Tag: ASIC

The Hundred-million Dollar Home Loan Fraud Conspiracy

ASIC says false documents were used for more than 500 loan applications valued at approximately $170 million submitted between about March 2008 and August 2010 to numerous banks and financial institutions.

These included the Commonwealth Bank of Australia, Westpac Banking Corporation, St George Bank, Bankwest, Adelaide Bank, Bank of Queensland, Choice Home Loans, Citibank, National Australia Bank, Pepper Homeloans and Suncorp Bank.

The false documents included bank statements, payslips, citizenship certificates and statutory declarations. These were predominantly used in support of applications for home loans for house and land packages as well as for the purchase or refinance of existing homes.

The sentencing follows an ASIC investigation into Footscray-based finance broking company Myra Home Loans Pty Ltd, which traded as Myra Financial Services (Myra).

Mr Najam Shah, 58, of Victoria, has been sentenced to 5 years jail after pleading guilty to one charge of conspiring to defraud financial institutions. Mr Shah must serve 3 years and 3 months before being eligible for parole.

The charge relates to Mr Shah’s role at Myra and the creation and use of false documents to support loan applications valued at a total of approximately $170 million.

On 13 February 2017, Mr Shah entered the guilty plea during an appearance at the County Court of Victoria. Mr Shah’s plea followed his arrest and charge in January 2015. By pleading guilty, Mr Shah admitted to conspiring to defraud financial institutions.

In sentencing Mr Shah, Judge Gucciardo noted that mortgage fraud of this nature damages the integrity of the lending system and that Mr Shah’s well organised deception enabled such corruption. He further noted that Mr Shah was motivated by greed.

ASIC Deputy Chair Peter Kell said, “ASIC will continue to ensure that mortgage brokers who provide false documentation are held to account. Today’s sentencing reflects both the severity of Mr Shah’s actions and the consequences facing those who do not abide by the law.”

The matter was prosecuted by the Commonwealth Director of Public Prosecutions.

ASIC’s investigation is continuing.

ASIC bans director of unlicensed payday lender

ASIC says it has banned Mr Robert Legat from engaging in credit activities for a period of three years following the penalty decision of the Federal Court on 10 March 2017.

The Court had previously found that payday lenders Fast Access Finance Pty Ltd, Fast Access Finance (Beenleigh) Pty Ltd and Fast Access Finance (Burleigh Heads) Pty Ltd (the FAF Companies) breached consumer credit laws by engaging in credit activities without holding an Australian credit licence.

The FAF Companies used a business model which used the sale and purchase of diamonds to provide loans to consumers (the diamond model). The Federal Court found that the diamond model was designed to conceal the true nature of the transaction, which was the provision of credit. As such the FAF companies should have held an Australian credit licence under the National Credit Act.

ASIC found that Mr Legat created and caused the FAF companies to implement the diamond model, which was designed to circumvent the 48% legislative interest rate cap that would have been applicable to the loans. This conduct demonstrated a lack of judgement, integrity and professionalism on Mr Legat’s part and a disregard for the law. ASIC determined that Mr Legat is not a fit and proper person to engage in credit activities.

ASIC Deputy Chair Peter Kell said, ‘The National Credit Legislation contains important protections for consumers. ASIC will take action against people who seek to deprive consumers of these protections.’

ASIC questions legality of bank rate hikes

From The Adviser.

The corporate watchdog told a parliamentary hearing this week that the big banks could be in breach of the ASIC Act over the reasons given for hiking interest rates.

ASIC appeared before the House of Representatives Standing Committee on Economics yesterday (14 September) where chairman Greg Medcraft provided no opening remarks and instead launched straight into the inquiry.

Chairing the committee was David Coleman MP, who kicked off the questioning by raising the issue of recent rate hikes by the banks. He noted that some banks, in their public justifications for the out-of-cycle rate hikes, have named the regulatory impact but did not name any other factors.

Mr Coleman questioned if the interest rate increases were larger than could sensibly be justified by the regulatory impact.

