Tag: ASIC

ASIC announces further measures to promote responsible lending in the home loan sector

ASIC today announced a targeted industry surveillance to examine whether lenders and mortgage brokers are inappropriately recommending more expensive interest-only loans. With many lenders, including major lenders, charging higher interest rates for interest-only loans compared with principal-and-interest loans, lenders and brokers must ensure that consumers are not provided with unsuitable interest-only loans.

Building on earlier work on home lending standards, ASIC is also announcing that eight major lenders will provide remediation to consumers who suffer financial difficulty as a result of shortcomings in past lending practices.

Interest-only loans

ASIC will shortly commence a surveillance to identify lenders and mortgage brokers who are recommending high numbers of more expensive interest-only loans. Data will be gathered using ASIC’s compulsory information-gathering powers from large banks, other banks, mutual banks and non-bank lenders.

In an environment where many interest-only loans are now clearly more expensive than principal-and-interest loans, lenders and mortgage brokers must carefully consider the implications of providing borrowers with interest-only loans. While interest-only loans may be a reasonable option for some borrowers, for the vast majority of owner-occupiers in particular, an interest-only loan will not make sense.

Past lending practices

In 2015, ASIC conducted a review of how lenders provide interest-only home loans. ASIC found that lenders were not properly inquiring into a consumer’s actual living expenses when assessing their capacity to make repayments. ASIC’s review led to industry-wide improvements by lenders: see 15-220MR Lenders to improve standards following interest-only loan review.

As part of today’s announcement, eight lenders examined by ASIC have improved their practices for enquiring about expenses to determine the consumer’s financial situation and capacity to make repayments. Rather than obtaining a single monthly living expense figure and then relying on a benchmark figure to assess suitability, borrowers’ actual figures for different categories of living expenses (e.g. food, transport, insurance, entertainment) will now be obtained. This will provide lenders with a better understanding of consumers’ expenses.

In addition to typical hardship processes, lenders will individually review cases where consumers suffer financial difficulty in repaying their home loans, and determine whether they have been impacted by shortcomings in past lending practices. Where appropriate, consumers will be provided with tailored remediation, which may include refunds of fees or interest.

As interest rates are currently at record lows, and were falling in the lead up to 2015 and during 2016, ASIC does not expect lenders to identify high numbers of consumers who are now experiencing financial difficulty due to past lending decisions. Nevertheless, these additional actions will ensure that consumers are not disadvantaged.

To ensure that these remediation programs are operating effectively, ASIC is requiring lenders to audit their processes.

ASIC Deputy Chairman Peter Kell said, ‘Home loans are the biggest financial commitment most people will ever make. In assessing whether borrowers can meet loan repayments without substantial hardship in the short and longer term, it is important that lenders can collect and rely on information which provides an accurate view of the consumer’s financial situation. This is especially the case when interest rates are at record low levels’.

‘Lenders and mortgage brokers must also ensure that consumers are being provided with the home loan product that meets their needs. Lenders and mortgage brokers need to think twice before recommending that a consumer obtain a more expensive interest-only loan’.

Background

In 2015, ASIC reviewed interest-only loans provided by 11 home lenders, and issued REP 445 Review of interest-only home loans (Refer: REP 445) in 2015, which made a number of recommendations for home lenders to comply with their responsible lending obligations (Refer:15-297MR).

In REP 445, ASIC gave guidance on how lenders can make proper inquiries into a borrower’s actual expenses.

ASIC’s monitoring of lenders’ home lending practices continues. ASIC will carry out further reviews to ensure that industry standards are improved where necessary. ASIC will also take enforcement action as appropriate.

Any consumer with concerns about their ability to make home loan repayments should contact their lender in the first instance. Consumers can also access free external dispute resolution, through either the Financial Ombudsman Service (FOS) or Credit and Investments Ombudsman (CIO).

