Tag: ASIC

The Future of Capital Markets in a Digital Economy – Blockchain Disruption

In a speech by Greg Medcraft, Chairman, Australian Securities and Investments Commission he discusses digital disruption in capital markets. He rightly identifies blockchain technology as one of the most significant disruptive elements of all.

Regulators globally are facing new challenges brought by structural change and digital disruption. There are both opportunities and challenges posed – it is about harnessing the opportunities while mitigating the risks.
I believe that the great drawcard of digital disruption is the opportunity it brings. The markets are seeing this with global investment in fintech ventures tripling to US$12.2 billion in 2014, from US$4 billion in 2013.
It is nothing new when you think about innovations like credit cards and ATMs, which were developed by banks to facilitate customer access. But now, new developments are going beyond the banking system directly to the customer.Businesses have seen the potential for new ways of directly creating and sharing value with technologically savvy investors and consumers. Examples include:

  1. peer-to-peer lending and market-place lending
  2. robo-financial or digital advice
  3. crowdfunding
  4. payments infrastructures (e.g. digital currencies, Apple Pay).
  5. In the future, we will likely see further developments in insurance priced to reflect deeper understanding of individual risk characteristics, in areas such as home, life and car insurance (such as the use of telematics by QBE’s Insurance Box).
  6. Importantly, there is much work going on globally exploring the potential of blockchain technology.

All these innovations have the potential to change the way that investors and financial consumers interact with financial products and payments. But many of these activities may not fit neatly within existing regulatory frameworks or policy. The challenge for us will be to ensure that we continue to deliver on the priorities I mentioned earlier – investor and consumer trust and confidence and fair, orderly, transparent and efficient markets – in the face of these developments.

Potential that these developments have for capital markets – To help understand what this challenge means to us, I’d like to talk in more detail about blockchain technology. This technology – if it takes off as I think it will – has the potential to fundamentally change our markets and our financial system.

What is blockchain technology? Chances are you have heard about bitcoin – the digital currency. ‘Blockchain’ is the algorithm behind bitcoin that allows it to be traded without a centralised ledger. In basic terms, it is an electronic ledger of digital events – one that’s ‘distributed’ or shared between many different parties. And it maintains a continuously growing list of data records. It has three key features:

First, it is a vehicle for transferring value and holding records – each transaction or record is evidenced by a unique data set or ‘block’ that attaches to the continuously growing blockchain.

Second, it does not involve a central authority or third-party intermediary overseeing it or deciding what goes into it. The computers that store the blockchain are decentralised and are not controlled or owned by any single entity.

Third, every block in the ledger is connected to the prior one in a digital chain algorithm. So the record of every transaction lives on the computers of anyone who has interacted with it, and is updated with each entry. The continual replication and decentralised nature makes it secure.

How can blockchain transform capital markets? – I see four reasons.

First, efficiency and speed. At present, when investors buy and sell debt and equity securities or transact derivatives, they generally rely on settlement and registration systems that take sometimes several days to settle trades. It can take even longer, sometimes, where the trade involves cross-border parties. Blockchain holds potential to automate this whole process.

Second, disintermediation. Blockchain automates trust; it eliminates the need for ‘trusted’ third-party intermediaries. In the traditional market, buyers and sellers can’t automatically trust each other, so they use intermediaries to help give them the comfort they need. With blockchain, the decentralised ledger offers this trust. Investors can deal with each other and with issuers in private markets directly.

Third, reduced transaction costs. By eliminating the need to use settlement and registration systems and other intermediaries, there is significant potential to reduce transaction costs for investors and issuers. A June report backed by Santander InnoVentures, the Spanish bank’s fintech investment fund, estimated that blockchain could save lenders up to $20 billion annually in settlement, regulatory, and crossborder payment costs.

Fourth, improved market access. Because of the global nature of blockchain, global markets have the potential to become even more easily accessible to investors and issuers; therefore making it easier for investors and for issuers to invest in and issue debt and equity securities.

Naturally, harnessing this potential will depend on the integrity, capacity and stability of blockchain technology and processes. It will also depend on industry’s willingness to invest in, and make use of, new ways of settling and registering transactions. The potential is, nonetheless, enormous. Industry is seeing that potential and is looking to see how it and the markets might benefit.

