Tag: ASIC

ASIC acts against misleading Initial Coin Offerings and crypto-asset funds targeted at retail investors

ASIC has taken action to stop several proposed initial coin offerings or token-generation events (together, ICOs), targeting retail investors.

As well, ASIC recently stopped the issue of a Product Disclosure Statement for a crypto-asset managed investment scheme.

Consistent problems identified by ASIC are:

  • the use of misleading or deceptive statements in sales and marketing materials;
  • operating an illegal unregistered managed investment scheme (MIS);
  • not holding an Australian financial services licence.

Such problematic offers involve significant risks for investors.

ASIC Commissioner John Price said, ‘If you raise money from the public, you have important legal obligations. It is the legal substance of your offer – not what it is called – that matters. You should not simply assume that using an ICO structure allows you to ignore key protections there for the investing public and you should always ensure disclosure about your offer is complete and accurate.’

Recent activity by ASIC　

In five other separate matters since April 2018, ASIC successfully acted to prevent ICOs raising capital without the appropriate investor protections. These ICOs have been put on hold and some will be restructured to comply with the applicable legal requirements.

ASIC is taking further action in respect of one completed ICO.

On 13 September 2018, ASIC issued a final stop order on a Product Disclosure Statement issued by Investors Exchange Limited (IEL) for units in the New Dawn Fund (Fund). The Fund was proposing to invest in a range of cryptocurrency assets. Following ASIC raising concerns about the PDS, IEL consented to a final stop order so that no units could be obtained under the PDS. ASIC acknowledges the co-operative approach taken by IEL in responding to ASIC’s concerns.

Investor warning

As outlined on MoneySmart, ICOs are highly speculative investments that are mostly unregulated, and while there are genuine businesses using this structure many have turned out to be scams. ASIC suggests that investors consult the information on Moneysmart before deciding to invest.

Fees for no service: how ASIC is trying to make corporate misconduct hurt

From The Conversation.

On September 6, 2018, the Australian Securities and Investments Commission launched proceedings against two arms of the National Australia Bank alleging a widespread and long standing practice of charging fees for no service.

An intriguing aspect of the action is that the claim acknowledges that the two firms have already agreed to pay back around A$87 million to the affected customers. So ASIC isn’t seeking compensation.

Instead, it wants declarations that the NAB subsidiaries breached the law and engaged in “misleading or deceptive” conduct under the ASIC Act and “false or misleading” conduct under the Corporations Act.

More than compensation

It is seeking penalties in respect of those breaches.

Declarations and penalties are important because they can inflict reputational damage.

This can send a powerful message to the rest of corporate Australia about the need to observe and respect the law, something that appears to have been missing in the financial sector to date.

Also, the greater the penalties imposed, the less financially attractive the behaviour becomes to other corporations, who, after all, are chiefly motivated by profit.

Penalties are typically low

However, to date it is arguable that the level of penalties sought by ASIC and imposed by the courts have been too low to act as an effective deterrent.

ASIC’s latest claim is a significant step forward.

It is seeking penalties that are likely to hurt, and as a result more likely to make a difference to corporate behaviour.

Its Concise Statement of Claim points to the purpose of its legislation which is to protect consumers and promote fair and efficient market economies.

In essence, it is asking the Federal Court to make orders directed at changing corporate practices that undermine that purpose.

Its challenge will be to persuade the court to take seriously the need for deterrence and for punitive penalties in addition to compensation.

Interestingly, it isn’t alleging that the NAB subsidiaries made misrepresentations dishonestly, knowingly or recklessly. Its focus is on “misleading” rather than “deceptive” conduct.

Dishonesty is hard to prove

This is likely to be because personal dishonesty is notoriously difficult to prove against corporations, whose human agents (employees, managers and the like) are often engaged in independent activities and are not be able to “connect the dots” about broader corporate dishonesty.

It might be time for the law to move away from questions of personal dishonesty and instead look at the objective nature of corporate behaviour. Longstanding practices and systems that are designed to and are inherently likely to mislead fall below the standards Australians expect, whether or not any of the individuals involved act dishonestly.

The case against the subsidiaries of NAB might provide the perfect opportunity for ASIC and the courts to take an important step in the right direction.

Author: Elise Bant Professor of Law, University of Melbourne

ASIC commences civil penalty proceedings against ANZ

ASIC has commenced civil penalty proceedings in the Federal Court of Australia against Australia and New Zealand Banking Group Limited (ANZ) for an alleged continuous disclosure breach in relation to a $2.5 billion institutional share placement undertaken by the ANZ in 2015.

