Tag: ASIC

Westpac to refund premiums for unwanted insurance cover

ASIC says following an ASIC surveillance, Westpac will write to more than 10,600 insurance customers and will offer to refund any premiums paid for insurance cover they did not need. Westpac charged customers for loan protection insurance while the customer did not have a loan on foot and where the customer did not intend to be covered for that period.

Customers affected include those who took out a Mortgage Secure (MS) or Home Loan Protection (HLP) insurance policy when they applied for a home loan. These products were sold as consumer credit insurance (CCI) since 2002 and 2007 respectively, and were designed to provide a benefit in the event that the customer was not able to repay their home loan due to certain events occurring such as sickness or death.

An ASIC surveillance uncovered that Westpac may have been collecting premiums from some customers for a CCI policy over a period when the customer did not have a home loan. In particular, ASIC was concerned that Westpac had been collecting premiums for these products:

  • before a home loan was drawn down,
  • after a home loan was repaid, or
  • where a customer did not go ahead with a home loan.

ASIC Deputy Chair Peter Kell said, ‘It is important that a product is sold in a way that is consistent with what it is designed to do, in order to ensure that customers don’t pay for something they don’t need. In this case, Westpac customers may have been paying for insurance cover they did not need, either because it covered risks that were not present or risks against which they were already insured.’

Esanda compensates consumers for conduct by finance broker

ASIC says that following an ASIC investigation of Get Approved Finance, a West Australian car finance provider, Esanda has agreed to compensate more than 70 borrowers for car loans organised by Get Approved Finance.

ASIC’s investigation found that between 2011 and 2014, over 15 brokers employed by Get Approved Finance engaged in unfair conduct by having Esanda approve loans for consumers with poor credit histories, who otherwise did not meet Esanda’s lending criteria. The brokers arranged for a friend or relative of the consumer to become the nominated borrower, instead of the consumer who was not eligible for credit. They did this by misleading the friend or relative about the effect of the documents they were signing, for example, by stating they were a guarantor rather than the borrower.

The Get Approved Finance brokers also sold add-on products (such as insurance or warranties), on behalf of various insurers, to some borrowers without their knowledge or consent. The additional premiums increased the amount borrowed and therefore the risk of borrowers defaulting. In one case, the consumer was sold add-on products costing more than $15,000, increasing the amount borrowed from around $24,000 to over $39,000.

The total value of the loans financed was more than $1.38 million, with some loans approved of over $50,000.

Get Approved Finance was able to earn commissions from both Esanda and the providers of the add-on products that would have been lost if Esanda had rejected the applications for credit. ASIC was concerned that Esanda did not have systems in place to manage the risks created by these commission payments or to effectively identify the serious misconduct by the Get Approved Finance brokers, given that it continued for over two years.

Esanda is a division of Australia and New Zealand Banking Group Ltd.

West Australian-based finance broker, Jeremy (WA) Pty Ltd, trades as Get Approved Finance.

ASIC Says High-Frequency Trading and Dark Liquidity Is OK

High-frequency trading and dark liquidity have been two of the most topical market structure issues globally over recent years. During 2015, ASIC have undertaken two new reviews of high-frequency trading and dark liquidity. The aim of these reviews has been to update and build on their earlier analysis of equity markets and to assess the effect of high-frequency trading on the futures market.

No further regulation specifically addressing high-frequency trading or dark liquidity is proposed at this stage but ASIC says they will continue to monitor developments involving these and other markets issues.

The 2015 reviews involved:

(a) stakeholder engagement, including over 40 meetings with fund managers, market participants, high-frequency traders and market operators. Over 20 separate meetings on principal trading and facilitation with market participants, fund managers and overseas regulators;
(b) in-depth analysis of equity and futures order and trade data; and
(c) literature review, including research by academics and other regulators

High frequency trades make up more than 30% of all trades, and dark turnover is sitting at about 12%.

