ASIC’s Fintech “Sandbox” To Remain Unchanged

ASIC has released a consultation paper  and a review of its regulatory sandbox, introduced in December 2016.

 

In the review ASIC proposes to retain class waivers known as the fintech licensing exemption, that allow eligible financial technology (fintech) businesses to test certain specified services without holding an Australian financial services or credit licence for up to 12 months. The exemption is subject to a number of conditions, such as client and exposure limits, consumer protection measures, adequate compensation arrangements, and dispute resolution systems.

The fintech licensing exemption is a world-first approach that allows eligible fintech businesses to test certain services for up to 12 months without an AFS or credit licence.

Outside of the fintech licensing exemption, many fintech businesses rely on exemptions provided under ASIC’s relief powers. They have provided a number of exemptions from the licensing requirement for offering certain types of products and services. This is because, depending on the nature, scale and complexity of the products and services offered, it is not always appropriate for a business to obtain a licence and meet all of the usual regulatory obligations. They have provided relief for ‘low value’ non-cash payment facilities, the provision of generic financial calculators, and some services for mortgage offset accounts.

ASIC had committed to reviewing its fintech licensing exemption following 12-18 months’ operation.

ASIC Commissioner John Price said, ‘by introducing ASIC’s fintech licensing exemption,we have given a range of fintech businesses the chance to test their ideas without needing a licence.’

‘Even in cases where interested fintechs have discovered that they were not able to make use of the fintech licensing exemption, we have found that its introduction has encouraged businesses to come forward and consider their other options that result from the flexibility in ASIC’s existing regime.’

ASIC’s current fintech licensing exemption allows eligible businesses to test specified services for up to 12 months with up to 100 retail clients, provided they also meet certain consumer protection conditions and notify ASIC before they commence the business.

To date, four fintech businesses have used the fintech licensing exemption. Relying on the exemption, one business tested its financial services (providing advice and dealing in listed Australian securities); two businesses are currently testing advisory and dealing services in deposit products; and one business is testing acting as an intermediary and providing credit assistance.

In addition, over a dozen fintech businesses have also contacted ASIC about using the fintech licensing exemption.The consultation period closes on 27 February 2018.

ASIC also launched their Innovation Hub in 2015, and has worked with 233 fintech businesses that cover the spectrum of fintech.

 

Youi pays $164,000 for poor insurance sales practices

ASIC says Youi has refunded 102 consumers approximately $14,000 in total, and will pay $150,000 as a community benefit payment to the Financial Rights Legal Centre’s Insurance Law Service, after ASIC raised concerns about its home and car insurance sales practices.

Youi has also engaged an independent firm (EY) to conduct a review of sales practices in response to concerns that some sales staff were charging consumers for insurance policies without their consent to purchase. This included where consumers only made an inquiry to get an insurance quote.

ASIC was concerned that Youi’s remuneration and bonus structures incentivised sales staff to prioritise sales ahead of consumers’ interests.

Since the review, Youi has:

  • Changed its remuneration structure and reduced the incentives provided to sales staff based on sales volumes
  • Reviewed sales scripts and staff training
  • Introduced new controls and monitoring of sales staff
  • Made significant changes to its legal, risk and compliance capability.

EY will conduct a follow-up review to assess the implementation and test the effectiveness of the recommendations made in their initial assessment of Youi’s risk culture and review of sales practices. A final report will be provided to ASIC by 30 June 2018.

Acting ASIC Chair Peter Kell said positive consumer outcomes should be at the heart of sales structures: ‘It is completely unacceptable that customers were signed up for Youi insurance policies without their knowledge or permission.’

Consumers who believe they have a dispute with Youi should contact Youi directly on 07 3852 7895. The Financial Ombudsman Service can provide further assistance on 1800 367 287.

Background

The Financial Rights Legal Centre’s Insurance Law Service is a national service providing consumers free advice about insurance problems.

ASIC’s MoneySmart website has information for consumers about getting the best deal on insurance, including what to look for in insurance products so they can find the right policy for their needs.

ASIC accepts enforceable undertakings from ANZ and NAB to address conduct relating to BBSW

ASIC says Australia and New Zealand Banking Group (ANZ) and National Australia Bank (NAB) have today entered into enforceable undertakings (EUs) with ASIC in relation to each bank’s bank bill trading business and their participation in the setting of the Bank Bill Swap Rate (BBSW), a key Australian benchmark and reference interest rate.

