Tag: ASIC

Payday lender penalised for overcharging consumers

Following ASIC intervention, Fair Go Finance Pty Ltd has paid $34,000 in infringement notices for overcharging interest and establishment fees on payday loans. Fair Go Finance will also refund approximately 550 consumers around $34,500 for the interest and fees it collected from consumers in excess of the maximum amount allowed under the National Consumer Credit Protection Act 2009 (National Credit Act).

An ASIC investigation into Fair Go Finance’s ‘Flexi Loan’ product identified that the loans were set up in a manner that attempted to avoid the protections offered to consumers under the National Credit Act.

Although the credit contracts stated the loans could be repaid over a three year period, in practice the consumer was required to repay the loan over a substantially shorter period (which could be as short as 19 days). Consumers were also charged a default fee if they failed to meet the shorter repayment terms.

ASIC identified that Fair Go Finance charged establishment fees of more than twice the 20% maximum allowed. Furthermore, in a number of instances the total amount repaid by consumers over the term of the loan exceeded the maximum amount allowed under the National Credit Act.

Following ASIC’s intervention, Fair Go Finance withdrew the Flexi Loan product.

‘Some payday lenders are still attempting to avoid key protections for consumers of small amount loans,’ ASIC Deputy Chair Peter Kell said.

‘ASIC will continue its focus on the payday lending market so that vulnerable consumers are not denied important protections under the law.’

ASIC acknowledges Fair Go Finance’s co-operation in this matter. Fair Go Finance is taking action to repay consumers and ensure its staff are aware of their responsibilities under the National Credit Act. An external compliance consultant has also been engaged to undertake a review of Fair Go Finance’s business operations and to report back to ASIC.

BMW Finance pays $391,000 penalty for breaching responsible lending and repossession laws

Car finance provider, BMW Australia Finance Ltd (BMW Finance), has paid penalties totalling $391,000 and had a condition placed on its Australian credit licence following concerns raised by ASIC.

The licence condition requires BMW Finance to appoint a compliance consultant after ASIC found it breached important consumer protection provisions relating to responsible lending and the repossession of motor vehicles.

ASIC found that between November 2014 and May 2015, BMW Finance:

  • failed to make reasonable inquiries about, and take reasonable steps to verify, consumers’ stated living expenses, income and cash at bank when there was an unexplained discrepancy in the figures provided, and made insufficient  inquiries about consumers’ capacity or plans to repay substantial balloon repayments due at the conclusion of the loan term;
  • failed to assess credit contracts it entered into with consumers as unsuitable, and entered into unsuitable credit contracts, when documentation provided by consumers showed there was insufficient income available after expenses to service monthly loan repayments; and
  • failed or delayed in its obligations to provide customers with statutory information setting out their rights and the options available to them after a finance company repossesses a mortgaged vehicle or the consumer voluntarily returns that vehicle.

These failures by BMW Finance to comply with the requirements of the law resulted in customers entering into unsuitable loans and losing the benefit of important protections to reduce the impact of financial hardship.

ASIC Deputy Chair Peter Kell said, ‘The outcome with BMW Finance shows failing to comply with important consumer protection provisions can result in significant penalties. ASIC will continue to monitor compliance with these provisions to reduce the risk of borrowers being placed into unsuitable loans, and to ensure that borrowers are informed of their rights and options available to them when facing financial hardship.’

In addition to the penalties, the licence condition requires BMW Finance to appoint an independent compliance consultant to conduct a review of, and report to ASIC on BMW Finance’s policies and procedures on a quarterly basis over 12 months to ensure compliance with consumer credit laws.

ASIC releases report on debt management firms

ASIC today released a research report that aims to better understand the debt management industry in Australia and the consumer experience in using debt management firms. Debt management firms promise to help consumers in financial hardship or with listings of payment defaults on their credit reports.

The report, Paying to get out of debt or clear your record: the promise of debt management firms (REP 465), was commissioned by ASIC’s Consumer Advisory Panel (CAP).

The research involved two phases:

  • a qualitative analysis and mystery shop of debt management firms by BIS Shrapnel Pty Ltd; and
  • a survey on the involvement of debt management firms acting for consumers in Ombudsman schemes covering the financial services, telecommunications and energy and water sectors.