The eight lenders are:

  • Australia and New Zealand Banking Group Limited
  • Bendigo and Adelaide Bank Limited
  • Commonwealth Bank of Australia
  • Firstmac Limited
  • ING Bank (Australia) Limited
  • Macquarie Bank Limited
  • National Australia Bank Limited
  • Pepper Group Limited.

ASIC has also provided guidance to industry in Regulatory Guide 209 Credit licensing: Responsible lending conduct (Refer: RG 209).

Responsible lending is a key priority for ASIC in its regulation of the consumer credit industry. The changes made by the eight reviewed lenders continue a number of developments and outcomes involving responsible lending:

  • Treasury releases ASIC’s Review of Mortgage Broker Remuneration.
  • ASIC filed civil penalty proceedings against Westpac in the Federal Court on 1 March 2017 for alleged breaches of the National Consumer Credit Protection Act 2009 (refer: 17-048MR).
  • Cairns-based car yard lender, Channic Pty Ltd, and broker, Cash Brokers Pty Ltd, breached consumer credit laws (refer: 16-335MR). Part of the court’s judgement was that the broker did not meet all of the necessary responsible lending obligations before providing credit assistance because he did not consider the borrower’s insurance expenses, which was required under the credit contract and represented a significant portion of the borrower’s income.
  • ANZ paid a $212,500 penalty for breaching responsible lending laws when offering overdrafts (refer: 16-063MR).
  • Payday lender Nimble to refund $1.5 million following ASIC probe (Refer: 16-089MR).
  • BMW Finance pays $391,000 penalty for breaching responsible lending and repossession laws  (refer: 16-019MR).
  • Westpac pays $1 million following ASIC’s concerns about credit card limit increase practices (refer: 16-009MR).
  • Bank of Queensland Limited improved its lending practices following ASIC’s concerns about the way it assessed applications for home loans (Refer: 15-125MR).
  • The Cash Store Pty Ltd and Assistive Finance Australia Pty Ltd failed to comply with their responsible lending obligations. The Federal Court awarded record civil penalties (refer: 15-032MR).
  • Wide Bay Australia Ltd (now Auswide Bank Ltd) made changes to their responsible lending policy as a result of ASIC’s intervention (refer: 15-013MR).

ASIC establishes Financial Advisers Consultative Committee

ASIC today announced the establishment of the Financial Advisers Consultative Committee, designed to improve industry engagement with its regulator, and revealed its initial membership.

‘ASIC has extensive engagement with participants in the financial advice sector as well as financial advice industry bodies and consumer organisations. We saw benefit in extending our interaction with this sector through the establishment of a committee made up of practising advisers,’ said ASIC Deputy Chairman Peter Kell.

The Financial Advisers Consultative Committee (FACC) will supplement ASIC’s existing engagement with the financial advice industry by:

· contributing to our understanding  of issues in the financial advice industry, including those directly impacting on practising advisers;

· improving ASIC’s  capacity to identify, assess and respond  to emerging  trends in the financial advice industry.

The members of the FACC are practising financial advisers with a range of skills drawn from the following areas:

  • investment;
  • insurance;
  • superannuation;
  • self-managed superannuation funds; and
  • digital financial  advice.

The FACC will provide ASIC with views on a broad range of issues relating to the financial advice industry.

FACC Members

The initial members of the FACC are: Craig Banning, Jennifer Brown, Chris Brycki, Steven Dobson, Mark Everingham, Tony Gillett, Adam Goldstien, Cathryn Gross, Suzanne Haddan and Kevin Smith.

Deputy Chairman Peter Kell said, ‘The establishment of this committee is part of ASIC’s ongoing commitment to enhancing its engagement with its stakeholders.’

Referrers being paid ‘almost as much’ as brokers

From The Advisor.

There has been a sharp increase in the use of mortgage referrers, such as real estate agents and developers, whom are being paid “almost as much” as mortgage brokers in commissions “despite doing much less”, according to the financial services regulator.

ASIC’s Review of mortgage broker remuneration, which was released for consultation last week, included 13 findings about mortgage distribution and the home loan market.