Blockchain developments – Let me touch on four areas where the benefits of blockchain are being explored:

The first is in share, loan and derivative trades. A series of start-ups are looking to use blockchain to execute and settle securities and derivative trades.

The second is in private equity transactions. The US stock exchange, NASDAQ, is experimenting with using blockchain technology as a way of recording private equity transactions. In doing so, it hopes to provide ‘extensive integrity, audit ability, governance and transfer of ownership capabilities’.

The third is in government bond trades. A US firm is developing a way to use blockchain to record and settle short-term government bond trades on a distributed ledger.

The fourth is in money transfer. In Mexico City a firm has developed an app that lets migrants send money via the blockchain to Mexico and withdraw cash from ATMs.

How regulators are responding – I have talked about the opportunities blockchain offers. But, as I have said, these opportunities can also threaten our strategic priorities of investor trust and confidence and fair, orderly, transparent and efficient markets.  Right now, we don’t know exactly how blockchain or other disruptive technologies will evolve. But, for now, it is fair to say that they will. Blockchain potentially has profound implications for our markets and for how we regulate. As regulators and policymakers, we need to ensure what we do is about harnessing the opportunities and the broader economic benefits – not standing in the way of innovation and development. At the same time, we need to mitigate the risks these developments pose to our objectives. We also need to ensure those who benefit from the technology trust it. And, at the end of the day, we are working to ensure that investors and issuers can continue to have trust and confidence in the market.

How ASIC is responding to digital disruption? – ASIC’s role in ensuring that we harness the opportunities while mitigating the risks covers five key areas:

First, education. We are supporting investors and financial consumers in understanding the opportunities and the risks of participating in the digital economy. For example, our MoneySmart website, which last year received over 5 million visits.

Second, guidance. We are engaging with and providing guidance to industry in these areas. I want to mention two particular activities:
– The first is our cyber resilience work. We have undertaken significant work in the area of cyber resilience. Cyber resilience is the ability to prepare for,
respond to and recover from a cyber attack. In March this year, we published guidance for businesses to help in their efforts to improve cyber resilience and manage their cyber risks.
– The second is our Innovation Hub – we launched this last year. Much innovation in financial services comes from start-ups and from outside the regulated sector. The Innovation Hub is designed to make it quicker and easier for innovative start-ups and fintech businesses to navigate the regulatory system we administer. The Innovation Hub – which also includes our new industry-led Digital Finance Advisory Committee – also provides us with important information about the developments that are on the horizon, and how they might fit into the current regulatory framework.

Third, surveillance. We monitor the market and understand how investors use technology and financial products and the risks that arise. We undertake continual scans of the landscape, including developments overseas, to better understand new developments, the pace of change and emerging risks that may be posed by structural change driven by digital disruption. In the case of blockchain, there is a need for regulators to focus on and understand a number of issues, including:
– how blockchain security might be compromised
– who should be accountable for the services that make the blockchain technology work
– how transactions using blockchain can be reported to and used by the relevant regulator.

Fourth, enforcement. Of course, where we detect misconduct by our gatekeepers, we will take action. Our challenge here will be to understand how regulatory action can be taken where a transaction entered into here or overseas is recorded in the blockchain.

Fifth, policy advice. Ensuring the right regulation is in place to protect investors and keep them confident and informed, while also not interfering with innovation.

We also need to ensure that rules are globally consistent and regulators can rely on each other in supervision and enforcement with such developments. We will continue to review the current regulatory framework, analyse how new developments, such as blockchain, may fit into the framework and identify where changes may be required.

How IOSCO is responding – IOSCO too has a key role to play in this area, especially in ensuring that there is a global strategy in place and that cooperation between regulators is in place – in order to meet the challenge of addressing issues arising from cross-border transactions. IOSCO’s work plan this year in this area includes the following four priorities:

The first is working to identify and understand risks flowing from digital disruption to business models. In fact, the IOSCO Board will be holding a stakeholder
roundtable next month in Toronto to discuss financial technology developments and regulatory responses.

