ASIC reports on changes to small business loan contracts by big four banks

ASIC has today released a report setting out the details of the changes made by the big four banks to remove unfair terms from their small business loan contracts of up to $1 million.

The report, Unfair contract terms and small business loans (REP 565),  provides more detailed guidance to bank and non-bank lenders about compliance with the unfair contract terms laws as they relate to small business.

The report follows the announcement in August 2017 that the big four banks had committed to improving terms of their small business loans following work with ASIC and the Australian Small Business and Family Enterprise Ombudsman (ASBFEO). (See 17-287MR).

ASIC Deputy Chair Peter Kell said, ‘The UCT report provides further guidance to help banks and other lenders ensure that their small business loans are fair, and do not breach the rules prohibiting unfair contract terms.’

The report:

  • Identifies the types of terms in loan contracts that raise concerns under the law
  • Provides details about the specific changes that have been made by the banks to ensure compliance with the law
  • Provides general guidance to lenders with small business borrowers to help them assess whether loan contracts meet the requirements under the unfair contract terms law

‘ASIC will review small business lending contracts across the market. There are no excuses for failure to comply with the UCT laws, and we will consider all regulatory options available to us if we identify lenders whose unfair contracts break the law.’

ASIC will monitor the four banks’ use of the clauses to ensure they are not applied or relied on in an unfair way. ASIC will also examine other lenders’ loan contracts to ensure that their contracts do not contain terms that raise concerns under the unfair contract terms law.

ASIC and ASBFEO will continue work together to ensure small business loan contracts comply with the unfair contract terms law.

Download REP 565


Unfair contract terms protections were extended to small business from 12 November 2016.

ASIC and the ASBFEO have been working with the big four banks to ensure their small business loan contracts meet the standards that are required by the unfair contract terms law (refer: 17-139MR).

Small business loans are defined as loans of up to $1 million that are provided in standard form contracts to small businesses employing fewer than 20 staff are covered by the legal protections.

In August 2017, ASIC and the ASBFEO welcomed the changes to small business loan contracts by the big four banks (refer 17-278MR) that have:

  • Ensured that the contract does not contain ‘entire agreement clauses’ which prevent a small business borrower from relying on statements by bank officers (e.g. about how bank discretions will be exercised)
  • Limited the operation of broad indemnification clauses
  • Addressed concerns about event of default clauses, including ‘material adverse change’ events of default and specific events of non-monetary default (e.g. misrepresentations by the borrower)
  • Limited the circumstances in which financial indicator covenants will be used in small business loans and when breach of a covenant will be considered an event of default
  • Limited their ability to unilaterally vary contracts to specific circumstances with appropriate advance notice.

ASIC Highlights Burgeoning Referrer Market

From The Adviser.

The financial services regulator has told the Productivity Commission that there is now “an industry of referrers” who are often being paid the same amount as mortgage brokers despite doing less work.

At the final day of public hearings for the Productivity Commission’s (PC) inquiry into competition in the Australian Financial System, the financial services regulator outlined its thoughts on a range of topics, including mortgage brokers’ duty of care obligations, broker remuneration, comparison rates and financial advisers giving advice.

Speaking for the Australian Securities and Investments Commission (ASIC), Greg Kirk, the senior executive leader for strategy, and Michael Saadat, the senior executive leader for deposit takers credit & insurers, noted that there was a growing referrer market that are being paid a relatively high commission despite not being bound by the same regulation and compliance as brokers.

Mr Kirk said: “In our work on [broker] commissions, there were a separate category of people who are paid commission who don’t arrange the loan but just refer the borrower to the lender. It seems to be that professionals — lawyers, accountants, financial advisers — are reasonably prominent among people who are acting as referrers and that this strange one in that commissions they were paid for just a referral was almost as large as that [for a] mortgage broker doing all the extra [work].”

Indeed, Mr Saadat emphasised that although there is an exemption within the law for referrers, he noted that there is now “a fairly large industry of referrers comprising professionals, lawyers, accountants and advisers who do directly refer consumers to particular lender[s]” and that the commissions paid to these referrers “can be quite significant”.