Notably, the regulator highlighted that those who merely refer consumers to lenders are paid “almost as much as brokers”, despite “doing much less”.

The regulator described mortgage referrers as individuals or businesses that provide a referral service to lenders or brokers.

“Some of the most common referrers are real estate agents, financial planners, accountants and lawyers. However, referrers may also include other types of individuals and organisations, including property developers and non-profit organisations,” ASIC said.

The number of referrals being made to lenders, either by the referrer directly or through a referrer aggregator has increased significantly.

According to ASIC, the total number of home loans sold after a referral increased from 8,124 in 2012 to 26,106 in 2015, representing an increase in value from $3.3 billion to $14.6 billion (22.6 per cent).

ASIC noted that more than 87 per cent of those sales were by two major banks.

Referrals by professional services businesses (either directly or through a referrer aggregator) made up the bulk of referrals, with one out of three of these referrals coming through a referrer aggregator.

“We found that referrers are paid almost as much as brokers. Like brokers, they receive an upfront commission when a loan application is successful.”

ASIC found that on average, lenders paid 0.46 per cent of the loan amount as an upfront commission, although for some groups of referrers this was as much as 0.56 per cent.

“This level of commission-based remuneration is paid even though referrers play a very limited role,” the regulator said.

“The referrers we reviewed all operated under a licensing exemption. Under this exemption, they are permitted to merely refer a consumer to a lender, and in doing so they are required to disclose what remuneration they may receive. They cannot provide advice to consumers, or assist them in applying for a home loan. Referrers are also not subject to the responsible lending conduct obligations in the National Credit Act.”

ASIC asked lenders and aggregators whether they sought to restrict brokers from passing on some of their commission to referrers. No lenders reported that they sought to impose such restrictions.

“Around one-third of aggregators reported that the referral agreement with the broker did include limitations,” according to ASIC.

“However, based on aggregators’ additional comments, these provisions did not appear to prohibit a broker from making such payments; rather, they appeared to require the broker to comply with the relevant legislative provisions.”

ASIC accepts enforceable undertaking from Barclays entities

Yesterday, ASIC accepted an enforceable undertaking (EU) from three Barclays foreign financial service providers (FFSPs):

  • Barclays Capital Inc. (BCI) domiciled in the United States of America
  • Barclays Capital Asia Limited (BCAL) domiciled in Hong Kong, and
  • Barclays Capital Securities Limited (BCSL) domiciled in the United Kingdom,

collectively ‘the Barclays entities.’

As part of the terms of the EU, the Barclays entities will contribute $500,000 to The Ethics Centre for research and development into the provision of financial services to Australian clients.

The EU was accepted by ASIC following concerns about significant breaches of the conditions of the ASIC class order licensing exemptions relied on by the Barclays entities, including the failure to notify ASIC of breaches within the required time.

The Barclays entities failed to disclose to clients that they were exempt from holding an Australian Financial Services licence (AFSL) and are regulated by the relevant overseas regulatory authority. BCI and BCAL are not able to demonstrate that the requisite disclosure was made to clients since first commencing reliance on the ASIC class order licensing exemption, in 2004 and 2006 respectively. BCSL is not able to demonstrate that the requisite disclosure to clients had been made across a 10 year period from 2004 to 2014. BCI also failed to notify ASIC of certain offshore investigation and enforcement matters within the time required of FFSPs.

ASIC was particularly concerned that the Barclays entities failed to report these material breaches within the 15-day time frame and as a consequence excluded themselves automatically from the benefit of the ASIC class order licensing exemptions.

To maintain the availability of the services provided by the Barclays entities to the Australian wholesale sector ASIC has granted the Barclays entities conditional individual relief from the obligation to hold an AFSL.

The duration and number of breaches together with the failure to report breaches in time demonstrated serious, systemic weaknesses in the compliance controls implemented by the Barclays entities to meet their Australian regulatory obligations.