On 6 August 2015, ANZ issued a release to the Australian Securities Exchange (the ASX) entitled “ANZ announces Institutional Placement (fully underwritten) and share Purchase Plan to raise a total of $3 billion”.

On 7 August 2015, ANZ issued a release to the ASX in respect of the placement stating among other things, “ANZ today announced that it had raised $2.5 billion in new equity capital through the placement of approximately 80.8 million ANZ ordinary shares at the price of $30.95 per share”.

ASIC alleges that that ANZ contravened s.674(2) of the Corporations Act by failing to notify the Australian Securities Exchange (ASX) that approximately $791 million of the $2.5 billion of ANZ shares offered in the Placement was to be acquired by its underwriters rather than placed with investors.

ASIC is seeking a declaration that ANZ breached its continuous disclosure obligations and a pecuniary penalty order.

The proceedings are to be listed for a case management hearing in the Federal Court in Melbourne on a date to be fixed.

ASIC will be making no further comment at this time.

Prospa removes unfair loan terms for small business borrowers and guarantors

Following an ASIC review, Prospa Advance Pty Limited (Prospa) has changed   loan terms in its standard form small business loan contract to address terms being unfair under the unfair contract terms provisions of the ASIC Act.

The review of Prospa’s contract is part of a broader surveillance by ASIC to examine lenders’ small business loan contracts to reduce the risk of unfair contract terms.

As a result of ASIC’s review, Prospa has made a number of changes resulting in improved terms for borrowers and guarantors. The changes include addressing problematic terms outlined in ASIC Report 565: Unfair contract terms and small business loans, and changes to other terms which could have operated unfairly for borrowers and guarantors.

Prospa has agreed that all customers who entered into or renewed contracts from 12 November 2016 will have the benefit of the changes agreed with ASIC. Prospa will be communicating these changes to its small business customers with the amended contract coming into effect in early October.

ASIC’s surveillance of small business loan contracts is ongoing, and will consider regulatory action where appropriate.

Changes to Prospa’s loan contract

Prospa has agreed to make the following changes to its standard form small business loan contract:

  • amended the early repayment clause so that borrowers can now      prepay their loan early without requiring Prospa’s consent, and removed      Prospa’s absolute discretion whether to provide a discount for prepayment – Prospa will now apply a published Early Prepayment Policy so borrowers  can determine the discounts they they can expect to receive if they do pay back their loan early;
  • amended the ‘unilateral variation’ clause to significantly limit Prospa’s ability to unilaterally vary contracts to specific instances. Prospa has also extended the notice period to 60 days where Prospa intends to vary fees;
  • amended clauses defining events of default to add remediation periods and materiality thresholds and to permit changes to control of the Borrower with the lender’s consent (not to be unreasonably withheld);
  • removed a broad ‘cross-default’ clause which allowed Prospa to call a default under the loan contract due to any default under another finance document related to the loan (for example, guarantee or security document);
  • restricted the borrower’s indemnity to ensure that:

–    the borrower is required to indemnify only Prospa, its employees and agents (and not third parties that are not parties to the contract such as receivers or contractors); and

–    the borrower is not required to indemnify Prospa for losses or costs incurred due to the fraud, negligence or wilful misconduct of Prospa, its employees, officers, agents, contractors or receivers appointed by Prospa;

  • removed an ‘entire agreement’ clause which absolved Prospa from contractual responsibility for conduct, statements or representations made to borrowers about the loan contract;
  • limited the class of people who can provide guarantees under the loan contract to:

–    people who are actively involved in the management of a borrower’s business;

–    if the borrower is a company, people who are directors or shareholders of the borrower; and

–    if a shareholder of the borrower company is a company, directors or shareholders of that company.

  • inserted a 5-business-days’ notice provision to guarantors about:

–    borrowers who are 30 calendar days behind their agreed repayment schedule; and

–    the commencement of legal proceedings against a borrower or the appointment of a receiver.

  • limited the guarantor’s liability so that the guarantor is not liable for any increase in the amount of the loan principal and interest agreed at the start of the loan(but the guarantor is liable for fees and reasonable enforcement costs).
  • inserted a provision to obtain consent of the guarantor:

–    where there is a discharge or release of any security held by Prospa given by the borrower or a guarantor; and

–    where there are multiple guarantors, before releasing a guarantor.