Findings – qualitative analysis and mystery shop:

  • fees and costs were opaque making it difficult for consumers, often in significant financial hardship, to assess the cost relative to the purported value;
  • fees were often ‘front loaded’ – that is, fees were payable before services were provided thereby increasing consumer commitment through sunk costs;
  • some sales techniques create a high-pressure sales environment;
  • little information was given about important risks and some firms had a poor understanding of the relevant law and the consequences of particular strategies which may lead to unsuitable services for consumers.

Findings – Ombudsman survey data and analysis:

  • a growing number of firms are representing consumers at external dispute resolution (EDR)—this is concentrated among a few large players, with an increasing number of  small firms entering the market;
  • the disputes brought to EDR schemes by debt management firms relate almost exclusively to arguments about the removal of default listings on consumer credit reports (despite the breadth of other issues that can arise for indebted consumers);
  • while an increasing number of consumers are being represented at EDR by debt management firms, this is not leading to more credit reporting related disputes being found in favour of consumers.

‘Where consumers go to debt management firms, it is important they understand what they are getting and how much it will cost, so they can decide if it’s worth it,’ said ASIC Deputy Chairman Peter Kell.

‘The promise is always more prominent than the price”, he said.  “It is hard to find information about fees and they tend to be high, front loaded, and not refunded if the promise isn’t delivered.

‘It’s also important for consumers to understand that they have alternatives to the use of such firms that may be free of charge, such as financial counselling services.

‘Many stakeholders have raised concerns with ASIC and other regulators about potential harms posed by firms that may provide unsuitable services, act in ways not in the best interests of clients, or at worst, engage in predatory conduct leaving the consumer worse off,’ Mr Kell said.

Background

Debt management firms promise to help consumers in financial hardship or with listings of payment defaults on their credit reports by:

  • ‘cleaning’, ‘fixing’ ‘repairing’, ‘removing’ or ‘washing’ away default listings on credit reports
  • developing and managing budgets
  • negotiating with creditors, including lenders, telecommunications companies , utilities companies or debt collectors
  • advising and arranging formal debt agreements under Part IX of the Bankruptcy Act, 1966.

While the models are diverse, many debt management firms operate one-stop-shop models offering a combination of some or all of the above services.

The debt management industry has grown despite the fact that  consumers can freely access:

  • their credit report and challenge an incorrect listing at no cost;
  • help from financial counsellors or community legal services;
  • independent ombudsman schemes to help resolve disputes with lenders, telcos and utilities providers.

This suggests that there is a lack of consumer awareness about the potential benefits of alternatives to debt management firms.

There is no uniform regulatory framework for debt management firms and barriers to entry are low or non-existent. Consumers in financial hardship can be extremely vulnerable and behavioural research shows that financial stress can materially affect people’s ability to make good decisions.

Case studies

The report includes case studies, which demonstrate that some consumers experience poor outcomes.

Westpac pays $1 million following ASIC’s concerns about credit card limit increase practices

ASIC has announced that Westpac has improved its lending practices when providing credit card limit increases to customers. Westpac has also committed to a remediation program that includes proactive customer refunds, and a contribution of $1 million over four years to support financial counselling and literacy.

ASIC was concerned that Westpac failed to make reasonable inquiries about some consumers’ income and employment status before increasing their credit card limit. In particular, ASIC was concerned that Westpac, in relying largely on its automated processes, was not making reasonable inquiries of individual cardholders, which is not consistent with the responsible lending obligations under by the National Consumer Credit Protection Act 2009 (the National Credit Act).

Westpac has committed to a number of steps to address ASIC’s concerns including:

  • Changing its credit limit increase processes to ensure that, at a minimum, reasonable inquiries are made about a customer’s income and employment status to ascertain their financial situation before the limit is increased.
  • A remediation program involving a review of credit limit increases previously provided where a cardholder experiences financial difficulty, with consumer refunds paid where appropriate.
  • Engaging an independent external expert to provide assurance of the effectiveness of the remediation program.

Westpac will also make a $1 million payment to support financial counselling and financial literacy initiatives.

Michael Saadat, Senior Executive Leader of Deposit Takers, Credit and Insurers said, ‘Credit card issuers, like all consumer credit providers, have to meet obligations under responsible lending laws.’

‘ASIC maintains an ongoing focus on compliance with these laws. Where we see non-compliance, we will take action, including taking steps to ensure affected consumers are appropriately remediated.’

ASIC acknowledges the co-operation of Westpac in resolving this issue, including suspending its sending of credit limit increase invitations until ASIC’s concerns were resolved and Westpac’s processes improved.