Under the terms of the EU the Barclays entities must engage an ASIC approved independent expert to, among other things:

  • review and test the compliance framework implemented by the Barclays entities following the reporting of breaches, to meet the relevant conditions of the ASIC licensing exemption; and
  • report any deficiencies and make recommendations on how to rectify those deficiencies to ensure effective and enduring compliance with the relevant conditions of the ASIC licensing exemption.

ASIC Commissioner Cathie Armour said, ‘Foreign financial services providers relying on a class order licensing exemption must have effective and enduring measures to ensure compliance with the conditions set out in these instruments, including the fundamental obligations relating to disclosure and reporting.’

‘Entities that fail to self-report a breach of their obligations to ASIC within the required time will be subject to automatic and indefinite exclusion from the licensing exemption provided by these instruments.’

ASIC releases findings of CommInsure investigation

ASIC has released a public report today on its investigation into the life insurance business of CommInsure (the trading name of The Colonial Mutual Life Assurance Society Limited).

ASIC has been conducting an extensive investigation and examination of CommInsure’s practices, including reviewing over 60,000 documents and interviewing staff. ASIC obtained files from dispute resolution schemes, spoke to consumer advocacy organisations, and obtained independent medical and legal advice.

Key outcomes of ASIC’s investigation are:

1. CommInsure had trauma policies with medical definitions that were out of date with prevailing medical practice, specifically for heart attack and severe rheumatoid arthritis. However, this was not against the law. This is because the law allows an insurer to set out the level of cover its policy provides, including out of date medical definitions as long as these are clearly disclosed in the policy.

It is important to recognise that a consumer can end up with a life insurance policy that has out of date medical definitions in two ways (both of which we found applied to CommInsure)

  1. Insurers can sell consumers policies which already have outdated medical definitions. Although this is not against the law, it is clearly out of step with community expectations, given that consumers cannot be expected to know whether a medical definition is already outdated when they purchase life insurance. The life insurance industry has recognised this, and under the new life insurance code of practice will take steps to minimise the risk that medical definitions are out of date when policies are sold.
  2. As life insurance is a long term product, a consumer can end up  with a life insurance policy where previously current medical definitions have become out of date over time. This occurs because life insurers are legally required to maintain a consumer’s cover, and cannot easily update a policy or change its terms. While this is an important consumer protection, it creates a ‘legacy products’ issue in the life insurance industry. The Government is considering this industry-wide issue further in response to a recommendation of the Financial System Inquiry.

2. CommInsure has since updated its medical definitions, including for heart attack and severe rheumatoid arthritis. CommInsure had previously announced that it would apply its updated heart attack definition back to May 2014. In response to ASIC’s concerns that its heart attack definition was out of date from at least October 2012, CommInsure has now voluntarily agreed to apply its updated heart attack definition back to October 2012. This is the date at which global cardiology bodies published an updated consensus on the appropriate clinical marker for heart attack. CommInsure will now commence the process of identifying affected consumers and making payments as appropriate. ASIC welcomes CommInsure’s revised position on this matter.

3. Following a thorough investigation, ASIC found no evidence to support allegations that CommInsure claims managers applied undue pressure on doctors to change or alter their medical opinions.

4. In the course of the investigation, ASIC identified a number of areas where CommInsure needs to make improvements to its claims handling processes. Areas of improvement were also identified by Deloitte in their independent review of CommInsure’s claim handling. Such improvements included, for example, better and more timely communications with consumers and enhanced training and assistance for claims managers. ASIC will work with CommInsure to make sure these improvements are implemented as quickly as possible. ASIC has requested CommInsure to undergo a further implementation review by an independent expert in mid-2018, to test the effectiveness of the changes, and provide additional assurance that CommInsure is making the necessary improvements to its business. CommInsure has agreed to this request.

5. ASIC is continuing to investigate concerns that CommInsure’s advertising and promotion of life insurance policies to consumers contained potentially misleading or deceptive information in the period before March 2016. We will provide a further update on this aspect of our investigation when appropriate.