“In some cases, [they are] as close to the commissions that are paid to mortgage brokers, who are doing more work than a referrer is supposed to be doing,” Mr Saadat said.

ASIC’s senior executive leader for deposit takers, credit & insurers continued: “What they can do under the law is quite limited. I guess there is a risk that some might be going beyond what they are allowed to do under the exemption and that risk is potentially exacerbated by the incentives that are provided by banks. And we have seen cases where misconduct has occurred by so-called referrers and ASIC has taken action against those.

“But, yet, it is a feature of the law, and as a result, there is now an industry of referrers that includes financial advisers and therefore they are paid for that referral.”

The Productivity Commission also asked ASIC about whether financial planners should be given the ability to move into the credit space, to which the senior executive leader for strategy outlined that there seems to be little appetite from planners to offer it.

Mr Kirk said: “Financial advisers can and do provide advice on credit now, and in fact, our regulatory guidance encourages them to in some circumstances… We’re going through at the moment some of our databases to try and get you some data on the level of crossover, but as a broad indicator, it would look to be about 4 per cent licences have a dual licence.”

ASIC on remuneration and changing standards

Touching on the potential of increasing standards for mortgage brokers and potentially changing broker remuneration, the regulator suggested that only small tweaks, rather than drastic changes, would be needed.

Mr Kirk said that when mortgage brokers were first regulated, the standard set was the same as that of the product issuer (i.e. a bank), but he said that “it does seem now that a mortgage broker is [working] to offer customers something more”, such as help with navigating the marketplace. As such, he said that “there is scope to increase the standards expected on mortgage broker”.

However, the strategist argued that “it may be better to start with the obligation that is on [brokers] now and to work in some more specific requirements”, rather than bring in a new “best interests” duty.

Mr Kirk explained: “Typically, there are two elements now of responsible lending; the loan has to be repayable by the consumer given their financial circumstances without undue hardship, but it also needs to meet their needs and objectives.

“And I think often, at the moment, the needs and objectives are only explored in very broad terms [such as] the main need is to buy a house… rather than more detailed needs and objectives about looking for the most competitive loan [a borrower] can get, the best priced one across the market, etc.

“There is something more explicit about what they should be canvassing and addressing in meeting consumer needs and objectives [and there] may be a more direct way to get to this sort of solution.”

Mr Saadat went on to highlight that ASIC’s report for its review into broker remuneration last year suggested “improvements” to the standard commission model rather than fundamentally changing commissions structures, and noted that the “industry has come together and proposed a number of improvements to that standard model” which he believes are “positive suggestions”.

He told the PC: “I suppose one thing to consider is whether you wait for the impact of those to flow through to the market and then assess whether further change is required or whether there is enough evidence now to say that more fundamental change is required to those commission arrangements.

“And for our own purpose, I don’t think we have landed on that position.”

ASIC Winds Up Payday Lending Companies for Unpaid Fines

ASIC says it has obtained orders winding up Fast Access Finance Pty Ltd, Fast Access Finance (Beenleigh) Pty Ltd and Fast Access Finance (BurleighHeads) Pty Ltd (the FAF Companies) for their failure to pay fines for breaching consumer credit laws. Mr Anthony Castley of William Buck has been appointed as the liquidator.

In March 2017, the Federal Court fined the FAF Companies a total of $730,000 after finding, in proceedings brought by ASIC, that the FAF Companies breached consumer credit laws by engaging in credit activities without holding an Australian credit licence.

The FAF Companies operated under a business model where consumers seeking small value loans were required to sign documents which purported to be for the purchase and sale of diamonds in order to obtain a loan. The reality was that there were no diamonds and it was  a sham designed to avoid consumer credit laws.


ASIC was successful in obtaining orders against the FAF Companies in September 2015 and fines were imposed in March 2017 (refer: 13-205MR and 17-060MR).