ASIC-HFT-Oct-2015ASIC’s Key Findings

High Frequency Trading – Equity Markets

  1. The level of high-frequency trading in our equity markets is reasonably steady at 27% of total turnover (this is comparable to Canada, the European Union and Japan).
  2. However, the concentration of high-frequency trading in our markets is higher, with 30% fewer high-frequency trading accounts. Trading is also more active in mid-tier securities than in 2012.
  3. High-frequency traders are trading somewhat more aggressively than in 2012, while still contributing significantly to the orders at the best displayed prices. Average holding time is between 50 and 60 minutes.
  4. High-frequency traders appear to have become more sophisticated. Compared to 2012, they are better at avoiding interacting with one another and they are extracting larger gross trading revenues. ASIC estimate that they earned $110–180 million in aggregate over the 12 months to 31 March 2015. This translates to a cost of 0.7 to 1.1 basis points to other market users. This is material, but substantially less than other figures suggested by some, and less than some other trading costs (e.g. average bid–offer spreads are 13 basis points).
  5. High-frequency trading does not appear to be a key driver of transaction costs. It appears that higher levels of high-frequency trading assist in lowering transaction costs for low turnover securities.
  6. Some concerns about predatory trading remain (i.e. where trading is undertaken to exploit others or unfairly induce them to trade). While not excessive in our markets, predatory trading can adversely affect the trading outcomes for fundamental investors (those who buy or sell on an assessment of intrinsic value). Fundamental investors remain ASIC’s regulatory priority and unchecked predatory trading can undermine our objectives for those investors to have confidence and trust in our markets and for our markets to be fair, orderly, transparent and efficient.

High Frequency Trading – Futures market

  1. High-frequency trading has grown rapidly in the futures market (130% since December 2013), although from previously low levels. High-frequency trading in the S&P/ASX 200 Index Futures Contract (SPI) accounts for 21% of traded volume and in the Three Year and Ten Year Commonwealth Treasury Bond Futures Contracts (bond futures) it accounts for 14% of traded volume. While these levels do not currently concern ASIC, they are closely monitoring growth
  2. ASIC are conducting inquiries into a number of traders for excessive order entry and cancellation in the ASX 24 market during the quarterly expiries (i.e. the ‘roll’). This practice affects other market users because it prevents the prioritisation of their orders and forces them to cross the spread (i.e. pay more). ASIC has asked ASX to consider what steps may be taken to discourage this practice.

Dark liquidity

  1. There has been a partial shift back to using dark liquidity for its original purpose, namely large block trades to reduce market impact. This is a positive development and, in part, a response to the lowering of block trade thresholds in May 2013
  2. Many of the concerning trends with crossings systems that ASIC identified in 2012 have abated. The reasons for this are likely due to buy-side clients demanding improved standards and ASIC market integrity rules introduced to enhance fairness and improve transparency around the operation of crossing systems
  3. There has been a decline in the use of crossing systems and growth in the use of the exchange dark venues (i.e. ASX Centre Point and Chi-X hidden orders). This is likely a response to the trade with price improvement rule introduced in May 2013, and a lack of price improvement opportunities in crossing systems
  4. There is a trend here and overseas toward exchange and crossing system operators seeking to preference some market users over others (e.g. better or worse order execution priority) for dark trading. These developments have the potential to undermine fair and non-discriminatory trading and may be inconsistent with operators’ obligations. ASIC is unlikely to support any form of preferencing where it unduly favours some market users over others, unfairly limits access to market facilities, or otherwise results in the unfair treatment of orders or market users
  5. ASIC has concerns about how some market participants are managing their conflicts of interest for principal trading and client facilitation. Market participants should review their arrangements to protect clients’ trading intentions, manage conflicts of interest, avoid the risks of insider trading, conduct compliance and supervision and have appropriate incentive structures. They should avoid situations where staff are responsible for the participant’s own trading while having access to unexecuted client orders. Additional controls, including physical separation, should be put in place to manage the conflicts and conduct risk arising from active facilitation

We think high frequency trading is of concern, because it is clear, those who invest in major IT systems to reduce transaction times have significant market advantage – it has become an arms race, where smaller players cannot win. The system is essentially gamed.