ASIC’s investigation also examined CommInsure’s surveillance processes and looked at whether there was any compromise of a CommInsure database. No breaches of the law were uncovered, but areas for improvement were identified, and further details of these issues are set out in the investigation report.

The investigation

As part of our investigation, ASIC:

  • obtained approximately 60,000 documents for consideration, including significant amounts of emails
  • interviewed a range of individuals, including customer representatives (financial and legal advisors, at the request of the customers)
  • conducted compulsory examinations
  • reviewed client files from CommInsure, the Financial Ombudsman Service (FOS) and the Superannuation Complaints Tribunal (SCT)
  • obtained external legal advice
  • obtained independent expert medical advice
  • engaged extensively with APRA
  • engaged extensively with CommInsure and its independent reviewers, and
  • liaised with FOS and the SCT and consumer law groups in relation to CommInsure matters to understand the issues faced by consumers.

In October 2016, ASIC released Report 498, Life insurance claims: An industry review.

Wider industry reforms to insurance claims handling

ASIC also conducted an industry wide review of life insurance claims handling with a report in October 2016 (refer: 16-347MR). A range of the concerns ASIC has identified in relation to Comminsure were also identified as industry-wide issues in ASIC’s report, and there are measures being undertaken by ASIC and industry to address these issues, including better public reporting on claims outcomes.

Following ASIC’s industry wide review, the Government agreed in October 2016 with ASIC’s recommendation that the exemption for insurance claims handling under the Corporations Act be reviewed as well as reviewing the penalties available for miscoduct in relation to claims handling and the coverage under Unfair Contracts Terms legislation.

Consumer advocates call for further ASIC reviews into brokers

From Mortgage Professional Australia.

ASIC’s Review into mortgage broker remuneration does not go far enough, according to consumer advocacy group CHOICE. In a panel hosted by ASIC at their 2017 Annual Forum, CHOICE’s head of campaigns and policy Erin Turner argued, “we can’ just settle for tweaks to the system…I hope this is the first report of many”.

Turner highlighted three issues in mortgage broking: a gap between consumer expectations and reality; conflicts of interest; and the need for system wide reforms beyond commission. In particular she criticised the current regulation for its stipulation on providing ‘not unsuitable’ advice. Mortgage brokers who provide advice on investments, tax and SMSFs should be ASIC’s next target, Turner said.

Turner’s comments did not go unopposed on the panel. Sitting with her was the MFAA‘s Cynthia Grisbrook, NAB’s Anthony Waldron and AFG‘s Brett McKeon. One awkward encounter saw Turner use an extravagant broker conference on a cruise ship as an example of banks’ soft dollar benefits, only for McKeon to explain that in fact it was AFG who ran the cruise.

One point that most parties did agree on (NAB excepted) is that the ongoing Sedgwick Review by the Australian Bankers Association should not be allowed to determine changes to commission. This was despite ASIC’s report referring to the Sedgwick Review at several points, and Stephen Sedgwick himself moderating the panel.

ASIC acts against alleged contraventions of FoFA obligations

ASIC says it has commenced proceedings in the Federal Court of Australia against Wealth and Risk Management Pty Ltd (WRM), and related companies Yes FP Pty Ltd (Yes FP) and Jeca Pty Ltd (trading as Yes FS) (Yes FS), in relation to various alleged breaches of the Corporations Act 2001 and the Australian Securities and Investments Commission Act 2001, including alleged breaches of best interests obligations. ASIC is seeking injunctive relief, declarations of contraventions and financial penalties.

 

WRM is licensed to advise retail clients about, and deal in, life risk insurance and superannuation products. WRM authorises advisers, generally employed by WRM’s corporate authorised representative Yes FP, who provide personal financial advice to retail clients referred to them by Yes FS, via the website yesfs.com.au.