Brokers responsible for more than half of interest-only lending

From Australian Broker.

More than half of interest-only loans come through the third party channel, corporate regulator ASIC has revealed ahead of its forthcoming review of mortgage brokers in regards to interest-only lending.

Speaking at the FBAA conference held on the Gold Coast in November, ASIC senior executive leader – deposit takers, credit & insurers, Michael Saadat announced that the regulator would turn its focus to mortgage brokers following its recent review of banks in regards to interest-only lending.

Saadat has now revealed to Australian Broker that the shift in focus has come after its review of lenders found that interest-only loans through the broker channel increased by 8% over two years.

“Since 2012, the proportion of interest-only loans sold through the broker channel has gone up from 49% to 57% as of the fourth quarter of 2014.”

However, despite writing more than half of the interest-only loans in the market, Saadat said the review found that the average value of an interest-only loan submitted by a broker was less than that of a bank.

“Clearly brokers are involved in arranging interest-only loans but the other thing we noted in our report was the size of interest-only loans also varies by channel, and actually, it is the direct channel rather than the broker channel where the larger interest-only loans have been provided.”

ASIC’s forthcoming review will analyse quantitative and qualitative data of around 10 to 12 large broking groups, according to Saadat. The review will also have a focus on record-keeping practices.

“We will also be looking to get individual customer files to see how brokers are meeting their responsible lending obligations, and how they go about recording the information they obtain and the verification they conduct on the file,” Saadat told Australian Broker.

“One of the findings of our review of lenders’ files was that record keeping practices were not as good as they could be, so we are quite interested to see how brokers are going with record keeping as well.”

 

IMF Updates Global and National Housing Outlook, Australian Property Overvalued

In the latest release, the IMF have provided data to October 2015, and also some specific analysis of the Australian housing market. We think they are overoptimistic about the local scene, and we explain why.

But first, according to the IMF, globally, house prices continue a slow recovery. The Global House Price Index, an equally weighted average of real house prices in nearly 60 countries, inched up slowly during the past two years but has not yet returned to pre-crisis levels.

chart1_As noted in previous quarterly reports, the overall index conceals divergent patterns: over the past year, house prices rose in two-thirds of the countries included in the index and fell in the other one-third.

house prices around the world_071814Credit growth has been strong in many countries. As noted in July’s quarterly report, house prices and credit growth have gone hand-in-hand over the past five years. However, credit growth is not the only predictor for the extent of house price growth; several other factors appear to be at play.

house prices around the world_071814For OECD countries, house prices have grown faster than incomes and rents in almost half of the countries.

chart2_House price-to income and house price-to-rent ratios are highly correlated, as documented in the previous quarterly report.

chart2_ Turning to the Australia specific analysis, Adil Mohommad, Dan Nyberg, and Alex Pitt (all at the IMF) argue that house prices are moderately stronger than consistent with current economic fundamentals, but less than a comparison to historical or international averages would suggest. Here is just a summary of their arguments, the full report is available.

Argument: House prices have risen faster in Australia than in most other countries, suggesting, ceteris paribus, overvaluation.

OZ-House-Prices-to-GDPCounter argument 1: House prices are in line on an absolute basis – Price-to-income ratios have risen in Australia and now near historic highs. However, international comparisons suggest that Australia is broadly in line with comparator countries, although significant data comparability issues make inference difficult.
Counter argument 2: The equilibrium level of house prices has also risen sharply – Lower nominal and real interest rates and financial liberalization are key contributors to the strong increases in house prices over the past two decades. The various house price modeling approaches indicate that house prices are moderately stronger (in the range of 4-19 percent) than economic fundamentals would suggest.
Counter argument 3: High prices reflect low supply – Housing supply does indeed seem to have grown significantly slower than demand, reducing (but not eliminating) concerns about overvaluation.
Counter argument 4: It is just a Sydney problem, not a national one – The two most populous cities, Sydney and Melbourne, have seen strong house price increases, including in the investor segment. A sharp downturn in the housing market in these cities could be expected to have real sector spillovers, pointing to the need for targeted measures—including investor lending—to reduce risks from a housing downturn.
Counter argument 5: There are no signs of weakening lending standards or speculation – While lending standards overall seem not to have loosened, the growing share of investor and interest-only loans in the highly-buoyant Sydney market, is a pocket of concern.
Counter argument 6: Even if they are overvalued, it doesn’t matter as banks can withstand a big fall – While bank capital levels are likely sufficient to keep them solvent in the event of a major fall in house prices, they are not enough to prevent banks making an already extremely difficult macroeconomic situation worse.