Court finds ANZ breached responsible lending laws in its former Esanda car finance business

ASIC says the Federal Court in Melbourne has published its findings and reasons for ordering Australia and New Zealand Banking Group Ltd (ANZ) to pay a penalty of $5 million for breaches of the responsible lending provisions by its former car finance business, Esanda.

The Court’s judgment follows ASIC’s announcement of a package of actions against ANZ for contraventions of various responsible lending provisions of the National Consumer Credit Protection Act (refer: 18-013MR).

In relation to the civil penalty proceedings, the Court found (in summary):

  • in respect of 12 car loan applications from three brokers, ANZ failed to take reasonable steps to verify the income of the consumer because ANZ relied solely on a document which appeared to be the consumer’s payslip in circumstances where ANZ:
    • knew that payslips were a type of document that was easily falsified;
    • received the document from a broker who sent the loan application to Esanda; and
    • had reason to doubt the reliability of information received from that broker;
    • income is one of the most important parts of information about the consumer’s financial situation in the assessment of unsuitability, as it will govern the consumer’s ability to repay the loan;
    • while ANZ did not completely fail to take steps to verify the consumers’ financial situation, it inappropriately relied entirely on payslips received from these brokers; and
    • ANZ management did not ensure that relevant policies were complied with and, in the case of the contraventions involving one broker, no action was taken despite management personnel having become aware of the issues about the broker.

The judgment annexes a statement of facts which sets out why ANZ had reason to doubt the reliability of the payslips being provided with the 12 applications, including that one of the brokers had been previously investigated for fraud. ANZ had also become aware of issues with payslips being provided by the brokers that gave it reason to doubt the authenticity of the submitted payslips.

The statement of facts also sets out that reasonable steps to verify a consumer’s income would have included requesting from the consumer a bank statement showing a history of salary deposits or substantiating salary deposits in ANZ bank accounts for an existing customer.

In its judgment, the Court made clear that where unlicensed brokers submit loan applications in reliance on the “point of sale” exemption under regulation 23 of the National Consumer Credit Protection Regulations 2010 (Cth), lenders have a heightened obligation to exercise particular care. This was the basis for the higher penalties imposed on ANZ relating to the loans submitted by one of the brokers under the point of sale exemption.

ASIC Deputy Chairman Peter Kell said, ‘A consumer’s income is an essential component in determining their ability to repay a loan. Lenders must take reasonable steps to verify a consumer’s financial situation, and this includes checking the reliability of documentation that is provided to them. Lenders must be alert to the potential for documents to be falsified and ensure that their controls are sufficiently robust.  ‘


ANZ will be remediating approximately 320 car loan customers for loans taken out through the three broker businesses from 2013 to 2015 which are likely to have been affected by fraud. The remediation will total around $5 million.

ANZ will:

    • offer eligible customers the option of entering into a new loan on more favourable terms than the existing loan;
    • provide refunds to some customers who have paid their loan out or had the car repossessed; and
  • remove any default listings resulting from the loan.

Broker commissions ‘far aligned’ from customer interests: PC

From James Mitchell at the Adviser.

The chairman of the Productivity Commission has said that while it may be in the interests of the bank and the broker to limit churn, it is not in the interests of the borrower.

Speaking at the Committee for Economic Development of Australia (CEDA) in Melbourne on Monday, Productivity Commission chairman Peter Harris reiterated some of the questions raised in the commission’s draft report into competition in the Australian financial system, which scrutinised broker remuneration and the purpose of trail commissions.

Despite ASIC finding last year that broker remuneration was generally sound and only required some minor changes to “improve” the structure (largely to do with soft dollar benefits), the productivity commission said it was “considering making a recommendation to the Australian government on the matter of trail commissions and commission clawbacks”.

The PC is also questioning whether consumers should pay brokers a fee for service.

Speaking on Monday, Mr Harris said: “Despite some recently announced industry changes to parts of the commission payment structure, commission earned by brokers remains far from aligned with the interests of the customer.