ASIC alleges that:

  • on numerous occasions since December 2015, WRM Advisers have provided advice that is conflicted and in breach of the best interests obligations contained in the Corporations Act;
  • WRM has breached s912A(1) of the Corporations Act by not:
    • doing all things necessary to ensure that the financial services covered by its licence are provided efficiently, honestly and fairly; and
    • has not taken reasonable steps to ensure that its representatives comply with financial services laws;
  • Yes FS has contravened s911A and/or s911B of the Corporations Act by carrying on a financial services business without holding an AFSL;
  • Yes FS has contravened s1041H of the Corporations Act 2001 and s12DA of the ASIC Act by engaging in misleading and deceptive conduct; and
  • WRM, Yes FS and Yes FP contravened s12CB of the ASIC Act by engaging in unconscionable conduct in connection with the supply or possible supply of financial services.

The first hearing of the matter is listed before the Federal Court of Australia at 9:30am on 31 March 2017.

Background

Part 7.7A of the Corporations Act 2001 (Cth) was enacted as part of the “Future of Financial Advice” (FoFA) reforms which are aimed at ensuring that financial advice companies and their advisers act in the best interests of the client. ASIC alleges in this case that WRM has breached s961L of the Corporations Act.

Regulatory Guide 175Licensing: Financial product advisers – conduct and disclosure provides guidance to help licensees understand ASIC’s expectations for meeting the best interests duty, and to ensure that it is consistent with ASIC’s guidance in Regulatory Guide 244Giving information, general advice and scaled advice.

Section 912A of the Corporations Act 2001 sets out the general obligations of Australian Financial Services Licensees.

Section 911A of the Corporations Act 2001 requires any person carrying on a financial services business in Australia and providing financial product advice to hold an AFS licence or be a representative of an AFS licensee.  ASIC contends that the conduct that is the subject of this action required Yes FS to have an AFS licence or be an authorised representative of an AFS licensee.

Mortgage Brokers Are Essential To The Home Loan Industry

It has been interesting reading the media coverage of the recently released ASIC report. Some suggest brokers have been “slammed”, others suggest its  more a touch on the tiller in terms of commission models. Having read the ASIC report in full – more than 240 pages, I think there are three points worth making.

First, around half of mortgages are originated via the broker channel, it varies by lender of course, but consumers get more responsive assistance and access to industry knowledge via a broker, and our surveys indicate much higher satisfaction ratings than those going direct to a bank. Because brokers look across lenders, they should have access to a wider range of options, and (perhaps) better pricing. Different types of customers use brokers differently.  But there is a valid and important role for brokers.

Broker originated loans may be more “risky” but this is more to do with the types of consumers who choose to use them.

Second, the current commission models are complex and not transparent, especially as it relates to soft commissions, incentives and other elements. In addition, the ownership of brokers is unclear. As a result consumers cannot be sure they are getting unbiased advice, and it may be the ownership structures and commissions get in the way.  As ASIC says:

Remuneration and ownership structures can, however, inhibit the consumer and competition benefits that can be achieved by brokers.

ASIC also says:

Brokers almost universally receive commissions paid by the ‘supply side’ of the market (i.e. the lender or aggregator), rather than by the consumer. Our review identified significant variability and complexity in remuneration structures between industry participants. The common element across all remuneration structures for brokers, however, was a standard commission model made up of an upfront and a trail commission.

ASIC are not suggesting the removal of the commission model, but they are suggesting significant changes to it. There will be ongoing consultation on the nature of those changes. But I think the enhanced requirements for disclosure of ownership structures is as important. Transparency is good. Better transparency is better.

We did a piece on brokers on our video blog (in 2016) – in the Truth About Mortgage Brokers.

But third, there is something which continues to bug me. Financial Advisors have a requirement to provide “best interest” advice (see ASIC’s report today), whereas Brokers and Lenders dealing with often the largest transaction a household will undertake have a lower hurdle of “not unsuitable”. This bifurcation of the supervision regime makes no sense.