On 10 November 2017, the Federal Court made declarations that each of ANZ and NAB had attempted to engage in unconscionable conduct in connection with the supply of financial services in attempting to seek to change where BBSW set on certain dates (in respect of ANZ, on 10 occasions in the period 9 March 2010 to 25 May 2012, and in respect of NAB, on 12 occasions in the period 8 June 2010 to 24 December 2012). The Court also declared that each bank failed to do all things necessary to ensure that they provided financial services honestly and fairly.

The Federal Court imposed pecuniary penalties of $10 million each on ANZ and NAB for the attempts to engage in unconscionable conduct in respect of the setting of BBSW. The Court also noted that each of ANZ and NAB will give EUs to ASIC which provides for them to take certain steps and to pay $20 million to be applied to the benefit of the community, and that each will pay $20 million towards ASIC’s investigation and other costs.

Background

ASIC commenced legal proceedings in the Federal Court against ANZ on 4 March 2016 (refer: 16-060MR) and against NAB on 7 June 2016 (refer: 16-183MR). The EUs form part of an agreed resolution to those proceedings.

On 16 November 2017 Jagot J of the Federal Court published her decision in both the ANZ and NAB proceedings ([2017] FCA 1338).

On 5 April 2016, ASIC commenced legal proceedings in the Federal Court against the Westpac Banking Corporation (Westpac) (refer: 16-110MR). These proceedings are ongoing.

ASIC has previously accepted enforceable undertakings relating to BBSW from UBS-AG, BNP Paribas and the Royal Bank of Scotland (refer: 13-366MR, 14-014MR, 14-169MR). The institutions also made voluntary contributions totaling $3.6 million to fund independent financial literacy projects in Australia.

In July 2015, ASIC published Report 440, which addresses the potential manipulation of financial benchmarks and related conduct issues.

The Government has recently introduced legislation to implement financial benchmark regulatory reform and ASIC has consulted on proposed financial benchmark rules.

Citibank refunds $3.3 million to credit card customers and $1m on transactions

ASIC says Citibank has refunded Citibank has refunded around 4,000 current and former customers more than $1 million after misstating the bank’s obligations around unauthorised transactions on customers’ accounts. Separately, Citibank will refund more than $3.3 million to around 39,500 current and former customers for failing to refund customers when credit card accounts were closed with an outstanding credit balance.

Citibank will refund more than $3.3 million to around 39,500 current and former customers for failing to refund customers when credit card accounts were closed with an outstanding credit balance.

Citibank will provide refunds for Citibank, Virgin Money, Bank of Queensland, Suncorp and Card Services branded credit cards and for Citibank Ready Credit loan customers. Citibank is the credit provider for all of these products.

This error occurred on accounts as far back as 1994 but did not happen every time an account was closed.

Citibank is writing to eligible customers to advise that they will receive a refund of the credit balance with interest. Former customers will receive a bank cheque and current customers with an open account will receive a direct credit into their account.

The closed credit card and loan accounts with more than $500 in credit balances, which were not transacted on for seven years (or three years as applicable) have been transferred to ASIC as required under unclaimed money legislation.

Citibank has strengthened its systems so that cheques for credit balances are issued to customers automatically when they close their accounts.

“Customers should be confident that when they close an account, they are refunded any outstanding balance,” ASIC Deputy Chair Peter Kell said.

Mr Kell also said customers may be entitled to claim their balance through ASIC’s MoneySmart website which holds unclaimed money from accounts which have been inactive for a certain period:

“If you think you might be impacted, your money may be with ASIC as unclaimed money. I strongly encourage you to search your name on ASIC’s MoneySmart unclaimed money search.”

Citibank reported the issue to ASIC, and has cooperated with ASIC in resolving the matter.

Background

Citibank (Citigroup Pty Ltd) has commenced writing to all affected customers, and affected customers will be contacted before 30 November 2017.

 

Citibank has refunded around 4,000 current and former customers more than $1 million after misstating the bank’s obligations around unauthorised transactions on customers’ accounts.

Citibank had refused customers’ requests to investigate unauthorised transactions because it claimed the requests were made outside the time period permitted under the Visa and MasterCard scheme chargeback protections.

Affected customers had made reports to Citibank about ‘card not present’ unauthorised transactions (such as internet transactions), where a payment was made using the credit or debit card number details, rather than the physical card itself.

In letters sent to customers in response to their requests, Citibank incorrectly stated that because the request was made outside the timeframe specified by Visa and MasterCard, it was not required to assess the claim, and that the customer’s only options were to approach the merchant or a fair trading agency.

The letter would likely have misled customers about their protections under the ePayments Code. The ePayments Code provides protections to consumers for unauthorised transactions – these protections are separate to, and not the same as, the protections provided by Visa and MasterCard.

