reciprocal data holders (i.e. ADIs who are accredited data recipients) will be required to make available to consumers all phase one (including consumer, account and transaction data relating to credit and debit cards, deposit and transaction accounts) and phase two (mortgage products) data.
1 July 2020 – All remaining product data will be required to be made available to consumers by the four major banks and reciprocal data holders, including business finance and personal loans. Subsequent data holders (i.e. ADIs other than initial data holders, foreign bank branches or reciprocal data holders) will be required to share CDR data in respect of phase one products.
1 February 2021 – Subsequent data holders will be required to share CDR data in respect of phase two data.
1 July 2021 – Subsequent data holders will be required to share CDR data in respect of phase three data.

Progress of legislation to implement the Consumer Data Right

The Treasury Laws Amendment (Consumer Data Right) Bill 2019 (Cth) was introduced into Parliament in February 2019. However, the legislation failed to pass before the election and the bill lapsed in April 2019.

No doubt the Bill will be reintroduced when Parliament sits again.

ACCC’s role in designing draft Rules for the Consumer Data Right

As stated earlier, rules must be developed to establish the framework and business rules under which institutions will be required to deliver up the information they hold about a customer.

These rules are being implemented via amendments to the Competition and Consumer Act 2010,with the Australian Competition and Consumer Commission (ACCC) being the responsible government regulator. The ACCC is working in a coregulatory model with CSIRO Data61 and the Office of the Australian Information Commissioner to implement the CDR.

The ACCC released the draft Competition and Consumer (Consumer Data Right) Rules 2019 for industry consultation on the 29 March 2019. The consultation period ended on the 10 May 2019.

Privacy and consent

Consumers’ privacy will be protected under the Privacy Act and it is evident that there will need to be strict adherence with security standards. The Act will be extended to bind all accredited data recipients, such as small to medium sized enterprises who may normally be exempt from these requirements. Refer to the Treasury Laws Amendment (Consumer Data Right) Bill 2019, Section 56EQ.

Consumers will need to give their consent as to when and how their data will be transferred and used – refer to draft Competition and Consumer (Consumer Data) Rules (2019) issued by the ACCC.

The draft rules contain specific privacy safeguards, including the requirement for consent to be ‘voluntary, express, informed, specific as to purpose, time limited and easily withdrawn’. The draft rules also provide that consent and authorisation will automatically expire after 12 months. Consumers will have a range of options to seek redress where the privacy protections are breached.

Accreditation

Under the new legislation, it is not proposed that customer data be handed direct to customers – instead the data will be handed to ‘accredited recipients’. It is contemplated that there might be differing levels of accreditation depending on the risks associated with the data.

The ACCC will determine the criteria for accreditation. It is proposed that accreditation application guidelines, criteria and conditions may be imposed – see draft rule 5.9. In the note to draft rule 5.2 it is evident that initially there will be one general level of accreditation, with the ACCC proposing additional levels of accreditation in subsequent versions.

Technical Specifications for data Transfer

Standards will also be developed by the CSIRO’s Data61, outlining how data will be transferred between parties. These standards will be based on the UK’s Open Banking Technical Specifications and will determine how data should be transferred by APIs. The Data Standards Chair must make a standard in relation to authorisation, which must provide for multi-factor authentication requirements refer to draft Rule 8.11.

Identity Theft and Financial Crime

An issue identified in the Open Banking Review was the risk of identity theft where verification of identity data is easily available in ‘a packaged electronic form’. At page 39 of the report on the Review, it was recommended that;

If directed by the customer to do so, data holders should be obliged to share the outcome of an identity verification assessment performed on the customer, provided the anti-money laundering laws are amended to allow data recipients to rely on that outcome

This approach would require amendments to Anti-Money Laundering laws to allow for reliance on the outcome rather than the identity data to be sufficient verification.

Conclusion

Open banking still has a way to go before it is implemented.

Extension of the customer data right to other industry sectors is still to be developed.

We hope this is all worth the effort.

We trust that we do not end up with the same experience as in the UK as noted in PWC’s report which determined that the relatively slow take up of open access to data rights was due to low customer awareness, minimal media coverage and a lack of marketing.

Update | Banking and Finance | February 2019

February 13, 2019 by Virginia Dooley

In this issue

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!