NAB changes debt collection practices following concerns by ASIC

According to ASIC, National Australia Bank (NAB) has made changes to its debt collection practices following ASIC concerns that some of NAB’s collection letters may have been misleading, deceptive or unconscionable.

ASIC was concerned that NAB was sending debt collection letters to customers using letterheads for “Fairhalsen Collections” and “Brunswick Collections Services”, which may have given the incorrect impression that NAB had sold, outsourced or otherwise escalated a debt when this was not the case. These letters only disclosed that the entity was a division of NAB in fine print at the bottom of the page.

ASIC was also concerned that letters sent to some customers during the collection process stated that if the debt was not paid, or contact made:

  • legal proceedings for recovery of the entire debt might commence without further notice and that such proceedings could result in a judgment being entered and/ or bankruptcy;
  • a debt collector might visit the customer’s  home to collect the debt; or
  • NAB might use any other legal action necessary to collect the debt.

In fact, for the majority of recipients, such action was either unlikely or would only be considered at a later stage in the collection process.

In response to ASIC’s concerns NAB has removed from its collection letters:

  • references to Fairhalsen Collections and Brunswick Collection Services
  • representations in relation to face-to-face contact, legal action and bankruptcy (unless such action is likely to occur).

ASIC Deputy Chairman Peter Kell said, ‘Creditors and collectors are entitled to accurately explain the consequences of non-payment of a debt, but the consequences must not be misrepresented or overstated. The threat of legal proceedings and bankruptcy can be very stressful. Collectors must not threaten legal action if such action is not possible, not intended, or not under consideration.’

National Australia Bank to implement a large scale Financial Advice Remediation program

ASIC has announced that from today, National Australia Bank (NAB) will be contacting customers who may have received non-compliant advice since 2009. Affected clients will have their files reviewed to determine if compensation should be paid. NAB will also provide affected customers with financial assistance to seek professional independent advice where appropriate.

ASIC has worked with NAB to develop their Financial Advice Customer Response Initiative (CRI), a large review and remediation program for customers affected by non-compliant advice. ASIC will ensure that the CRI will provide a fair and effective mechanism for customers to be properly compensated (REF: MR15-101). The CRI will also be subject to independent scrutiny by an external consultant, which will report its findings to ASIC. ASIC acknowledged NAB’s co-operation in this matter. This action is associated with ASIC’s broader Wealth Management Project (refer MR15-081).

Background

The Wealth Management Project was established in October 2014 with the objective of lifting standards by major financial advice providers The Wealth Management Project focuses on the conduct of the largest financial advice firms (NAB, Westpac, CBA, ANZ and AMP). ASIC’s work in the Wealth Management Project covers a number of areas including; (i) ASIC’s work with other the Wealth Management participants to address the identification and remediation of non- compliant advice.  This is in addition to the work ASIC is doing to ensure appropriate customer remediation where fees have been charged and no advice service has been provided; ii) Seeking regulatory outcomes where appropriate against Licensee’s and advisers. For example, since ASIC’s Wealth Management Project commenced ASIC has banned the following advisers from the financial services industry:

Property Group Spruiking SMSF Property Punished

Following ASIC action, the Supreme Court of NSW found Park Trent Properties Group Pty Ltd (Park Trent) had been unlawfully carrying on a financial services business for over 5 years by providing advice to clients to purchase investment properties through a SMSF.

In his judgment, his Honour Acting Justice Sackville said it was in the public interest that Park Trent be restrained from carrying on a financial services business.

ASIC launched legal proceedings in November 2014 against Park Trent who, by the time of the trial in June 2015 had advised over 860 members of the public to establish and switch funds into an SMSF.