Both advisors and brokers should be clearly working in the best interest of the clients. So why not create a standard and unified regulatory framework, covering all product and financial advice?  Now, I understand ASIC has two departments, separately looking at financial advice and mortgage lending but this is not a good enough reason. Time to put all advice, whether for wealth or lending, under the same regime. Not least because investment property loans are actually about wealth building, and should be considered as part of a wealth management strategy.  One third of mortgages are for investors, and our research highlights investors are more likely to access brokers.

The requirement for transparency, quality of the advice, and consumer outcomes should be the same. Far fetched? No.

The Financial Markets Authority in New Zealand says:

Financial advisers are people who give advice about investing and other financial services and products as part of their job or business. They include financial planners, mortgage and insurance brokers and people working for insurance companies, banks and building societies that provide advice about money, financial products and investing.

They do not have this bifurcation.

All financial advisers must exercise the care, diligence and skill that a reasonable financial adviser would exercise in the same circumstances. In determining what a reasonable financial adviser would do, the following matters must be taken into account:

  • the nature and requirements of the financial adviser’s client or clients
  • the nature of the service and the circumstances in which it is provided
  • the type of financial adviser

See more in section 33 of the Financial Advisers Act 2008. See examples below of how these obligations apply to advice on insurance and credit products.

How large financial advice firms have dealt with poor advisers

ASIC has today released the findings of its review of how Australia’s largest financial advice firms have dealt with past poor advice and non-compliant advisers, including how these firms have dealt with affected customers.

The review—which forms part of ASIC’s broader Wealth Management Project—was focussed on the conduct of the financial advice arms of AMP, ANZ, CBA, NAB and Westpac. It arose out of serious concerns about past adviser misconduct, and had the broad objective of lifting standards in major financial advice providers.

The review looked at:

  • how the firms identified and dealt with non-compliant conduct by their advisers between 1 January 2009 and 30 June 2015
  • the development and implementation by the firms of large-scale review and remediation frameworks to remediate customers impacted by non-compliant advice, and
  • the processes used to monitor and supervise the firms’ advisers, focussing on background and reference-checking, the adviser audit process and use of data analytics.

ASIC Report 515 Financial advice: Review of how large institutions oversee their advisers (REP 515) covers the key findings of this review and also provides an update on ASIC’s actions against the advisers who have been identified as raising serious compliance concerns, as well as the institutions’ progress in developing review and remediation programs.

As of 31 December 2016, ASIC had banned 26 advisers identified in this review who demonstrated serious compliance concerns, and has ongoing investigations or surveillance activities in relation to many others.

A total of approximately $30 million has been paid to 1,347 customers who suffered loss or detriment as a result of non-compliant conduct by advisers during the period of this review. (This amount is in addition to the compensation being paid by the institutions as part of the ‘fee for no service’ compensation payments set out in Report 499 Financial advice: Fees for no service (REP 499)).

ASIC Deputy Chairman Peter Kell said, ‘ASIC’s report sets out the significant work that has been done by the major financial advice institutions to implement large-scale review and remediation programs to identify and remediate customers impacted by poor advice given in the past. ASIC is working closely with these institutions as they deal with customers who have been affected by the past non-compliant advice. The programs all have third-party oversight and assurance.’

‘ASIC acknowledges the work undertaken by the financial advice institutions to improve their practices, and broader compliance approach, since the period of conduct under review, supported by recent legislative and regulatory reforms.

‘However, there is further work to be done to assist in re-building consumer trust and confidence in the financial advice industry,’ he said.

ASIC identified a number of areas of concern where further improvements need to be made, including:

  • failure to notify ASIC about serious non-compliance concerns regarding adviser conduct
  • significant delays between the institution first becoming aware of the misconduct and reporting it to ASIC
  • inadequate background and reference-checking processes, and
  • inadequate audit processes to assess whether the advice complied with the ‘best interest’ duty and other obligations.

Mr Kell said, ‘Failure or delay in notifying ASIC of suspected serious non-compliant conduct significantly affects our ability to take appropriate enforcement or other regulatory action. More importantly, it may also result in an increased risk of customer detriment as so-called ‘bad apple’ advisers continue to work in the industry.’