The second is in the international policy space. This is about designing regulatory toolkits and responses that are flexible, creative, and provide incentives for financial technology innovation that drive growth without undermining investor and financial consumer trust and confidence in our markets.An example of this is work we are considering on crowdfunding.

The third is in the area of cyber resilience. We are working with the Committee for Payments and Market Infrastructures to develop guidance that will help strengthen the cyber resilience of financial market intermediaries.
We expect this guidance to be finalised next year.

The fourth is on strengthening cooperation. We are working on enhancements to IOSCO’s Multilateral Memorandum of Understanding – or MMOU – to deal with the new technological environment in which we are operating.
The MMOU is a cooperation arrangement that enables 105 regulators to share information to combat cross-border fraud and misconduct. These enhancements will make it easier for us to take action in relation to cross-border transactions.

Cost of Consumer Leases Can Be as High as 884% – ASIC

ASIC today released a report that found that consumer leases can be a very expensive option for consumers seeking to access common household goods, and that the market for consumer leases is failing many low income consumers.

Consumer leases are a contract for the hire of goods under which the consumer will pay more than the cash price of the goods and where the consumer does not have a contractual right or obligation to purchase the item. Fixed term consumer leases with a term greater than four months are regulated under the National Consumer Credit Protection Act 2009 (Cth) (National Credit Act). Unlike credit contracts such as payday loans, consumer leases are not subject to price caps.

A 2014 report by IBISWorld estimated the value of the leasing industry in Australia as around $570 million for rentals of electronic goods (including televisions, stereos, DVD players and computers) and household appliances (including fridges, ovens, microwaves, toasters and blenders).

ASIC compared the cost of leases from two sources: the advertised prices on leasing 544 products through nine lessors, collected by the Royal Melbourne Institute of Technology (RMIT) in April 2015 on behalf of ASIC; and a review by ASIC of 69 leases provided by two lessors since 2014 to consumers in receipt of Centrelink payments.

ASIC found the market for consumer leases is delivering poor outcomes for many consumers. For similar household goods, ASIC found large price variations both across different lessors and within individual lessors for different consumer segments. In both cases the consumers that are more likely to be charged higher amounts are Centrelink recipients, despite being on lower incomes.

More specifically, ASIC found:

  • the highest price charged by a lessor, expressed as an interest rate, was 884% (for a clothes dryer).
  • that consumer leases can cost as much as five times the maximum amount permitted under a payday loan, where a cap on costs applies.
  • that consumers receiving Centrelink payments are being charged much higher prices than the prices advertised by lessors.

‘As there is no cap on the amount lessors can charge, we found that some consumers can end up paying very high costs.’ ASIC Deputy Chair Peter Kell said.

‘Of particular concern is that the most financially vulnerable consumers in Australia are paying the highest lease prices for basic household goods. For two year leases, half the Centrelink recipients in our study paid more than five times the retail price of the goods.’

The amounts charged by different lessors for the same goods vary significantly

Product and lessor Retail price Total fortnightly rental payments Amount charged above retail price Interest rate
5 kg dryer (lessor 1) $429.00 $488.80 $59.80 25.88%
5 kg dryer (lessor 2) $449.00 $1,582.88 $1,133.88 85.33%
5 kg dryer (Centrelink recipient) $345.00 $3,042.00 $2,697 884.34%

Note: The maximum fortnightly rental payment in the RMIT market survey is the payment at the 75th percentile.

ASIC is also reviewing the conduct of some lessors for compliance with their responsible lending obligations under the Credit Act.

‘ASIC is reviewing a number of larger lessors, to see if they are making reasonable inquiries to ensure the consumer can afford the lease and that it meets their needs, particularly considering how high the total cost of a lease can be. 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,’ Mr Kell said.

ASIC has taken a series of enforcement actions against lessors for failure to comply with responsible lending requirements over the last few years, including banning directors, cancelling licences and obtaining refunds for customers.

‘We will consider further enforcement action if necessary,’ said Mr Kell.

‘We also recommend consumers shop around, as there are often cheaper options available for obtaining goods. Consumers can compare the total cost of a consumer lease using ASIC’s ‘Rent vs buy’ calculator, available on ASIC’s MoneySmart website. The website also provides helpful tips on alternatives to consumer leases, such as layby, no interest loans or Centrelink advances’.