In handing down his judgment, his Honour observed that Park Trent’s business model depended on “persuading relatively unsophisticated investors of the virtues of using their superannuation accounts to purchase investment properties and to establish SMSFs… Investors were influenced to make important decisions concerning their superannuation strategy with little or no genuine consideration of whether the decision took proper account of their individual financial circumstances. Some suffered financial loss as a consequence.”

His Honour also referred to the role of Park Trent’s CEO, Ronald Cross and referred to his “willingness to ignore legal advice as to the nature of Park Trent’s statutory obligations.”

His Honour said that his decision “serves as a warning to others who conduct or propose to conduct businesses which seek to influence clients to establish SMSFs for investment purposes, without having the necessary licence to do so.”

ASIC Deputy Chairman Peter Kell said: ‘This outcome demonstrates the courts, ASIC and the public will not tolerate this type of unscrupulous behaviour.

‘Property spruikers who recommend people invest in property via SMSFs, or facilitate such an investment, and who do not have an Australian financial services licence are breaking the law.

ASIC’s message is that anyone recommending or facilitating SMSFs as a way of investing in property will need to have a licence and provide appropriate advice that prioritises the client’s interests.

‘It is important that advisers who deal with SMSFs are appropriately licenced because the important safeguards and standards that come with being licenced are in place for a sector which is of growing importance to more Australian investors.’

The parties have until 29 October 2015 to file submissions on the form of final orders.

ASIC helps consumers to understand risks of interest-only mortgages

ASIC has released a suite of online tools to help consumers better understand the risks of interest-only mortgages, to complement its review of loan providers’ compliance with responsible lending laws.

The new tools, available on ASIC’s MoneySmart website at moneysmart.gov.au, include:

ASIC Deputy Chairman, Peter Kell, said while ASIC’s review had found that banks and other lenders needed to lift their game to ensure compliance with responsible lending obligations, consumers can help themselves by doing their homework before taking on such a large financial commitment.

‘For most Australians, a mortgage is one of the most significant financial decisions they will make in their lives,’ Mr Kell said.

‘While an interest-only mortgage may be attractive due to their initial lower repayments, they generally cost more in the long run.  Some lenders have also started charging higher interest rates on interest-only mortgages compared to principal and interest mortgages.

‘Anyone thinking of taking out an interest-only mortgage needs to have a clear plan of action when the interest-only period ends to ensure they can afford the repayments, which may increase significantly,” said Mr Kell.

Mr Kell suggests consumers who are considering an interest-only mortgage, or who already have one at present, should consider the following:

  • ensure you can afford the increased repayments once the interest-only period ends, and also factor in an interest rate rise
  • the principal of the loan will not reduce while you are making interest-only repayments
  • using an offset account to reduce the cost of an interest-only mortgage will only work if you can keep making these extra repayments without making any withdrawals.  If you are tempted to dip into your offset account, then you might be better off with a principal and interest mortgage instead.

ASIC’s recent probe into interest-only mortgages reinforced the fact that lenders and brokers need to meet responsible lending obligations and ensure the interest-only loans they arrange meet their customers’ requirements and objectives.

‘We expect that lenders and brokers arranging interest-only mortgages would do so in a way that is consistent with their customers’ plans,’ Mr Kell said.

Background

On 20 August 2015, ASIC released a report of its review into how lenders provided interest-only mortgages to both investors and owner occupiers (refer: 15-220MR).  The review found that lenders providing interest-only mortgages needed to lift their standards to meet important consumer protection laws.

ASIC’s MoneySmart website provides trusted and impartial guidance and online tools for Australians on issues relating to money and finances. Visit ASIC’s MoneySmart at moneysmart.gov.au.

Australia is currently experiencing low interest rates.  Consumers should build in a buffer over the minimum repayment for any interest rate rises and increases in repayments, especially if they have taken out an interest-only mortgage.