As a result, customers did not have their claims properly considered in accordance with Citibank’s contractual obligations with those customers under the ePayments Code.

To remediate affected consumers:

  • Current customers will have their accounts refunded
  • Former customers who are owed more than $20 will be sent a bank cheque
  • Former customers whose individual amounts were more than $500 and cannot be located will have their funds treated in accordance with unclaimed money requirements
  • For former customers owed less than $20, and those who cannot be located with amounts less than $500, an equivalent amount will be donated to charity

If a donation is made and the customer comes forward, Citibank will honour individual refunds.

Citibank has also reviewed its processes to ensure there are no further miscommunications about its obligations under the ePayments Code.

“If an unauthorised payment has been made on their account, customers should be confident that their bank will appropriately investigate the payment. Customers should never be misled about their rights under the Code.” ASIC Deputy Chair Peter Kell said.

“Banks should ensure in all their communications that they are clear and accurate with customers about their consumer rights.”

Citibank’s remediation program covered consumers who may have received the letter between 1 January 2009 to 22 July 2016, and did not have their claim appropriately assessed.

Financial advice firm to pay $1 million penalty for breach of best interests duty – ASIC

ASIC says the first civil penalty has been imposed on a financial services licensee for breaches of the best interests duty under the Future of Financial Advice (FOFA) reforms. The focus on the matter was on the “best interest” provisions and the remuneration model. This is a significant development.

The Federal Court has imposed a civil penalty of $1 million against Melbourne-based financial advice firm NSG Services Pty Ltd (currently named Golden Financial Group Pty Ltd) (NSG) for breaches of the best interests duty introduced under the Future of Financial Advice (FOFA) reforms.

The penalty relates to financial advice provided to retail clients by NSG advisers on eight occasions between July 2013 and August 2015. The clients were commonly sold insurance and advised to roll over superannuation accounts that committed them to costly, unsuitable and unnecessary financial arrangements.

The Court found that the failures by NSG to ensure compliance by its representatives were systemic in nature and in his reasons, Justice Moshinsky said, “I regard the contraventions as very serious ones”.

In March 2017 NSG consented to the making of declarations against it and after a hearing on 30 March 2017 the Court was satisfied that declarations ought to be made.

The Court found that NSG’s representatives breached:

  • s961B of the Act by failing to take reasonable steps to ensure that they provided advice that complied with the best interests obligations; and
  • s961G of the Act by failing to take reasonable steps to ensure that they provided advice that was appropriate to its clients.

Those breaches formed the basis of 20 contraventions in total by NSG of s961K(2) or s961L of the Act, which provides that a financial services licensee must take reasonable steps to ensure its representatives comply with the above sections of the Act.

The Court made the declarations based on a number of deficiencies in NSG’s processes and procedures, including the following:

  • NSG’s training on legal and regulatory obligations was insufficient to ensure clients received advice which was in their best interests;
  • NSG did not conduct regular or substantive performance reviews of its representatives;
  • NSG’s compliance policies were inadequate, and did not address its representatives’ legal or regulatory duties, and in any event, were not followed or enforced by NSG;
  • There was an absence of regular internal audits, and the external audits conducted identified issues which were not adequately addressed nor recommended changes implemented; and
  • NSG had a “commission only” remuneration model, which meant that representatives would be paid by way of commission for sales of personal risk insurance products and superannuation rollovers.

ASIC Deputy Chairman Peter Kell said, “This outcome makes clear to the industry the serious consequences of financial services licensees failing to comply with their FOFA obligations.  ASIC will continue to pursue licensees who fail to do so.”

NSG, who agreed with ASIC on the amount of the penalty immediately prior to the hearing on penalty, and made joint submissions as to the orders, was also ordered to pay $50,000 in costs to ASIC, and will also pay $50,000 towards ASIC’s costs of its investigation into NSG under s91 of the ASIC Act.

MP grills CBA on brokers, offsets and big mortgages

From The Adviser.

NSW MP Kevin Hogan said that mortgage brokers have told him that it is in their best interest to get clients to borrow as much as they can.

Mr Hogan was on the parliamentary committee that questioned CBA chief executive Ian Narev in Canberra on Friday (20 October), where he was eager to find out from the CEO how brokers were behaving.

“You have one of the most extensive broker networks in the country,” Mr Hogan said, addressing Mr Narev.

“Brokers, as well as customers, tell me it’s obviously in the broker’s interest to get the customer to borrow the maximum amount of money they can get them to borrow — they get remunerated that way — even though they might not need that much money. And then they open an offset account and put the money they don’t need in that account, but they have drawn down the maximum amount of money they can borrow.”