ASIC will provide a copy of this report to the panel looking into the effectiveness of the law relating to small amount credit contracts (SACCs), in accordance with section 335A of the National Credit Act. The terms of reference include consideration of whether any of the provisions which apply to SACCs should be extended to regulated consumer leases. The panel is due to report at the end of this year.

ASIC and FSI Outcomes

In a speech given by Greg Medcraft, Chairman, Australian Securities and Investments Commission at the 32nd annual conference of the Banking and Financial Services Law Association (Brisbane), he looked at the Financial System Inquiry from a regulator’s perspective.

Specifically, he sees three FSI recommendations as complementary. Product intervention powers would complement and reinforce the good practices and controls required by product design and distribution obligations. Where product design and distribution obligations were in place, and were effectively being complied with, there would be less need for ASIC to intervene. Adequate penalties provide a deterrent for gatekeepers against engaging in misconduct, and this in turn influences their behaviour. Gatekeepers who already have a solid culture have nothing to fear from these recommendations. For those who fall short, ASIC will continue to use the right nudge to change their behaviour. The introduction of a product intervention power, design and distribution obligation and appropriate penalties will assist ASIC in providing the right nudge.

Today I would like to talk about three particular recommendations of significance to ASIC.

1. for ASIC to have a new ‘product intervention’ power
2. to introduce a new product design and distribution obligation on product issuers, and
3. that penalties should be increased to act as a credible deterrent, and that ASIC should be able to seek disgorgement of profits gained by wrongdoing.

I would like to spend a little time now speaking about each of these recommendations in turn.

Product intervention power

Globally, regulators are looking for a broader toolkit to address market problems, including moving away from purely disclosure-based regulation. For example, the International Organization of Securities Commissions (IOSCO) has recommended that regulators look across the financial product value chain, rather than simply disclosure at the point of sale. In the United Kingdom, the Financial Conduct Authority has a product intervention power in place. A product intervention power would give ASIC a greater capacity to apply regulatory interventions in a timely and responsive way. It would allow ASIC to intervene in a range of ways where there is a risk of significant consumer detriment. ASIC would be able to undertake a range of actions, including simple ‘nudges’, right through to product bans. I know that some commentators have been worried that ASIC would use its powers to ban products – and that this would affect innovation and competition.

We think that such a power would not stifle innovation that has a positive impact on consumers. In fact, banning products would be very rare and would only occur in the most extreme circumstances. Both industry and regulators have a common interest in seeing innovation that fosters investor and financial consumer trust and confidence – innovation that helps investors, but does not harm them. Most interventions would likely fall well short of product banning. For example, we might be able to require amendments to marketing materials, or additional warnings. In more extreme cases, we might be able to require a change in the way a product is distributed or, in rare cases, ban a particular product feature. We agree that the use of intervention powers by ASIC would naturally need to have transparency, clear parameters and accountability mechanisms.

However, let me say that a ‘product intervention’ approach – that is, regulation that is not purely based on disclosure – is not new in the regulation of retail financial markets in Australia. This kind of regulation has improved investor outcomes in a wide range of markets over many years, for example: the Future of Financial Advice (FOFA) reforms, including the restriction on conflicted remuneration, and more broadly, the prohibition on unfair contract terms for financial products.

The FSI’s recommendation would mean that ASIC itself would have greater capacity to apply such non-disclosure based approaches in a timely and responsive way. This would be an alternative to waiting – sometimes many years – for legislation to address the problem.

Product design and distribution obligation

I will now turn to the recommendation to introduce a product design and distribution obligation for product issuers. For this recommendation, I want to set the context from ASIC’s perspective. There are three cornerstones of the free market-based financial system. These are: investor responsibility, gatekeeper responsibility, and the rule of law.

The ability of the free market-based system to function effectively and efficiently, and to meet investor and financial consumer needs, is greatly influenced by the real behaviour of its participants. Investor responsibility is key in our free market-based financial system. It is important that losses remain an inevitable part of this market system. ASIC will not, and cannot, be expected to prevent all consumer losses. In addition, it is important that gatekeepers take responsibility for their actions. Recently I have talked a lot about the culture of our gatekeepers. The culture of a firm can positively or negatively influence behaviour. Poor culture – such as one that is focused only on short-term gains and profit – often drives poor conduct. Conversely, good culture will drive good conduct. I see a good culture as one that puts the customer’s long term interests first.