Example: $500,000 mortgage over 30 years with a constant interest rate of 6%

  1. For a principal and interest loan, a consumer would pay around $582,274 in interest over the life of the loan.
  2. For an interest-only loan with a 5-year interest-only period, a consumer would pay around $619,493 in interest (an extra $37,219 over the life of the loan) and have to find an extra $332 per fortnight in repayments after 5 years.
  3. If the interest-only period was extended to 10 years, a consumer would pay around $662,720 in interest (an extra $80,446 over the life of the loan) and have to find an extra $498 per fortnight in repayments after 10 years.

Example image from ASIC’s MoneySmart interest-only calculator

Moneysmart Interest Only

ASIC Concerned About Broker Advertising

ASIC says Elite Mortgage Brokers, a Melbourne-based Chinese mortgage broking firm, has recently agreed to make changes to its website and print advertisements in response to concerns raised by ASIC.

ASIC was concerned that the following statements, which were made in Chinese, were misleading or deceptive or likely to mislead or deceive:

  • 100% success rate
  • pre-approvals within 15 minutes
  • Melbourne’s largest Chinese mortgage broker; and
  • matching of all banks’ interest rates.

The advertisements were made over the period October 2014 through to March 2015 in the Melbourne Property Weekly and on Elite Mortgage Brokers’ business website.

ASIC was concerned that statements claiming a ‘100% success rate’ were likely to be misleading because they suggest that credit will be provided to all applicants. Lenders or brokers that are subject to responsible lending obligations generally cannot claim that all applicants will receive credit – doing so is either non-compliant with the lending laws or otherwise misleading or deceptive.

ASIC was also concerned that the other statements made were likely to be misleading or deceptive, as Elite Mortgage Brokers could not properly substantiate the claims.

ASIC Deputy Chair Peter Kell said, ‘All representations made in advertising of credit-related products, including representations regarding the size of a business or the nature of services provided, must be accurate and able to be substantiated to avoid consumers being misled. This extends to ensuring consumers from non-English speaking backgrounds are not misled or deceived by advertising in a foreign language.

‘ASIC monitors all forms of advertising and will continue to monitor advertising targeted at non-English speaking consumers. Where necessary, ASIC will take enforcement action’, Mr Kell said.

Another day, Another IT failure

From The Conversation.

St George Bank ruined a lot of bank holiday plans this weekend when their online banking systems stopped working.

The bank’s Internet systems appear to have stopped working on Sunday evening and were still unavailable almost 24 hours later on Monday afternoon. ATMs were working but, as it was a bank holiday, branches were closed meaning that people who rely on the Internet for account transfers and overseas credit card transactions were out of luck.

Apart from a short message acknowledging the outage on their website, St George has not yet given details of the causes of the problem.

But this was not the only recent Internet banking outage at a major bank.

On the 11th and 12th September, the Commonwealth Bank (CBA) suffered a prolonged disruption to its IT services in particular its ‘industry leading’ banking platform – NetBank. And this was not the only prolonged outage at CBA this year. There were IT service disruptions earlier this year, with failures to transfer money into and out of accounts, thus racking up late and overdraft fees for customers. And also last year, and before that …….

For those who would like to see the impact of such outages on CBA customers, the excellent website Aussieoutages has a whole section devoted to CBA and a blog on which customers can register their frustration, with many of the comments NSFW – as social media terms bad language.

So what has the Commonwealth Bank to say for itself about the latest outages? Nothing!

The media page on the CBA site does not even carry a recognition of the outage let alone an apology. There was however a cock-a-hoop press release on the recent decision to bin the Deposit Levy, to add to CBA’s already record profits, and more bonuses for the CEO Ian Narev. And this is from a company that is claiming to be building a culture of customer service!

Where are the banking regulators when banking customers are inconvenienced by the banks that they are paying records fees to?

Unfortunately, APRA and ASIC continue to play pass the parcel on banking regulation.