The MP then asked Mr Narev if he has noticed “a big difference” in the number of customers who open an offset account, with money put in it straightaway, between the broker network and their branch network.

The CBA boss took the question on notice, but provided his thoughts on debt levels and the financial wellbeing of customers.

Mr Narev said: “You are raising a different and very valid point, which is: how much should people borrow? In the context of the broader regulation on general advice versus specific advice, we have a lot of discussion about that at the bank, and it is a very live discussion both through our own channels and through proprietary channels.”

Mr Narev noted that, historically, there has generally been a view that “whatever the bank will lend me, I should borrow”.

While he stressed that CBA lends responsibly for what people can service, Mr Narev said that the question of what level of debt somebody is comfortable with is “very personal”.

“The whole industry — and we are certainly doing it, including through behavioural economics in conjunction with academics from Harvard University — is working through how, within the constraints of the law on advice, we can have richer discussions with people to go down exactly the distinction you’ve drawn.”

Mr Hogan restated his belief that brokers get incentive to put customers in larger loans, saying: “It is obviously in the broker’s interest to get that person to borrow as much money as they can possibly get them to do — which might not necessarily be in the best interest of the customer — and you have an extensive network.”

Outgoing ASIC chairman Greg Medcraft also believes that brokers encourage customers to borrow more. In fact, he even admitted that he would do it himself if he was a mortgage broker.

Speaking at a Reuters Newsmaker event on 12 September, Mr Medcraft touched on a recent report from investment bank UBS, which suggested that around $500 billion of mortgages could be based on inaccurate information.

Mr Medcraft said: “The mortgage commission is based on [the fact that] the larger their loans, the more you get. So, logically, what would you do?

“It’s human behaviour. I’d do it.”

Banking Regulators Asleep at the Wheel?

Well, finally, we got an admission from APRA that mortgage lending standards have decayed over the last decade, and that they needed to take action to reverse the trend. And now they are looking at debt-to-income.

Poor lending standards, they say are systemic, driven by completion, and poor bank practices. They recently intervened (a little). And late to the piece (now) debt-to-income is important. Did you hear the door slamming after the horse has bolted?

This is after ASIC called out poor lending practices, and the RBA have been raising concerns about the high household debt, and the downstream risks to growth this represents.

A completed change of tune from the declarations of 2015 when everything was said to be just dandy!

Those following this blog over the past few years will know we have been flagging these concerns, especially as the cash rate was brought to its all time low.  We said DTI was critical, that standards should be tightened, and the growth of debt to income was unsustainable.

These three parties, plus the Treasury form the “Council of Financial Regulators” which is chaired by the RBA are all culpable.  This body, which works behind the scenes, is referred to when hard decisions need to be take. If you look back at recent APRA and RBA statements, the Council gets a Guernsey!

The problem is there has been group-think for year, driven by the need to use households as a growth proxy for the failing mining and resource sector. And no clear accountability.

But too little has been done, too late.  And it is poor old households who, one way or the other will pick up the pieces – not the banks who have enjoyed massive profit and balance sheet growth.

Even now, lending for housing is growing three time faster than incomes or cpi.

Regulators are now lining up to call out the problems. Managing the risk going forwards is a real challenge. Time to review the regulatory structure.

Worth remembering that the Financial System Inquiry recommended the creation of a new Financial Regulator Assessment Board to assess the performance of the regulatory framework, but this was rejected by the Government!

 

ANZ and ASIC Agree to Settle the BBSW case

In a short release, ANZ says it has reached a confidential in-principle agreement with the Australian Securities and Investments Commission (ASIC) to settle court action relating to the Australian interbank BBSW market.

As a result, this morning ASIC has asked the Court to stand down the trial for 48 hours, which ANZ will consent to, so as to progress the in-principle agreement following which ANZ will make a more detailed statement.

Based on the in-principle agreement, the financial impact to ANZ will be reflected in the 2017 Financial Year results and is largely covered by the provisioning held as at 31 March 2017.

Brokers ‘not recording the outcomes’ of IO discussions: ASIC

From The Adviser.

Brokers may be having the appropriate conversation with borrowers on interest-only home loans, the financial services regulator has said, but there has been some “pretty poor record keeping”.

The financial services regulator announced last week that it would “shortly” begin reviewing the loan files of brokers with a “high proportion of interest-only loans” as part of its work “to ensure that consumers are not paying for more expensive products that are unsuitable”.

The review was triggered by the fact that interest-only (IO) loans are now often more expensive than principal & interest loans, and it is therefore becoming “ever important now for lenders and brokers to explain and justify why they are putting people into more expensive loans”.