He then asked ASIC chairman Greg Medcraft: “Would that concern you?”

“Yes, it would. I think what you are really saying is, are they profiteering on the announcement?” Mr Medcraft replied, before passing to ASIC deputy chair Peter Kell to elaborate.

“Yes, it certainly would concern us,” Mr Kell said. “It would go in effect to, I suppose, whether the public justification or explanation for the interest rate rise was actually inaccurate and perhaps false and misleading, and therefore perhaps in breach of the ASIC Act.”

The deputy chairman explained that ASIC is currently “looking at this issue” and will be working with the ACCC, which has been given a specific brief by Treasury to investigate the factors that have contributed to the recent interest rate setting.

“It is an issue we are concerned about,” Mr Kell said. “We will have to look at any particular statement carefully. I would also ask if the committee has any particular statements they have concerns about?”

CBA blames regulator for rate hikes

David Coleman MP took the opportunity to read from a 27 June press release issued by the Commonwealth Bank of Australia (CBA) which informed the market of home loan pricing changes. It stated: “To meet our regulatory requirements, variable interest-only home rates for owner-occupiers and investors will increase by 30 basis points.”

Mr Coleman said that there was “no wiggle room” in CBA’s statement, which made clear that regulatory requirements were the sole reason for the rate hike.

“CBA has very clearly put on the record that it is to meet the regulatory requirement,” he said.

“It is notable in this context that analysts who have looked at these rate rises have concluded that the rate rises will increase the profitability of the banks. Presumably, this is not the role of a regulatory change.”

Mr Coleman said that it is important that the industry is aware and that bank executives are aware that “the ACCC has powers to interrogate these matters very carefully”.

Back book repricing under scrutiny

APRA was grilled by the parliamentary inquiry earlier in the week, where Mr Coleman questioned whether CBA’s and other lenders’ back book IO repricing practices were “actually opportunistic changes” that had effectively used the APRA speed limits as excuses to garner profit.

He called on APRA chairman Wayne Byres to clarify whether lenders had put out “misleading” statements by using the APRA crackdown as reasoning for back book repricing.

Deflecting the question, Mr Byres said that APRA would wait to see what came out of inquiries by the ACCC and ASIC. He noted that ASIC would have “great interest” in the matter.

Applications for crowd-funding licences open 29 September 2017 – ASIC

ASIC says that from 29 September 2017, the new crowd-sourced funding (CSF) regime will come into effect and ASIC will begin accepting licence applications from CSF intermediaries.

Under the CSF regime, eligible public companies will be able to make offers of fully paid ordinary shares to a large number of investors via the online platform of a licensed intermediary. Generally, the CSF regime reduces the regulatory requirements for public fundraising and the intermediaries will play an important oversight role in this process.

ASIC Commissioner John Price said that the new system balances the need for regulatory oversight with supporting innovation.

‘ASIC welcomes the start of the new crowd-sourced funding laws. Crowd-sourced funding helps both start-ups and small to medium sized businesses and investors access the opportunities that are available from an innovative economy. It is also important for investors to understand the benefits and risks of crowd-sourced funding and we encourage them to refer to the materials on crowd-sourced funding on our MoneySmart website‘. he said.

For companies to access the benefits of the new CSF regime, ASIC must first license suitable intermediaries to provide crowd-funding services. Providers of CSF services must hold an Australian financial services (AFS) licence. From 29 September 2017 ASIC will begin accepting applications from potential CSF intermediaries for AFS licence authorisations to provide a crowd-funding service.

To facilitate implementation of this regime as soon as possible, ASIC’s Licensing team will consider applications from CSF intermediaries as a matter of priority.

ASIC has today released further details of its approach to the assessment of CSF intermediaries, and the information required for both new licence and variation applications seeking CSF service authorisation.

Applicants should read the information provided on this page before making an application.

ASIC has also released an update to ASIC Form 206 which can be used to convert an existing company so that it is eligible to use the new CSF regime. ASIC will now accept lodgement of ASIC Form 206.