OK, but which regulator should be wielding the big stick?

In 2011, DBS Bank, the largest bank in Singapore, suffered a computer outage that deprived its customers of access to banking services for about seven hours (half of that experienced by St George customers).

After an investigation, the local banking regulator, the Monetary Authority of Singapore (MAS) hit DBS with a stern rebuke and a set of new regulatory requirements. The bank was also ordered to “redesign its online and branch banking systems platform to reduce concentration risk and allow greater flexibility and resiliency in operation and recovery capability”. In other words – fix your IT systems, or else.

Importantly, the regulator ordered DBS to increase the capital held in reserve for ‘operational risks’ by 20 per cent, or around $180 million. Under the Basel II banking regulations, banks are required to maintain a capital buffer against operational losses, in particular ‘systems risks’.

Because the failure of Internet systems is clearly an operational risk problem, APRA should be considering at least a 20% addition to the operational risk capital charge on Commbank and Westpac (which owns St George and the other banks like BankSA which went offline at the same time). According to Commbank’s latest Risk (so-called Pillar 3) report, which incidentally has pictures of happy Internet users on the front page, a 20% increase would have CBA having to raise just over an additional $500 million of capital. On the same basis, Westpac would require just under $500 million extra capital. Good luck with that, when banks are scrambling to raise capital to cover upcoming regulatory changes.

But has APRA moved to get the IT systems of the country’s biggest banks under control? No sign so far.

So what of ASIC?

ASIC has recently released its regulatory stance on so-called Conduct Risk, or “the risk of inappropriate, unethical or unlawful behaviour on the part of an organisation’s management or employees”. Conduct Risk is the very latest in regulatory fashion and is an attempt to get banks to treat their customers more fairly.

One would have thought that, in return for account fees, providing access to customers’ own money might be a start for banks?

But a quick look at the ASIC web-site shows the usual list of fines and suspensions on financial institutions so tiny that small fry seem huge. But not a whale or even a barramundi in their nets. ASIC does not go after the big fish.

So which regulator should be going into bat for the costumers of the big banks?

Both!

APRA to ensure that IT systems in banks are robust, by using capital tools. And ASIC to ensure that banks treat customers fairly. Demanding return of fees for non-performance might be start?

Author: Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie University

Federal Court finds Fast Access Finance breaches National Credit Act

ASIC says that the Federal Court has 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.

ASIC claimed that the FAF companies constructed a business model which was deliberately designed to avoid the protections offered to consumers by the National Consumer Credit Protection Act 2009 (National Credit Act), including the cap on interest charges. Consumers who were seeking small value loans (of amounts generally ranging from $500 to $2,000) entered into contracts that purported to be for the purchase and sale of diamonds in order to obtain a loan. Consumers in ASIC’s case were completely unaware of the actual nature of the contracts into which they were entering and assumed that they were obtaining a traditional loan.

The Federal Court found that the true purpose of the contracts was to satisfy the consumer’s need for cash and the FAF companies’ desire to make a profit from meeting such a need. The provisions in the contracts for the sale and resale of diamonds added nothing to the transaction. The effect of these contracts was to charge interest well in excess of the 48% interest rate cap that should have applied to these types of loans. In some cases interest of over 1000% was charged.

The Court also found that the FAF companies intended to conceal the true nature of the transaction from those responsible for enforcing the interest rate cap.

Deputy Chairman Peter Kell said, ‘Consumers seeking small amounts of credit are often desperate for money, making them vulnerable to manipulation by those who seek to operate outside the law.’

‘Safeguards exist under the law to ensure people are not exploited. ASIC will act against companies which deliberately disregard their obligations under the National Credit Act.’

The matter will be listed for a further hearing, on a date to be set, in relation to the declarations sought by ASIC, civil penalties and compensation payable by the FAF companies. The maximum penalty payable by the FAF companies for engaging in credit activities without a credit licence is $1.1 million for each contravention.