So the FSI recommendation – that a broad, principles-based obligation be placed on financial institutions to have regard to the needs of their customers in designing and targeting their products – is a recommendation that puts the interests of the customer at its centre. In my view, the FSI’s recommendation aligns very closely with the theme of culture. Product manufacturers should design and distribute products with the best interests of the investor or financial consumer in mind. This is part of having a customer-focused culture.

In fact, the FSI has noted that the kinds of practices required by a design and distribution obligation would already be in place in many institutions that already invest in customer-focused business practices. Firms that already have a customer-focused culture would not need to significantly change their practices.

Penalties

Finally I would like to turn to the recommendation on penalties. The FSI recommended that penalties for contravening ASIC legislation should be substantially increased, and that ASIC should be able to see disgorgement of profits obtained as a result of misconduct. Comparatively, the maximum civil penalties available to us in Australia are lower than those available to other regulators internationally. And they are fixed amounts, not multiples of the financial benefit obtained from misconduct.

In order to regulate for the real behaviour of gatekeepers in the system, penalties need to be set at an appropriate level. And we need a range of penalties available, to act as a deterrent to misconduct. Penalties set at an appropriate level are critical in the ‘fear versus greed’ calculation of the potential wrongdoer. Penalties need to give market participants the right incentive to comply with the law. They should aim to deter contraventions and promote greater compliance, resulting in a more resilient financial system.

 

Interest Only Loan Assessments Falling Short – ASIC

ASIC today released a report that found lenders providing interest-only mortgages need to lift their standards to meet important consumer protection laws. They identified a number of issues relating to bank underwriting practices. We would also make the point that despite the low losses on interest-only loans to date in Australia, in a downturn they are more vulnerable to credit loss.

ASIC’s probe into interest-only home loans was announced in December 2014 and looked at 11 lenders, including the big four banks, to assess how they are complying with responsible lending laws.

As the national regulator for consumer credit and responsible lending, ASIC identified that demand for interest-only loans had grown by around 80% since 2012. ASIC’s review looked at how consumers were assessed for loans by lenders with a focus on the affordability of the loans over the longer term.

The review found that interest-only loans are more popular with investors and those on higher incomes, and that delinquency rates are currently lower for interest-only home loans.

However, ASIC also found that lenders have been falling short of their responsible lending obligations in the provision of interest-only loans. Lenders are often failing to consider whether an interest-only loan will meet a consumer’s needs, particularly in the medium to long-term.

Their key findings from the data review were:

  1.  The majority of interest-only home loans were extended to investors; however, a substantial proportion of interest-only home loan approvals (41% in the December 2014 quarter) were for owner-occupiers.
  2. A greater proportion of the total number of interest-only home loans was sold through third-party or broker channels, compared to direct channels
  3. The average value of interest-only home loans was substantially higher than principal-and-interest home loans for both owner-occupiers and investors, and this was especially so for loans provided through direct channels in comparison with third-party channels.
  4. Overall, there was a smaller proportion of interest-only home loans in higher LVR categories when compared to principal-and-interest home loans
  5. A diverse group of consumers tended to take out interest-only home loans. In general, interest-only home loans were more popular with consumers who earned more money, but a substantial proportion (29%) of owner-occupiers with interest-only home loans earned less than $100,000
  6. Consumers with interest-only home loans were, on average, further ahead in reducing the balance of their loan when including funds held in offset accounts related to the home loan, than those with principal-and-interest home loans.

ASIC’s review of more than 140 consumer loan files from bank and non-bank lenders identified:

  • In 40% of files reviewed, the affordability calculations assumed the borrower had longer to repay the principal on the loan than they actually did
  • In over 30% of files reviewed, there was no evidence that the lender had considered whether the interest-only loan met the borrower’s requirements
  • In over 20% of files reviewed, lenders had not considered the borrower’s actual living expenses when approving the loan, but relied instead on expenditure benchmarks.