  • limited the actions of lender-appointed attorneys where there is an event of default under the loan contract so that an appointed attorney cannot act in a way that prefers the interests of the attorney over the interests of the borrower or guarantor.

Prospa’s Interest Charges and Late Fees

Prospa charges a factor rate for interest on its fixed term loans. The amount of interest, which can be considerably higher than bank loans, is fixed and disclosed at the outset and does not vary even if the loan term is extended.  The amount of interest is therefore part of the “upfront price” of the loan and is excluded from review under the unfair contract term provisions.

Late payment fees for missed payments are, however, subject to review under the unfair contract term provisions. ASIC will be undertaking further monitoring of Prospa’s charging of late payment fees to assess whether the manner in which the fees are being charged is unfair in practice.

Background

In March 2018, ASIC published REP 565, which outlines changes to small business loan contracts made by the big four banks to comply with the UCT law. This report also provides guidance to the broader small business lending industry.

At the same time ASIC announced that it will also examine other lenders’ small business loan contracts to ensure that their contracts do not contain terms that raise concerns under the UCT law. ASIC is reviewing the contracts of bank and non-bank small business lenders, including Prospa, to check their compliance with UCT law.

Since publishing REP 565, ASIC is also monitoring the big four banks’ compliance with the UCT law. In March 2017, ASIC and the ASBFEO completed a review of small business standard form contracts and called on lenders across Australia to take immediate steps to ensure their standard form loan agreements comply with the law (refer: 17-056MR).

In August 2017, ASIC and the ASBFEO welcomed the changes ASIC required 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 (for example, 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 (for example, 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.

Fees for no service: ASIC commences Federal Court action against NAB companies

ASIC has today commenced proceedings in the Federal Court of Australia against two entities in NAB’s wealth management division, NULIS Nominees (Australia) Limited (NULIS) and MLC Nominees Pty Ltd (MLC Nominees). The court proceedings relate to fees charged by both entities to a significant number of their superannuation members for services not provided.

ASIC alleges that NULIS and MLC Nominees (as the current and former superannuation trustee of NAB) misled members of MLC MasterKey Super products.

ASIC also alleges NULIS and MLC Nominees deducted approximately $33m Plan Service Fees from 220,000 members of MLC MasterKey Business and MLC MasterKey Personal Super who did not have Plan Adviser (No-Adviser Members).  NAB also deducted approximately $67m Plan Service Fees from 300,000 members of MLC MasterKey Personal Super where Plan Advisers were not required to provide services and members did not receive services (or any services they could not otherwise obtain for free).

ASIC seeks from the Federal Court declarations of contravention and a civil penalty.

The commencement of this civil penalty action is part of ASIC’s broad-ranging and significant investigations currently underway into fee for no service failures in the financial services industry. Alongside these investigations ASIC is obtaining considerable remediation for impacted customers, currently estimated to exceed $850m.

ASIC alleges that MLC Nominees and NULIS:

  • contravened s912A(1)(a) of the Corporations Act 2001 (Corporations Act) by failing to ensure that its financial services were provided efficiently, honestly and fairly when it deducted approximately $33m Plan Service Fees from 220,000 No-Adviser Members;
  • made false or misleading representations to No-Adviser Members in contravention of ss 12DB, 12DA of the Australian Securities and Investments Commission Act 2001 (ASIC Act) and s1041H of the Corporations Act by representing that it was entitled to deduct the Plan Service Fee and the No-Adviser Member was obliged to pay it when there was no such obligation;
  • contravened s912A(1)(a) of the Corporations Act when deducting approximately $67.1m Plan Service Fees from 300,000 members of MLC MasterKey Personal Super (Linked Members) in circumstances where it did not oblige Plan Advisers to provide services and members did not receive services;
  • made false or misleading representations in contravention of s12DB and s12DA of the ASIC Act by not disclosing that Linked Members in MLC Masterkey Personal Super had the right to turn off the Plan Service Fee; and
  • contravened s912A(1)(c) of the Corporations Act by failing to comply with financial services laws, including issuing defective disclosure documents within the meaning of s1022A of the Corporations Act and failing to exercise the degree of skill, care and diligence as a prudent trustee would exercise and failing to act in the best interests of members in breach of its general law duties and the Superannuation Industry (Supervision) Act 1993 when making the fee deductions and alleged misrepresentations to members.

Download

Background

Between October 2016 and June 2017, NULIS remediated No-Adviser Members approximately $35.9m (including interest and less fund tax of $6m).