“Trailing commissions are an example of that. These are only paid while a customer remains with a loan. They are worth $1 billion per annum. There is nothing immaterial about them.

“The industry itself has said that trailing commissions are designed to reduce churn and manage customers on behalf of banks.

“Despite the hint to the contrary, we do actually understand quite well why it might be in a bank’s interest and a broker’s interest to jointly limit churn.

“But not the customer’s interest, who (the data is surprisingly unavailable, as noted earlier) is most probably paying for the service.”

He continued: “Given the unhappy experience with misaligned incentives in wealth management, being able to substantiate the assurance that a broker is acting in the customer’s best interest would seem to be pretty desirable today.”

He said that the commission would “prefer” that banks imposed this interest via contract rather than have the standard introduced via regulation. (However, the commission’s chairman added that as the commission has no power to recommend what banks do, it has instead proposed regulation in the draft report.)

“It would have been valuable to put the cost-benefit side by side”

Once again, the chair highlighted a data gap in the industry, stating that he believes the “default position among data holders in this industry is set against transparency”.

“[W]e were genuinely surprised to find that they either do not hold data at all on some important aspects of decision making, or for another reason could not supply them,” Mr Harris said, stating that “the cost of mortgage brokers is quite high”.

Mr Harris added that brokers cost $2,300 for the average loan of $369,000, plus a trailing commission of $665.

He said: “Other analysts have suggested higher numbers than these in high-priced locations, but we will stick with national averages.

“More than $2.4 billion is now paid annually for these services. Some in the broking industry want to know why there is suddenly attention being paid to commissions.

“The sum I just cited, as a large apparent addition to industry costs since the mid ’90s, by itself suggests a public analysis of why it is so large might be in order.”

He argued that the $2.4 billion figure “becomes problematic when it is also suggested that customers aren’t burdened by this as they don’t pay these costs”, adding that “anyone with a slight amount of common sense knows that somewhere in any product purchase it is only a customer or a shareholder who could be paying this charge, unless offsetting costs have been stripped out”.

Mr Harris continued: “Shareholders returns are pretty constant, so we would have liked to unpack that cost question a little, to see if the price was supported by cost savings. With the data provided by banks, this proved to be near impossible.

“For smaller banks, we were able to develop some estimates of the branch costs they would potentially face, without broker assistance. But we received insufficient information from most (not all) banks, and so could not create a clear picture.

“Thus, we can’t say whether there has been a net improvement in efficiency, even as a large sum in commissions has been added to industry costs. We have also shown in the report that brokers do produce slightly better rates for their clients than going in to the bank branch. But that benefit for consumers has been declining since the GFC. It would have been valuable to put the cost-benefit side by side.”

Mr Harris also took aim at vertical integration, suggesting that bank-owned aggregators control about 70 per cent of the mortgage broking market.

He added that in-house products or white label loans appear to “dominate disproportionately” the outcomes for borrowers who use bank-owned aggregators.

The PC chair noted that, in 2015, the Commonwealth Bank had 21 per cent overall market share in the broker channel but a 37 per cent market share via Aussie Home Loans.

However, while it has concerns about vertically integrated groups, the Productivity Commission said that forcing banks to divest of their broking businesses should be “a last resort”.

“Of course, if the necessary solutions prove commercially unpalatable, institutions themselves may then choose to divest,” Mr Harris said.

Many in the industry have spoken out against the Productivity Commission’s draft report, with some suggesting that the remuneration figures cited are “incorrect”, others stating that the recommendation to charge fees would be “anti-competitive”, and both broker associations calling out some findings of the report (which relied heavily on figures from CHOICE consumer group and UBS reports) as “limited”, “amateur” and — in some cases — “nonsense”.

ASIC reports on Credit Rating Agencies

ASIC has conducted a market-wide surveillance of credit rating agencies (CRAs) and made a number of recommendations for change.

The findings of the surveillance are outlined in REP 566 Surveillance of Credit Rating Agencies.

ASIC’s main areas of focus were the CRAs’ governance arrangements (including relating to conflicts of interest and their corporate structure), transparency and disclosure.