These practices can expose borrowers to not being able to afford their loan repayments in the future, particularly for interest-only loans, which have much higher repayments after the initial interest-only period ends.

ASIC also issued a survey to the 11 lenders to gain valuable data about the growth of interest-only home loans. The findings are detailed in Report 445, Interest-only home loan review (REP 445).

ASIC Deputy Chair Peter Kell said, ‘Interest-only loans may be a reasonable option for some borrowers. However, lenders must have robust processes in place for assessing a customer’s ability to afford a loan, taking into account the increased repayments once the interest-only period ends. They should lend responsibly, and in a way that does not result in consumers taking on debt that they cannot afford, especially if interest rates rise.’

The report makes a number of recommendations that lenders and brokers should review to ensure they are complying with responsible lending obligations. Following ASIC’s review, all 11 lenders have changed their practices in line with ASIC’s recommendations or have committed to implementing necessary changes in the coming months. The recommendations include ensuring:

  • loans align with consumers’ requirements and objectives
  • lenders use a consumers’ actual expenses rather than relying on a benchmark
  • affordability assessments include buffers for future interest rate rises.

Mr Kell said, ‘We are pleased that the lenders involved in the review have already started implementing changes based on our findings. The rest of the lending industry, including brokers, should  now take note and swiftly review the practices they have in place to ensure they comply with their responsible lending obligations.’

As a result of this review, ASIC has commenced follow-up investigations in certain cases which are ongoing. Where necessary, ASIC is considering enforcement action or other regulatory action.

Digital Now The Default – ASIC

ASIC has released new guidance and waivers to further facilitate businesses providing disclosures through digital channels and to encourage innovative communication of information about financial products and services. It is essentially a ‘digital first’ option, meaning that consumers can expect electronic delivery as the default option. It recognises the significant online migration underway, and will be welcomed by many. Two points, this is a departure from “omnichannel” strategies, and it may not provide suffice protection for those who choose not to, or cannot use digital channels. The digital divide does still exist, and disadvantaged households will be least well served.

ASIC Commissioner John Price said, ‘The measures announced today respond to changing consumer preferences, with ever increasing numbers of people transacting digitally. Almost 15 million Australians now have a home internet connection and 68% of those online are using three or more devices to access the internet.

‘The changes mean product disclosure statements (PDS) and other financial services disclosure documents will be delivered to consumers digitally as the default option, unless the consumer opts out. This will reduce the costs of printing and mailing for businesses while preserving choice for those consumers who wish to receive paper.’

‘ASIC wants industry to harness the opportunities of digitisation and is encouraging the use of more engaging forms of communication using digital media – interactive, video and audio. This can boost consumer understanding of financial services and products,’ Mr Price said.

ASIC has given relief to enable providers to make many disclosures available digitally, and notify the client the disclosure is available, without the need for client agreement to receive the disclosures in that manner (‘publish and notify’ method). This relief allows for disclosure by, for example, sending clients:
(a) an email, SMS, app notification, social media notification or other digital message with a hyperlink or similar connection, or instruction to access the disclosure; or
(b) a notification that the disclosure is available digitally

The publish and notify method of delivery is available for the following disclosures:
(a) FSGs and SOAs;
(b) PDSs;
(c) ongoing disclosure of material changes and significant events;
(d) periodic statements; and
(e) information statements for CGS depository interests.

Rather than seeking agreement to deliver in this way, the provider must merely notify the client that they intend to make disclosures available digitally, and will notify the client when those disclosures are available. The client must then be given at least seven days to opt out of this publish and notify method, should they choose to do so

They say:

  1. An advantage of digital disclosure for clients is that it can incorporate more engaging forms of media and can be interactive. This can make the information more attractive and easier to understand for clients. It can also be more timely, convenient and reliable.
  2. Digital disclosure also has advantages for providers in reducing the costs of printing and mailing.
  3. ASIC has taken a technologically neutral approach to disclosures and do not mandate the delivery of disclosures digitally. It is for providers to determine the method of delivering disclosures that best suits their clients or their products and that will not expose those clients to undue risk of scams and fraud. For example, a margin-lending product might work particularly well online because clients are likely to be monitoring their investments online.
  4. While the Corporations Act expressly permits the electronic delivery of financial services disclosures, we understand that some providers have been discouraged from doing so because of uncertainty about what specific practices the law allows.
  5. Consumer protection under digital delivery still exists

ASIC-Digital-Disclosure

Further evidence of the digital revolution. As we said recently:

“DFA has just updated the 26,000 strong household survey examining their channel preferences. Our report summarises the main findings.