NULIS also announced on 26 July 2018 that it would refund Linked Members with the total remediation expected to be approximately $87.1m (including interest and less fund tax of $15m).

ASIC also imposed, by consent, additional licence obligations on NULIS in January 2017 following its inquires in relation to several breach reports, including the Plan Services Fee.

ASIC has ongoing investigation in relation to Adviser Service Fees charged by NAB entities in relation to personal advice services.

ASIC prescribes three-year period for credit card responsible lending assessments

Following consultation, ASIC has set a three-year period to be used by banks and credit providers when assessing a new credit card contract or credit limit increase for consumers.

From 1 January 2019, under the revised responsible lending obligations, a credit card contract or credit limit increase must be assessed as unsuitable if it is likely the consumer would be unable to repay the credit limit within this period. The three-year period will apply to all classes of credit card contracts.

ASIC has prescribed a three-year period to strike an appropriate balance between:

  • preventing consumers from being in unsuitable credit card contracts, and
  • ensuring that consumers continue to have reasonable access to credit through credit card contracts.

In July 2018 ASIC released Consultation Paper 303 Credit cards: Responsible lending assessments (CP 303), which outlined the proposal to prescribe a period of three years for responsible lending assessments. The consultation paper suggested this period would apply to all classes of credit card contracts.

Today ASIC published a feedback report (REP 590) which outlines the submissions received and ASIC’s responses. ASIC Credit (Unsuitability-Credit Cards) Instrument 2018/753 has also been created.

In REP 590 ASIC provides further guidance on the assumptions that should be made when assessing whether a consumer can repay the credit limit within three years. This includes guidance on:

  • fees on credit card accounts
  • interest rates charged on credit card contracts held with other credit providers, and
  • the effect of the reform on responsible lending assessments for other credit products.

The new legal requirement commences on 1 January 2019. Credit providers are expected to have systems in place to ensure that that they can meet the new obligations.

The revised obligations will apply to licensees that provide credit assistance and licensees that are credit providers for both new credit card contracts and credit limit increases under existing credit card contracts.  ASIC will monitor the prescribed period and our guidance to ensure that it is achieving the goals of the reform.

Background

In March 2018 the Government implemented reforms in response to the Senate Economics References Committee report relating to credit card interest rates. As part of the reforms, responsible lending obligations were amended to require that a credit card contract or credit limit increase must be assessed as unsuitable if it is likely that the consumer would be unable to repay the credit limit within a period prescribed by ASIC.

The purpose of this reform is to make sure that consumers can afford to repay their credit card debts within a reasonable period. Consumers will still retain the flexibility to make low minimum repayments on credit cards.

In July 2018 ASIC released Report 580 Credit card lending in Australia (REP 580), which contained our findings that more than one in six consumers are struggling with credit card debt, and that lenders could do more to take proactive steps to address persistent debt, low repayments or poorly suited products. We also found that in the 12 months to June 2017, $621 million could have been saved if consumers who regularly incur interest charges had used a lower rate card.

In REP 580 ASIC flagged that it would publicly report on the credit providers who do and don’t respond to the findings and this will occur later in 2018.

ASIC received 15 submissions in response to CP 303. ASIC thanks the people, businesses and associations that took the time to provide comments on our proposal.

Westpac Cops A Little Fine

We look at Westpac’s poor home lending practice

Please consider supporting our work via Patreon

Please share this post to help to spread the word about the state of things….

Economics and Markets
Economics and Markets
Westpac Cops A Little Fine
Loading
/

Westpac admits to breaching responsible lending obligations

ASIC says Westpac has admitted breaching its responsible lending obligations when providing home loans and agreed to submit to a $35 million civil penalty to resolve Federal Court proceedings under the National Consumer Credit Protection Act 2009 (Cth) (the National Credit Act). A three-week trial for this matter was due to commence in the Federal Court yesterday.

The parties have jointly approached the Federal Court seeking orders that Westpac contravened the responsible lending provisions of the National Credit Act because its automated decision system:

  • did not have regard to consumers’ declared living expenses when assessing their capacity to repay home loans, and instead used a benchmark (the Household Expenditure Measure); and
  • for home loans to owner occupiers with an interest-only period, failed to use the higher repayments at the end of the interest-only period when assessing a consumer’s capacity to repay the loan. For example, for a loan of $500,000 at 5.24% with a term of 30 years and a 10-year interest-only period, the assumed repayment using the incorrect method is $2,758 per month, whereas the actual repayment after the expiry of the interest-only period using the correct method is $3,366 per month.