Let us think about each in turn.

Thus, DFA concludes the IMF initial statement is correct, and despite their detailed analysis, their counterarguments are not convincing. We do have a problem.

Consumer leasing company to pay $1.25 million in penalties

According to ASIC, the Federal Court has awarded penalties totalling $1.25 million against consumer leasing company Make It Mine Finance Pty Ltd ACN 130 102 411 (Make It Mine) for breaching consumer credit laws, including its responsible lending obligations.

The Court handed down the penalty  following its 28 April 2015 decision that Make It Mine failed to disclose important information to its customers, breached various responsible lending obligations and operated for a period whilst unlicensed (refer: 15-093MR).

His Honour Justice Beach made reference to the strong public interest in imposing penalties to deter other operators who fail to comply, stating that: ‘The consumer lease industry is growing… The undesirable practices of operators in consumer leasing and, by analogy, credit contracts for purchase by instalments, are a matter of significant public interest and importance, and are capable of serious adverse impacts on the most vulnerable members of the Australian community.’

His Honour was clear in conveying a message that businesses dealing with vulnerable consumers must take considerable care in complying with and implementing statutory safeguards designed for the protection of those consumers. In particular, ‘Commercial behaviour leveraged off the vulnerability of others will be closely scrutinised and disciplined’ where businesses fail to comply with the legislation.

The decision demonstrates that tough penalties will be imposed on credit licensees who fail to comply with their obligations under the National Credit Act, including responsible lending obligations.

ASIC Deputy Chair Peter Kell said, ‘As ASIC found in its report on the consumer lease industry issued in September 2015, the market for consumer leases is delivering poor outcomes for many consumers.’

‘Particularly given the very high cost of leases which are often taken out by vulnerable consumers, it is imperative that consumer lease providers disclose all information necessary to enable consumers to make an informed decision, and comply fully with their responsible lending obligations, including making proper inquiries about the consumer’s income and living expenses and obtaining all necessary information to enable a meaningful suitability assessment to be made. Relying on consumers being able to make payments as long as they are in receipt of Government benefits is not a substitute to making these inquiries.’

In addition to the penalties, in September 2015, Make It Mine agreed to the imposition of a condition on its credit licence by ASIC. This licence condition will require Make It Mine to engage an independent external compliance consultant to conduct a review of and report to ASIC on Make It Mine’s policies and procedures to ensure compliance with consumer credit laws.

Download the judgement

Background

Make It Mine supplies computers and household white goods to customers in receipt of Centrelink benefits. As at 30 June 2015, 17,493 Centrelink customers had a current Centrepay deduction authority for payments to Make It Mine. The total dollar amount in Centrepay deductions paid to Make It Mine during the 2014/2015 financial year was over $30 million.

ASIC received complaints from Murray Mallee Family Care in Dareton and NSW Legal Aid in 2013 which prompted ASIC’s initial surveillance. The NSW Office of Fair Trading also received complaints about Make It Mine.

The findings which led to the Court imposing the penalties were made in a proceeding brought by Make It Mine itself, and another proceeding commenced by ASIC, which were consolidated and heard together. Most of the key facts in the proceedings were undisputed and Make It Mine largely admitted the conduct.

The breaches related to:

  • The failure to inform customers of the cash price, or market value, of the goods they were purchasing on a sale by instalments basis, as well as the interest rate and total amount of interest to be paid in relation to more than 24,000 contracts entered into between July 2010 and March 2013;
  • The failure to make any enquiries about the financial position of more than 20,000 customers between April 2011 and March 2013. This included failing to make an assessment as to whether the contract was suitable; and
  • Unlicensed conduct in relation to more than 3,600 contracts entered into between July 2010 and April 2011.

In November 2014, ASIC commenced civil action against Make It Mine (refer: 14-316MR).

In September 2015 ASIC issued its report on consumer leases (refer: 15-249MR).

ANZ to pay $13 million after failing to accurately apply bonus interest

ASIC says Australia and New Zealand Banking Group (ANZ) is compensating around 200,000 customers approximately $13 million after it failed to accurately apply bonus interest to Progress Saver Accounts (PSA) for a number of years. The refund payment includes an additional amount to recognise the time elapsed since the initial breach. ANZ reported this matter to ASIC under its breach reporting obligations in the Corporations Act.