‘Strengthening breach reporting requirements will be an important issue in the current review of ASIC’s enforcement powers announced by Government in October 2016,’ he said.

ASIC acknowledged the Australian Bankers’ Association’s recently announced Reference Checking and Information Sharing Protocol. ‘There will be considerable focus on the operation of this protocol, and we encourage the industry to take a rigorous approach to ensure it is effective so that we see rapid improvements in the checking and provision of adviser references,’ said Mr Kell.

ASIC also welcomes the development of data analytics and key risk indicator tools by all of the advice institutions to improve the early identification of potentially non-compliant advice.

ASIC has developed a number of checklists for all advice licensees and compliance consultants to consider when:

  • conducting background and reference checks before appointing a new adviser (refer Appendix 2 of REP 515)
  • auditing  advisers to assess their compliance with the best interests duty and related obligations when providing personal advice (refer Appendix 3 of REP 515), and
  • developing and implementing Key Risk Indicators to identify high-risk advisers (refer Appendix 4 of REP 515).

‘It is critical that customers are able to get financial advice they can trust. ASIC expects internal processes to support core values of putting the customer first and where there are failings, for advice firms to act quickly to provide a response in the interests of their customers. This is a message for both large and small advice firms,’ Mr Kell said.

 

ASIC Review of Mortgage Broker Remuneration Released

The Treasury has released the ASIC review on mortgage broker remuneration, together with two info-graphics on the industry. The findings will shape the future of the mortgage industry, and are now open for consultation.

Importantly, ASIC says the standard model of upfront and trail commissions creates conflicts of interest.

There are two primary ways in which these conflicts may become evident. Firstly, a broker could recommend a loan that is larger than the consumer needs or can afford to maximise their commission payment. This may also involve recommending a particular product or strategy to maximise the amount that the consumer can borrow (e.g. through the choice of an interest-only loan). In this report, we have referred to this as a ‘product strategy conflict’. Alternatively, a broker could be incentivised to recommend a loan from a particular lender because the broker will receive a higher commission, even though that loan may not be the best loan for the consumer. We refer to this as a ‘lender choice conflict’.

ASIC has put forward six proposals to improve consumer outcomes and competition in the home loan market:
(a) changing the standard commission model to reduce the risk of poor consumer outcomes;
(b) moving away from bonus commissions and bonus payments, which increase the risk of poor consumer outcomes;
(c) moving away from soft dollar benefits, which increase the risk of poor consumer outcomes and can undermine competition;
(d) clearer disclosure of ownership structures within the home loan market to improve competition;
(e) establishing a new public reporting regime of consumer outcomes and competition in the home loan market; and
(f) improving the oversight of brokers by lenders and aggregators.
ASIC consider that these proposals should be implemented before a further review of the market is conducted in three to four years to determine whether additional changes are required.
They also propose to conduct a targeted review of the suitability of advice
provided by brokers (including through a shadow shopping exercise)
commencing in 2017.

Here is the Treasury release.

As part of the Government’s response to the Financial System Inquiry (FSI), Improving Australia’s Financial System 2015, the Government requested ASIC undertake an industry-wide review of mortgage broker remuneration.

The Review found that the current mortgage broker remuneration and ownership structures create conflicts of interest that may contribute to poor consumer outcomes.

The Review outlines a number of proposals for industry aimed at improving consumer outcomes, including:

  • improving the standard commission model for mortgage brokers;
  • moving away from bonus commissions and soft-dollar benefits;
  • increasing the disclosure of mortgage broker ownership structures; and
  • improving the oversight of mortgage brokers by lenders and aggregators.

The proposals outlined in this paper are intended to elicit specific and focused feedback, and should not be viewed as a statement of the Government’s final policy position.

The Government invites all interested parties to make a submission on the proposals outlined in this paper. Closing date for submissions: Friday, 30 June 2017