The litigation related to Westpac’s home loan assessment process during the period December 2011 and March 2015, during which approximately 260,000 home loans were approved by Westpac’s automated decision system. For approximately 50,000 home loans, Westpac received, and did not use, consumers’ actual expense information that was higher than the Household Expenditure Measure. For approximately 50,000 home loans, Westpac used the incorrect method when assessing a consumer’s capacity to repay a home loan at the end of the interest-only period. Of these approximately 100,000 loans, Westpac should not have automatically approved approximately 10,500 loans.

If approved by the Federal Court, this will represent the largest civil penalty awarded under the National Credit Act.

Westpac admitted contraventions of the National Credit Act and the parties filed a Statement of Agreed Facts and joint submissions as to the appropriate penalty. Westpac will also pay ASIC’s litigation and investigation costs.

The National Credit Act provides consumer protections to ensure that credit providers make reasonable inquiries about a borrower’s financial situation, verify the information that they obtain and assess whether a loan contract will be unsuitable for the borrowers.

The responsible lending laws are designed to ensure that lenders have regard to all relevant information about the consumer before approving a loan to minimise the risk of adverse outcomes for the consumer over the course of the loan. Lenders must have in place the right processes to ensure that they comply with these important obligations.

ASIC Chair James Shipton said, ’This is a very positive outcome and sends a strong regulatory message to industry that non-compliance with the responsible lending obligations will not be tolerated. Responsible lending in the home lending market is absolutely vital to consumers, banks and our economy.

‘This outcome, and ASIC’s actions in relation to responsible lending, reinforce that all lenders must obtain information from individual borrowers about their financial situation to ensure that they can properly assess the ability of the customer to repay the loan. Lenders must then verify the information to ensure that it is true, and then assess whether the loan is unsuitable for the borrower. Taken together, these responsible lending obligations are a cornerstone protection for both borrowers and lenders,’ he said.

‘This outcome is a warning to all lenders that they must comply with the responsible lending obligations. If they do not, ASIC will take action to enforce the law.’

Background

ASIC published its review of interest-only loans in August 2015 (refer: 15-220MR), as part of a broader review by the Council of Financial Regulators into home-lending standards. The review included 11 lenders, including the big four banks, and found that lenders were often failing to consider whether an interest-only loan would meet a consumer’s needs, particularly in the medium to long-term (refer: 15-220MR). ASIC was particularly concerned with Westpac’s home loan assessment process, and with Westpac providing very lengthy interest-only periods (up to 15 years) for owner occupiers.

As part of the outcomes of ASIC’s work, ASIC required lenders and brokers to raise standards to ensure they were complying with responsible lending obligations. The 11 firms in our review, including Westpac, all committed to implementing stronger standards.

ASIC has provided guidance on responsible lending in Regulatory Guide 209 Credit licensing: Responsible lending conduct (RG 209). ASIC is updating its guidance this year and will be engaging in a full public consultation as part of this process.

ASIC has also been engaging with the Government in relation to comprehensive credit reporting and a proposed open banking regime. These initiatives will assist in improving responsible lending standards by making high-quality information about consumers’ financial situation available to lenders when assessing the suitability of a loan.

IPOs must disclose royal commission exposure

ASIC has warned companies seeking to raise money through IPOs that they must tell investors how they are likely to be affected by the royal commission, via InvestorDaily.

 The corporate regulator released Report 589: ASIC regulation of corporate finance on Friday. The report covers ASIC’s regulation of fundraising activities, M&A and other corporate governance transactions throughout the first six months of 2018.

ASIC raised disclosure concerns with 19 per cent of the prospectuses filed in the period. The top concern was that the business model was not fully of adequately disclosed.

One of the ongoing concerns for ASIC this year when it comes to IPOs has been the disclosure of risks associated with the royal commission into misconduct in the banking, superannuation and financial services industry.

ASIC reveals in the report that during the first six months of 2018 it “closely examined and queried the adequacy of disclosure about the risks associated with a wealth management company’s vertical integration model”.

“If a financial services company raises funds through an IPO over the coming period, we consider that investors should be given candid information about how the business may be affected by the issues being raised in the royal commission,” said ASIC.

Depending on the business model, companies will be required to disclose relevant historical and current interactions with regulators – as well as specific regulatory risks the the business may encounter, said ASIC.

ASIC also warned against the practice of leaking information to the media about upcoming IPOs.

“We are concerned that references to investor education reports are made public through the media, often before the prospectus is lodged with ASIC,” said the regulator.