PSA holders qualify for bonus interest payments in any particular month if they satisfy deposit and withdrawal requirements for that month. ANZ misaligned the monthly cycle it applied to determine whether a PSA holder was eligible for bonus interest payments and the monthly cycle it applied to calculate bonus interest payments. This issue was limited to PSA holders who made qualifying deposits or disqualifying withdrawals near the end of their monthly interest cycle, and did not impact the payment of bonus interest in other circumstances.

As a result, PSA holders may have made a qualifying deposit or disqualifying withdrawal on the last day of the previous monthly cycle while believing that it was the first day of a new monthly cycle.

ANZ discovered the breach following a customer complaint and reported it to ASIC. ANZ advised ASIC of its intention to undertake a thorough account reconstruction exercise to determine the financial impact on all affected PSA holders. The financial impact is dependent on what other transactions occurred in neighbouring monthly cycles.

ASIC Deputy Chairman Peter Kell said, ‘ANZ has taken its breach reporting obligations seriously in this matter. Breach reporting helps ASIC ensure affected consumers are returned to the position they would have held if it were not for the breach occurring at all.’

ASIC acknowledges the cooperative approach taken by ANZ to resolve this matter.

ANZ has issued letters to current PSA holders to clarify and update existing terms and conditions such as requirements and timing to qualify for bonus interest payments.

ANZ is contacting and providing refunds to affected past and present PSA holders, a process that should be completed by the end of this week.

GE Money changes advertising following ASIC concerns

ASIC says GE Money has changed its advertising of personal loans and debt consolidation loans following concerns that the advertising was potentially misleading. The advertisements, which claimed ‘one of the best rates in the market,’ were promoting products which were subject to risk based pricing.

Risk based pricing is where the interest rate offered to the consumer is dependent on the consumer’s credit risk profile, as assessed by the credit provider. Under this pricing model, the consumer applies for the product without knowing what interest rate they will be offered (should their application be successful).

Information provided online by GE Money further described the interest rate as ‘One of the best rates in the market, from 12.99% (comparison rate 14.20%) for loans over $10,000 for new customers.’

In fact, a consumer applying for the product would be offered an interest rate between 12.99% p.a. and 34.95% p.a. ASIC was concerned that the advertising was misleading as only some consumers qualified for the lowest rate.

The overall impression given by the advertisement was that all customers would receive an interest rate that was “one of the best rates in the market”, when this was not correct. ASIC was also concerned that:

  • the use of the qualifying term ‘from,’ in the context of risk-based pricing with a significant variation between lowest and highest cost, was insufficient to prevent consumers being potentially misled
  • the headline statement ‘One of the best rates on the market’ where it appeared on a standalone basis was, in this case, too strong a claim to be effectively qualified
  • in some cases, advertising failed to provide any disclaimer or clarification
  • the disclaimer on the website failed to disclose the interest rates for risk pricing of loans and how high interest rates could actually go.

ASIC Deputy Chairman Peter Kell said, ‘Price-based marketing fosters competition and can be beneficial to consumers. However, promoters need to ensure that consumers are not misled about an advertised interest rate when their risk profile may affect the actual interest rate offered.’

‘With the increasing practice of risk-based pricing of credit products, ASIC will continue to monitor advertisements in this space and will take action in response to misleading advertisements ,’ Mr Kell said.

ASIC helps inform payday lending review

ASIC has today put forward a submission to the Independent Review of the Small Amount Credit laws. ASIC’s submission to the review notes that the current rules that apply to small amount loans, also known as payday loans, are a significant improvement over the previous State-based regimes. However, ASIC has identified a number of potential improvements that are worthy of consideration. To inform ASIC’s submission, a voluntary survey was sent to credit licensees who potentially provide small amount loans. Lenders were asked to provide information for the 2014-15 financial year on matters such as the number of applications received and the number of loans approved.

The data received indicates that the industry provided loans of $831 million last financial year, with the average loan size being $568. Over 1.4 million small amount loans were entered into, with the average length of the loan being well short of the 12 months allowed at just 50 days.

total number of contracts = 1,463,331average length=50 daysaverage loan size = $568

ASIC’s submission also drew on its recent review of industry compliance with the small amount lending provisions with our findings published earlier this year in Report 426 Payday lenders and the small amount lending provisions (REP 426).

Download a copy of ASIC’s submission