Speaking to The Adviser, Michael Saadat, ASIC’s senior executive leader for deposit takers, insurers & credit services, elaborated that while the regulator believes that brokers are having the appropriate discussions with consumers about the reasons for taking out IO loans, the record keeping on loan files has not been of a high standard.

He revealed: “In the past, I’d say we have seen pretty poor record keeping on that front, where there has been very little on the loan file which tells you why the consumer got that product. In general, when we have looked at loan files in the past, we have seen [responses to the question]: ‘What were the consumers’ requirements and objectives?’ In many cases, we see things like: ‘To buy a house’. That is pretty implicit, but it really doesn’t tell you too many things about what type of product, what type of loan, what type of rate, etc.

“So, our view is that although these discussions are happening… brokers are having these discussions, but they’re not recording the outcomes of those discussions. And it’s hard to prove that you’re meeting your obligations if you don’t have something on a file that shows why you have recommended a particular loan.”

What ASIC wants to see on IO loan files

Mr Saadat added that the next stage of the review into interest-only loans will be “getting these individual files and looking to see how consumers’ requirements and objectives have been documented on those files”.

He said: “If [borrowers] have been provided with an interest-only loan and they are an owner-occupier, we will be looking for a summary or an explanation on the loan file that describes why the consumer was provided with an interest-only loan. So, that’s really the key thing.”

Adding that ASIC “won’t be that prescriptive in terms of our expectations”, Mr Saadat revealed that what the regulator wants to see is “information on the file which is sufficient to explain why the consumer’s decision (or suggestion from the lender or broker) to go into an interest-only for an owner-occupier loan was the right one”.

The lending industry has already begun responding to some of these concerns, with Commonwealth Bank launching a new IO simulator to help brokers show customers the differences between these type of repayments as well as principal & interest repayments.

Mr Saadat told The Adviser that these types of tools, which delve deeper into why consumers need an IO product, help “make the consumer aware of some of the risks involved with going down a particular path”; for example, “the fact that at the end of that period, you do need to make higher principal and interest payments and, over the life of the loan, you may end up paying more interest as a result”.

Mr Saadat concluded: “Investors may have other reasons for getting an interest-only loan — they may be tax reasons, for example, whereas those reasons don’t necessarily apply to owner-occupiers. And that doesn’t mean that owner-occupiers should never have been given an interest-only loan. Of course, there will be cases where that still is appropriate. We just want to make sure that it is appropriate and that you’re documenting the reasons for that.”

The regulator’s crackdown on IO loans has begun to bite, according to some industry data. New data from Mortgage Choice has revealed that there was a 60 per cent decline in interest-only mortgages over a period of just six months.

According to Mortgage Choice’s latest home loan approval data, the proportion of interest-only loans written by the brokerage dropped from 35.95 per cent in April 2017 to 14.64 per cent in September 2017.

CEO of Mortgage Choice John Flavell said that the “significant decline” was a result of lenders hiking rates for these loans.

New ASIC chair announced

From The Adviser.

James Shipton, executive director of the Program on International Financial Systems at Harvard Law School, has been announced as government’s recommended nominee for the role of chair at ASIC.

According to an announcement by the Minister for Revenue and Financial Services, Kelly O’Dwyer, Mr Shipton will be recommended as the government’s choice for the role of chair of the Australian Securities & Investments Commission to the Governor-General in Council.

Mr Shipton would then replace Greg Medcraft for the five-year period starting 1 February 2018.

Mr Peter Kell, the current deputy chair, will be the acting chair from the time Mr Medcraft’s term ends on 12 November 2017 to when Mr Shipton commences in February.

Ms O’Dwyer commented: “Mr Shipton brings wide regulatory and financial market knowledge to the position, as well as international experience.

“He is currently the executive director of the Program on International Financial Systems at Harvard Law School. From 2013 to 2016 he was the executive director, Intermediaries Supervision and Licensing Division at the Hong Kong Securities and Futures Commission. Prior to that he had extensive experience in various roles in investment banking in Asia and Europe and commenced his professional career as a solicitor in Australia.

“I look forward to Mr Shipton making a significant contribution to the important work of ASIC in promoting confidence in Australia’s financial system and protecting consumer interests as the incoming chair.”

Ms O’Dwyer also went on to “express [her] appreciation to Mr Greg Medcraft for his commitment over the past years to ASIC both as the chair and as a member”.

She said: “Mr Medcraft has overseen significant changes in ASIC’s role during his tenure, including reforms to improve the quality of financial advice and financial literacy, and the establishment of a national business names register.”