Statements about pre-commitment to an IPO by institutional investors or ‘cornerstone investors’ should also be “made with care”, warned ASIC.

“Retail investors may interpret a large pre-commitment by institutional investors as a sign the IPO is a good investment and decide to follow suit,” said the report.

ASIC publishes a review of reverse mortgage lending

ASIC’s review of the reverse mortgage industry highlights that some taking a reverse mortgage could face financial difficulty later in life. This despite the fact that borrowers can never owe the bank more than the value of their property, and can remain in their home until they pass away or decide to move out

Thus, while this type of finance may assist older home owners (70% aged 55-85 own their own home), they face the dual risks of compounding effects on the original loan value as interest is rolled up…

… and significant risks should home prices fall, leading to loss of all or most capital.  63% of borrowers may end up with less equity than the average upfront cost of aged care for one person by the time they reach 84.

Plus there is limited competition, as just 2 credit licensees wrote 80% of the dollar value of new loans from 2013 to 2017.

A review by ASIC has found that reverse mortgages are allowing older Australians to achieve their immediate financial goals – improving their lifestyles in retirement – but longer-term challenges exist.

For older Australians who own their home with few other assets, a reverse mortgage can allow them to draw on the wealth locked up in their homes, while they continue to live in their property.

ASIC reviewed data on 17,000 reverse mortgages, 111 consumer loan files, lender policies, procedures, and complaints. We also commissioned in-depth interviews with 30 borrowers and consulted over 30 industry and consumer stakeholders.

The review found borrowers had a poor understanding of the risks and future costs of their loan, and generally failed to consider how their loan could impact their ability to afford their possible future needs. Lenders have a clear role to play here and need to do more: for nearly all of the loan files we reviewed, the borrower’s long term needs or financial objectives were not adequately documented.

Importantly, under legal protections in place since 2012, borrowers can never owe the bank more than the value of their property, and can remain in their home until they pass away or decide to move out. However, depending on when a borrower obtains their loan, how much they borrow, and economic conditions (property prices and interest rates), they may not have enough equity remaining in the home for longer term needs (e.g. aged care).

ASIC Deputy Chair Peter Kell said “Reverse mortgage products can help many Australians achieve a better quality of life in retirement.”

“But our review shows that lenders and brokers need to make inquiries that would lead to a genuine conversation with customers about their possible future needs, not just a set of tick boxes on a form.”

ASIC’s report also finds that there is an opportunity for lenders to reduce the risk of elder abuse. Under the new Code of Banking Practice, recently approved by ASIC, banks will be required to take extra care with customers who may be vulnerable, including those who are experiencing elder abuse.

Consumers also had limited choices for finding a reverse mortgage. Several providers withdrew from the market after the global financial crisis. From 2013 to 2017, two credit licensees provided 80% of the dollar value of new loans from 2013 to 2017.

Background

Reverse mortgages are a credit product that allows older Australians to borrow using the equity in their home. The loan does not need to be repaid until a later time, typically when the borrower has vacated the property or passed away. They are a more expensive form of credit compared to standard variable owner occupier home loans; the interest rates are typically 2% higher and, as there are no repayments required, interest compounds.

Consumer demand for reverse mortgages has grown gradually since the global financial crisis, with the total exposure of ADIs to reverse mortgages increasing from $1.3 billion in March 2008 to $2.5 billion by December 2017.

ASIC commenced a review of lending practices and consumer outcomes in the reverse mortgage market to proactively examine issues that might emerge for older Australians.

As part of this review, we evaluated the effectiveness of enhanced responsible lending obligations for reverse mortgages which were introduced five years ago into the National Consumer Credit Protection Act 2009 (National Credit Act).

This review examined five brands, who collectively lent 99% of the dollar value of approved reverse mortgage loans in 2013-17. These brands were: Bankwest, Commonwealth Bank, Heartland Seniors Finance, Macquarie Bank and Westpac (comprising St George Bank, the Bank of Melbourne and BankSA). As of late 2017, Macquarie Bank and Westpac are no longer providing new reverse mortgages.

This project forms part of ASIC’s broader work for older Australians to help bring about positive changes for these consumers in credit and financial services: see REP 537 Building seniors’ financial capability report 2017 and REP 550 ASIC’s work for older Australians.

ASIC’s MoneySmart website has information for consumers about reverse mortgages. Consumers can also use MoneySmart’s reverse mortgage calculator to see how a reverse mortgage can impact the equity in their home.