ASIC’s report makes a number of observations about CRAs’ activities with some leading to recommendations for change in areas such as board reporting, compliance teams and compliance testing, analytical evaluation of ratings and human resources.

ASIC Commissioner Cathie Armour said, ‘CRAs play an important role in our market by giving market users, for example, investors, issuers and governments, a better understanding of credit risks and informing their investment and financing decisions

‘While many of the CRAs operate in a global market with global standards, it is important that they do not lose sight of their regulatory obligations in Australia’, Ms Armour said.

ASIC is actively engaged internationally on policy development for credit rating agencies through its membership of the International Organization of Securities Commissions (IOSCO) and participates in supervisory colleges for the three large international CRAs – Fitch, Moody’s and S&P. Supervisory colleges were established to facilitate the exchange of information between the supervisors of internationally active CRAs in order to foster more effective supervision of these firms.


Under the Corporations Act, CRAs are required to hold an Australian financial services (AFS) licence and to comply with the conditions of the licence, including requirements to comply with the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies. CRAs are also required to provide assistance to ASIC, including in relation to their compliance with the Corporations Act.

There are currently six licensed CRAs operating in Australia and they all formed part of the surveillance – A.M Best Asia-Pacific Limited, Australia Ratings Pty Ltd, Equifax Australasia Credit Ratings Pty Limited, Fitch Australia Pty Limited, Moody’s Investor Services Pty Limited and S&P Global Ratings Australia Pty Ltd.

ASIC welcomes establishment of the Australian Financial Complaints Authority

ASIC welcomes the passage through Parliament of the Bill to establish the Australian Financial Complaints Authority (AFCA).

AFCA will be the culmination of more than 20 months of public consultation and inquiry, commencing with the review of the dispute resolution framework by an independent panel led by Melbourne Law School’s Professor Ian Ramsay.

ASIC Deputy Chair Peter Kell said, ‘Fair, timely and effective dispute resolution is a cornerstone of the financial services consumer protection framework. The combination of firms’ internal dispute resolution procedures and access to a free independent external scheme currently provides redress for many tens of thousands of Australians each year. Strengthening these dispute resolution requirements will help deliver higher standards and better outcomes in the financial services market.’

‘The establishment of a single scheme for all financial services and superannuation complaints is a very positive development, building on the outcomes achieved over many years by the existing three schemes: the Financial Ombudsman Service (FOS), the Credit and Investments Ombudsman (CIO) and the Superannuation Complaints Tribunal.’

Higher monetary limits and compensation caps, including for primary production businesses, will give more consumers and small businesses access to a free and independent forum to resolve their complaints.

ASIC will work with Government and scheme stakeholders to ensure that the transition to the commencement of AFCA is as smooth as possible.   In the interim, ASIC will retain direct oversight of the two ASIC-approved schemes – FOS and CIO – which will continue to provide high levels of service to consumers and firms.  Separate arrangements are in place for the ongoing operation of the SCT to enable it to deal with existing complaints.

Important information about transition

  • AFCA will start accepting complaints no later than 1 November 2018
  • The operator of the scheme will be authorised by the Minister, and the scheme will be subject to ongoing oversight by ASIC.
  • In order to maintain access to external dispute resolution for consumers in the lead up to commencement of AFCA, ASIC will monitor member compliance with existing EDR scheme requirements as well as the effectiveness of scheme operations.
  • Members of each of CIO and FOS – including licensees and credit representatives – must continue to maintain their EDR membership through this period, including paying membership and other scheme fees in full as required. ASIC has asked the two schemes to report any failure of members to do so.
  • A memorandum of understanding between CIO and FOS will prevent members inappropriately moving between the schemes in the transition period.
  • ASIC will be consulting soon on updated Regulatory Guide 139 (REG 139), which will set out details of ASIC’s oversight of AFCA. This will be finalised and published when AFCA commences operations.
  • ASIC will also publicly consult on new IDR standards and the mandatory IDR reporting requirements that are also contained in the AFCA Bill – but this consultation will not take place until afterAFCA commencement.
  • Current legislative IDR requirements for superannuation trustees and retirement savings account providers (including 90-day timeframes and requirements for written reasons) will continue to apply in their current form until ASIC consults on and then issues updated IDR policy (RG 165).