ASIC bans flex commissions in car finance market

ASIC has formally banned flex commissions in the car finance market, with the legislative instrument to ban these commissions registered on the Federal Register of Legislative Instruments today.

Flex commissions are paid by lenders to car finance brokers (typically car dealers), allowing the dealers to set the interest rate on the car loan. The higher the interest rate, the larger the commission earnt by the dealer.

ASIC is banning these commissions because it has found that they lead to consumers paying excessive interest rates on their car loans. The ban comes after ASIC led a public consultation on banning these commissions.

“We found that flex commissions resulted in consumers paying very high interest rates on their car loans. We were particularly concerned about the impact on less financially experienced consumers,” ASIC Deputy Chair Peter Kell said.

Mr Kell thanked those who had provided feedback to ASIC’s consultation: “The feedback we received from stakeholders provided us with helpful insights, and we thank all stakeholders for their cooperation.”

Background

The legislative instrument operates so that:

  • The lender not the car dealer has responsibility for determining the interest rate that applies to a particular loan. The car dealer cannot suggest a different rate that earns them more commissions.
  • Car dealers will have a limited capacity to discount the interest rate and receive lower commissions, leading to lower costs for credit.

The legislative instrument and the Explanatory Statement can be found here.

Lenders and dealerships will have until November 2018 to update their business models, and implement new commission arrangements that comply with the new law.

Under flex commissions:

  • The lender and the dealer agree that a range of interest rates will be available to any consumer (from a ‘base rate’ up to a prescribed maximum rate)
  • The dealer can set the interest rate for a particular loan within that range and will earn a greater upfront commission from the lender the higher the interest rate
  • There is no criteria used to set the interest rate which has been shown to  result in opportunistic pricing arrangements

The commission paid on a loan is determined by the ‘flex amount’ – which is the difference between the base rate and the interest rate of the loan sold to the consumer.

The lender and dealer share the flex amount. The percentage of the flex amount kept by the dealer varies significantly and can be up to 80 per cent of the interest charges.

CBA’s view on commissions published by Treasury

From Mortgage Professional Australia

Commonwealth Bank’s views on commissions have been made clearer after the Treasury made public CBA’s submission to ASIC’s Review of Mortgage Remuneration.

When the Treasury first revealed submissions from banks, aggregators, and associations last week, CBA did not appear to have made a submission. A spokeswoman told MPA that the bank had “contributed via the ABA’s [Australian Bankers Association] submission” and CBA’s submission points several times to the ABA’s Sedgwick Review, without explicitly repeating Sedgwick’s proposal to de-link broker commissions from loan size.

However, CBA’s submission also diverges from the ABA’s views. CBA state that “we note and support the comments in the ABA’s submission regarding a self-regulatory model, however it is important that the frameworks responding to both the Retail Banking Remuneration Review [Sedgwick Review] and Report 516 [ASIC’s review] be aligned.” CBA then requests further consideration and guidance from ASIC.

Divisions appear between the major banks

CBA’s guarded views regarding commissions are not necessarily shared by other banks.

NAB’s submission called for changes to the calculation of upfront commissions, whilst Westpac’s rejected many alternate remuneration models, including ASIC’s own commission-by-LVR suggestion.

The ABA’s submission strongly supported self-regulation through the Combined Industry Forum, which includes the MFAA, FBAA and other representatives through broking. CBA, alongside other banks, faces a balancing act between the Forum’s recommendations and those of Sedgwick, which they publically vowed to implement by 2020 if not earlier.

ANZ’s views remain unknown as their submission to the Treasury remains private, if indeed one has been made.

Growing frustration with public reporting proposal

One area where CBA was open in their views was ASIC’s 5th proposal, for more public reporting of the industry.

“The development of an enhanced public reporting regime should have regard to the nature of any commercially sensitive data,” warn CBA, “there may be some instances where data should remain private and more suitable to inform the regulator’s supervisory activities,”

Brokers have also criticised ASIC’s 5th proposal, with the FBAA arguing that “the very concept of publicly reporting this data is misguided and we do not support any part of it.”