We conclude that the move towards digital channels continues apace, facilitated by new devices including smartphones and tablets, and the rise of “digital natives” – people who are naturally connected.

We outline the findings across each of our household segments, and also introduce our thought experiment, where we tested household’s attitudes to the various existing and emerging brands in the context of digital banking. We found a strong affinity between digital natives and the emerging electronic brands, and a relative swing away from the traditional terrestrial bank players.

These trends create both threat and opportunity. The threat is that traditional channels, especially the branch, become less relevant to digital natives, and becomes the ghetto of older, less connected, less profitable customers. The future lays in the digital channels, where the more profitable and digitally aware already live. Players need to migrate fast, or they will be overtaken by the next generation of digital brands who are looking towards becoming players in financial services. The game is on!”

NAB Wealth refunds additional customers

Following an independent review, NAB has refunded customers who were impacted by errors dating back to 2001 and are centered on processes and controls relating to Navigator – a platform NAB inherited from the Aviva acquisition in 2009.

ASIC said National Australia Bank’s wealth management business (NAB Wealth) has announced the resolution of its compensation program due to issues with its Navigator Wrap platform, with $25 million in compensation to be paid to approximately 62,000 customers. The issues relate to tax estimation and income estimation errors on its Navigator Wrap platform.

Following ASIC’s request, NAB Wealth appointed PriceWaterhouse Coopers to independently review the payout process, systems integrity and breach reporting and governance.

Commissioner Greg Tanzer said, ‘ASIC expects banks to vigilantly monitor their platforms for issues such as this. Any issues identified should be swiftly and pro-actively reported to ASIC, with a view to promptly compensating customers.’

ASIC acknowledged NAB Wealth’s cooperation in this matter.

In NABs statement, they said as part of this review, NAB has identified errors and processes dating back to 2001, which was prior to NAB’s 2009 acquisition of Aviva, which included the Navigator platform, and when Aviva was eventually integrated into the NAB business in 2011.

These errors and processes relate to how income and tax was being allocated to customers’ accounts on closure. This resulted in surplus monies being held within the Navigator Platform Funds for the benefit of fund customers, rather than being attributed at the individual customer account level. At no stage have these monies been held by, or accounted for, as part of the assets of any NAB Group company.

The review undertaken by NAB over the past 12 months has now resolved this, with all affected customers to be paid their due allocations. In total, approximately 62,000 customers will receive funds to the value of approximately $25 million.

One-third (34%) of customers will receive a payment of $50 or less, 50% of customers will receive less than $100, and 75% of customers will receive less than $350. The average payment per customer is $400, which includes interest.

Group Executive, NAB Wealth and CEO of MLC, Andrew Hagger said that NAB will write to customers and advisers over the coming weeks to explain this legacy issue and what NAB has done to fix the problem.

“NAB Wealth has applied significant focus to our breach identification and reporting processes, which is what led to NAB originally reporting this legacy issue to ASIC,” Mr Hagger said.

“These errors date back to 2001 and are centred on processes and controls relating to Navigator – a platform NAB inherited when we acquired Aviva in 2009. Our teams have worked extensively, with oversight by PwC and ASIC, to ensure the right processes, systems and controls are now in place.

“While this is a legacy issue, we took deliberate steps to make absolutely sure we could get the fairest outcome for our customers.

“These errors are in no way related to the quality of NAB Wealth’s advice to its customers.”

The only customers impacted are customers who closed their accounts on the Navigator platform between 30 September 2001 and 30 April 2015. The majority of money now being distributed to customers is being distributed from within the Navigator Platform Funds to the entitled customers. Given that the majority of the $25 million is being reallocated from the Navigator Platform Funds, this payment is immaterial to NAB.