Warning over shadow shop scam impersonating ASIC

ASIC warns the public to be wary of a scam where cold callers are claiming to be undertaking a ‘shadow shop’ on behalf of ASIC. A shadow shop is where real consumers are recruited to purchase services such as financial advice to help assess the standards in the market.

These scammers claim to be looking for shadow shoppers as part of an ASIC compliance and monitoring campaign. The scam maintains that it will pay you for your time and may encourage you to meet in person or attend a presentation after which you will receive a questionnaire to complete.

The scammers promote their services at the following website, that makes false representations that their work is associated with ASIC.

ASIC has no involvement with this website or its operators, and is undertaking inquiries into the activities of the operators.

ASIC urges anyone who receives contact in these circumstances or is referred to this website to not respond.

From time to time ASIC carries out genuine consumer research including shadow shops, however we only work with accredited market research companies. If you are contacted by a company representing that they are undertaking research for ASIC you can call ASIC’s Infoline on 1300 300 630 to check.

This scam is not connected or associated with legitimate market research firm Shadow Shopper at and ASIC thanks them for bringing this matter to its attention.

Westpac remediates credit card customers more than $11 million

ASIC says Westpac has provided around $11.3 million in remediation to around 3,400 credit card customers after ASIC raised concerns about its credit card limit increase practices.

In 2016, ASIC announced that Westpac had agreed to improve its lending practices when providing credit card limit increases to customers to ensure that reasonable inquiries are made about customers’ income and employment status (refer: 16-009MR).

As part of Westpac’s commitment, it reviewed credit limit increases previously provided to affected cardholders where they subsequently experienced financial difficulty. Following this review, Westpac provided remediation to around 3,400 customers, which included refunds of around $3 million for fees and interest, and around $8.3 million in credit card balances waived.

Westpac engaged an independent expert to provide assurance over the remediation program and has made the first two payments (of the $1 million total contribution) to support financial counselling and financial literacy, with further payments to follow in 2018 and 2019.


In 2014 ASIC conducted a review focussing on credit card providers’ invitations to customers to increase credit card limits. ASIC’s concerns with Westpac’s processes were identified through the course of this review.

The Government has introduced reforms into Parliament that will prohibit credit card providers from sending credit card limit increase invitations regardless of whether the consumer has provided their consent.

The Government’s reforms will also require credit card providers to assess whether a credit card limit might be unsuitable based on the consumer’s ability to repay the proposed credit limit within a period prescribed by ASIC, rather than the consumer’s ability to meet the minimum repayment.

ANZ refunds $10 million for failing to disclose credit card charges

ASIC says the ANZ bank will refund $10.2 million to 52,135 business credit card accounts, after it failed to properly disclose fees and interest charges for the product.

ANZ reported to ASIC that for some of their ‘Business One’ business credit card customers they either failed to disclose, or incorrectly disclosed (in some cases from as early as 2009):

  • Applicable interest rates
  • The interest-free period
  • The annual fee
  • When an overseas transaction fee might apply
  • The amount payable for overseas transactions with foreign merchants or financial institutions.

ANZ has contacted eligible customers to advise they will receive a refund with interest.  Former customers will receive a bank cheque and current customers with an open account will receive a refund paid into their account.

ANZ has since updated its procedures and fee information for Business One.

Customers with queries or concerns about this matter should contact ANZ on 1800 032 481.


No consumer credit card accounts have been impacted by this matter.

Many of the ‘Business One’ credit card customers were small businesses. In 2017 ASIC launched a small business strategy to assist, engage and protect small businesses.

ASIC acknowledges the cooperative approach taken by ANZ in its handling and reporting of this matter.