ASIC’s Releases MoneySmart tips for home buyers

ASIC has launched a series of videos to help consumers make MoneySmart decisions when buying a home. Some would say, better late than never!

The recommendations on budgeting are especially pertinent.  However a weakness of the MoneySmart calculators are they they are static, we think they need a calculator to show the impact of changing interest rates for example. That said, the TrackMySpend App is a really useful tool to get to grips with what is being spent.

TV personality Shelley Craft hosts five videos featuring essential tips on the key decisions involved with a buying a home including:

  • How to get a home loan;
  • Working out how much you can afford with a mortgage;
  • Saving to buy a home;
  • Understanding the hidden costs of buying a home and;
  • Being a guarantor for a home loan.

‘For many people, buying a home is likely to be their biggest investment. We encourage home buyers to take the time to understand their individual financial position and be aware of what they are committing to with a home loan. And it is always a good idea to shop around for the best deal’, said Peter Kell, ASIC’s Deputy Chairman.

‘It can be challenging to build a home deposit, a good place to start is to create a budget to understand how much you can comfortably afford to save, borrow and repay. ASIC’s MoneySmart offers a range of useful calculators and resources, including the savings goals and mortgage calculators, to help Australians take control of their money and reach their savings goals’, added Mr Kell.

Shelley Craft emphasised the importance of the issues addressed in the video series including the real costs involved with buying a home, saving for a deposit, the first home owner grant, interest rates and mortgage repayments.

‘Buying a home is full of excitement but it can also be stressful, especially the financial aspects’, said Shelley Craft, ‘it’s important to take your time, consider all your options and be sure to ask lots of questions, so you understand what you’re signing up for’.

‘Don’t rely on just one source when you’re shopping around for a home loan because saving even half a percent on the interest rate can save you thousands of dollars over time’, added Ms Craft.

To see ASIC’s financial tips for home buyers visit ASIC’s MoneySmart website.

Background

ASIC is the Australian Government agency responsible for financial literacy, consistent with its strategic priority to promote confidence and trust in the financial system. ASIC supports the financial capability of Australians to improve their financial knowledge and skills and develop the attitudes and behaviours to make good financial decisions.

ASIC leads and coordinates the National Financial Literacy Strategy, which sets out a national framework for financial literacy work in Australia. The Strategy highlights the importance of people having access to tailored resources and tools, and addressing the financial issues facing vulnerable sectors of the community. People experiencing high financial stress and crisis are identified as one of a number of priority audiences in the National Strategy.

Broker clients not better off, say consumer groups

From Australian Broker.

Mortgage brokers don’t always obtain better priced loans for clients than the banks and they don’t always offer a diverse range of loan options, according to a joint submission from four consumer groups to Treasury.

While the submission, written by CHOICE, Consumer Action, Financial Counselling Australia and Financial Rights Legal Centre, released on Tuesday (29 August), centred on the Australian Securities & Investments Commission’s (ASIC) Review of Mortgage Broker Remuneration, it also made a number of suggestions outside of the six proposals initially presented by ASIC.

One key call to action involved increasing standards in the industry, with consumer groups saying that some clients fail to receive the service they expect when visiting a broker.

“Advertisements for brokers claim that they will find customers the right loan, provide tailored advice or get a great loan for the client. However, their actual obligation to clients is quite low – brokers are only required to provide credit assistance that is ‘not unsuitable’ for the consumer.”

The groups called on standards to be lifted, pointing to findings in the original ASIC report which showed that:

  • The difference in interest rates between proprietary and third party channels is small with the direct channel being cheaper in some cases
  • Individual broker businesses send 80% of their loans to four ‘preferred’ lenders with these lenders being different across brokerages

“Given the trust consumers place in brokers, they should all be held to a higher standard than arranging a ‘not unsuitable’ loan for their customers. They should be required to act in the best interests of their customers,” the groups wrote.

The National Consumer Credit Protection (NCCP) Act should more clearly define what a mortgage broker is and detail any new obligations that a broker should meet, they added.

Scrapping commissions

The groups also called for both upfront and trail commissions to be removed to “best serve consumer interests”. The current remuneration structure creates two types of conflicts, they said, with brokers possibly either recommending loans too large for a consumer or recommending one loan over another due to its higher commission.

“Based on cases that financial counsellors and community legal centres see, it appears that some mortgage brokers are so motivated by commissions that they put customers at significant risk and take extreme steps, including likely document fraud and breaches of the responsible lending obligations under the [NCCP Act],” they said.

The groups recommended that upfront commissions be replaced with a fixed fee for advice model (either through a lump sum or hourly rates) while trail be scrapped entirely.

“For consumers, there is some implication that trail accounts for service delivered by the broker over the life of a loan. It is incredibly unclear what service is being delivered,” they said.

Super fees set to become more transparent and easier to understand

ASIC says from 30 September there will be significant changes to the way superannuation and managed investment funds disclose the fees and charges that affect consumers.

The new requirement follows the Australian Securities and Investments Commission (ASIC) identifying a significant amount of under-reporting of fees, as well as considerable inconsistency in the way fees and charges are listed by funds. ASIC found this made it very difficult for consumers to understand how much they were paying, what they were paying for, and to compare funds.

The changes will help bring industry–wide consistency to exactly what must be included in the product disclosure statement (PDS). And, from later in 2018, the changes will also ensure that the information in PDS and in periodic statements will match more clearly. As a result, consumers will be better able to understand the fees and costs. The consistency and more accurate disclosure of fees will also help ensure that funds are competing more fairly.

ASIC also noted that the fees consumers are being charged may reflect the type of investment, with some higher cost investments also bringing higher returns in the long term. This change to reporting will also make it easier for consumers to identify when this may be the case.

ASIC will make amendments to provide more certainty around the relevant requirements and undertake compliance checks throughout the industry, to ensure funds are meeting their obligations.

Following extensive consultation with industry on the introduction of these changes, ASIC has agreed to extend the deadline for disclosure of property operating costs in the investment fee or indirect costs to 30 September 2018. The extension on this component will help provide additional time for discussions between ASIC and industry about how to calculate these fees.

ASIC has also extended the deadline for certain disclosures in periodic statements that require changes to the internal systems of funds. This is to ensure the change can be made in a cost effective manner.  Those requirements will have effect for annual statements for the year ending 30 June 2018.

Background

These changes to reporting of superannuation and managed funds fees arise from ASIC’s concerns with inconsistency and under–reporting of fees. This issue was investigated in Report 398 Fee and cost disclosure: Superannuation and managed investment products, which identified the following key issues:

  • under–disclosure of fees and costs associated with investing indirectly through other vehicles
  • tax treatment of fees and costs
  • performance fees
  • under disclosure of management costs

Following the release of Report 398, in November 2015 ASIC issued updated Regulatory Guide 97 Disclosing fees and costs in PDSs and periodic statements to bring greater consistency and transparency to fees reporting. These changes are due to come into force from 30 September 2017, as outlined above.

Big four banks change loan contracts to eliminate unfair terms

ASIC says that following a commitment to further review their small business loan contracts, the big four banks have now agreed to specific changes with ASIC to eliminate unfair terms from their contracts.

ASIC and the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) have welcomed the changes, which mean that:

  • the loan documents will not contain ‘entire agreement clauses’ that absolve the bank from responsibility for conduct, statements or representations they make to borrowers outside the written contract.
  • the operation of the banks’ indemnification clauses will be significantly limited. For example, the banks will now not be able to require their small business customers to cover losses, costs and expenses incurred due to the fraud, negligence or wilful misconduct of the bank, its employees or a receiver appointed by the bank.
  • clauses which gave banks the power to call in a default for an unspecified negative change in the circumstances of the small business customer (known as ‘material adverse change event’ clauses) have been removed – so that the banks will now not have the power to terminate the loan for an unspecified negative change in the circumstances of the customer.
  • banks have restricted their ability to vary contracts to specific circumstances, and where such a variation would cause a customer to want to exit the contract, the banks will provide a period of between 30 and 90 days for the consumer to do so.

The banks have all acted on ASIC’s and the ASBFEO’s calls to change their practices although have taken different approaches – and in some instances, gone further than the law requires – to address concerns about these clauses.

For example, NAB has taken an industry-leading position about the application of non-monetary default clauses, while the Commonwealth Bank will provide an industry-leading 90 calendar days’ notice for any changes to loan contracts that the small business customer does not wish to accept.

All four banks have limited the use of financial indicator covenants in small business contracts to certain classes of loans (e.g. property development and specialised lending such as margin loans). The banks have agreed that financial indicator covenants will not be applied to property investment loans.

The banks have agreed that all customers who entered or renewed contracts from 12 November 2016 – when the protections for small businesses began – will have the benefit of the changes agreed with ASIC.

To ensure that the new clauses do not operate unfairly in practice, ASIC will monitor the individual banks’ actual use of these clauses to determine if they are in fact applied or relied on in an unfair way. ASIC will work with ASBFEO when assessing the results of this monitoring.

ASIC will publish more detailed information about the changes agreed with the big four banks so that other lenders to small business can consider whether changes to their contracts may be required.

ASIC Deputy Chairman Peter Kell said, ‘ASIC welcomes the significant improvements made by the banks to their small business lending agreements. The improvements have raised small business lending standards and provide important protections for small business customers. ASIC will be following up with other lenders to ensure that their small business contracts do not contain unfair terms, and we will continue to work with the ASBFEO on these issues.’

The ASBFEO, Kate Carnell said, ‘This reflects nine months of hard work by ASIC working with the big four banks to meet the expectations of the Unfair Contract Term legislation. The banks’ initial underdone response to the legislation serves as a reminder that banks were once again trying to “game” the rules and this erodes trust.  There are now very positive signs that the big four banks are demonstrating industry leadership in embracing best practice.’

Ms Carnell added that, ‘In meeting the law to cover individual loan contracts up to $1million the banks have agreed to extend the cover to small business total loan facilities up to $3 million which is a move in the right direction. Recent reviews have consistently raised that a small business loan facility of $5m is the correct benchmark. This remains a sticking point that will need to be addressed.’

The four banks will shortly commence contacting all relevant small business customers who entered into or renewed a loan from 12 November 2016, about the changes to their loans.

Background

ASIC released Information Sheet 211 Unfair contract term protections for small businesses (INFO 211) to assist small businesses understand how the law deals with unfair terms in small business contracts for financial products and services and the protections that are available for small businesses.

From 12 November 2015, the unfair contract terms legislation was extended to cover standard form small business contracts with the same protections consumers are afforded. In the context of small business loans, this means that 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. Industry was provided one year to prepare their contracts for the legislation coming into effect on 12 November 2016.

In September 2016 the ASBFEO commenced an inquiry into Small Business Loans.

In March 2017, ASBFEO and ASIC 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 March 2017, ASIC established an Office of Small Business to focus ASIC’s efforts and initiatives to help small business succeed as a key driver of the Australian economy.

In May 2017, ASBFEO and ASIC hosted a round table where the big four banks committed to make significant improvements to their small business loan contracts to ensure they meet the unfair contract terms laws (refer: 17-139MR).

Changes to contracts

As part of industry’s response to the ASBFEO’s Small Business Loans Inquiry, the banks have separately agreed to changes in their small business contracts to limit the specific events of non-monetary default entitling enforcement action by the banks (such as insolvency). The banks will now provide an opportunity for a customer to resolve a breach of most of the specified events, and ensure that enforcement action can only be taken against the small business customer where the breach presents a material credit risk to the bank.