SMSF of $200,000 or less not cost effective – ASIC

ASIC has released two information sheets to improve the quality of advice provided by advisers on self-managed superannuation funds (SMSFs). The information sheets deal with the cost-effectiveness of an SMSF, making clear ASIC’s view that an SMSF with a starting balance of $200,000 or below is unlikely to be in the client’s best interests and that advice to establish one below that threshold is more likely to be scrutinised by ASIC. They are also intended to assist advisers comply with their conduct and disclosure obligations under the Corporations Act and outline what ASIC looks at when undertaking surveillance in this area. They specify the types of risks and costs that an adviser should  consider, discuss and then disclose to clients when providing advice on establishing or switching to, an SMSF.

ASIC Deputy Chairman Peter Kell said, ‘Setting up an SMSF is a significant financial step for consumers and many factors can impact their decision. It is therefore important that consumers receive good quality advice that will assist them in making informed decisions about their retirement savings.

‘ASIC wants to ensure that only those investors for whom an SMSF is suitable are advised to establish an SMSF and that our expectations around the standards of advice are clear.

‘SMSFs are a key priority for ASIC and we will continue to target inappropriate advice about SMSFs in our surveillance work,’ Mr Kell said.

To that end, the information sheets provide ‘compliance tips’ which  indicate the factors that ASIC is likely to look at more closely as part of our surveillance activities.

The information sheets are Information Sheet 205 Advice on self-managed superannuation funds: Disclosure of risks (INFO 205) and Information Sheet 206 Advice on self-managed superannuation funds: Disclosure of costs (INFO 206).

INFO 205 and INFO 206 follow a consultation paper released in 2013 (13-243MR) on proposals to impose specific disclosure obligations on advisers giving advice on SMSFs.

Omniwealth pays penalty for potentially misleading advertising

Omniwealth Services Pty Ltd has complied with an ASIC infringement notice, paying a  $10,200 penalty after including potentially misleading claims on its website.

Omniwealth’s website included a page on the advantages of investing in property within a self-managed super fund (SMSF). This page compared the performance of a geared property investment within a self-managed super fund to an ungeared equity investment within a self-managed super fund.

The webpage was also promoted through the social media profile of Omniwealth’s CEO with a statement that investing in property in a self-managed super fund has taxation, leverage and diversification advantages and included a link to the Omniwealth webpage’s related article.

ASIC was concerned that the webpage did not give a balanced message about the returns, benefits and risks of investing in property in a self-managed super fund, and in particular that the uncertainty of forecasts was not made clear.

ASIC Deputy Chair Peter Kell said: ‘Making appropriate investment decisions is one of the most important responsibilities of SMSF trustees. ASIC is determined that SMSF trustees get accurate information and are not misled by advertising, including on websites and through social media.’

As the use of social media for promoting financial products and advice services increases, it is important that financial consumers are not misled or misinformed. ASIC encourages financial services providers using social media to regularly review their content and consider ASIC’s guidance on promoting financial products and advice services in Regulatory Guide 234 Advertising financial products and advice services including credit: Good practice guidance. (RG 234)

Omniwealth has removed the statements from its website and related social media profiles and has fully cooperated in responding to ASIC’s concerns.

Background

The payment of an infringement notice is not an admission of a contravention of the ASIC Act consumer protection provisions. ASIC can issue an infringement notice where it has reasonable grounds to believe a person has contravened certain consumer protection laws.

In 2012, in response to the growth in SMSFs ASIC established an SMSF Taskforce. The advertising to SMSF trustees or potential trustees through social media has been a recent specific focus of the Taskforce.

Publically available information may be read, and acted on, by a wide range of consumers with a variety of personal circumstances. ASIC encourages all SMSF trustees to look at the information available on the MoneySmart website and provided by the Australian Tax Office. Content that recommends a strategy, which requires a particular set of personal circumstances for it to be relevant, may be better suited to a personal advice situation.

New ‘Rent vs Buy’ calculator for consumers on ASIC’s MoneySmart website

ASIC has announced that Consumers are now able to easily compare the cost between renting and buying household goods, such as electrical appliances and furniture, by using ASIC’s MoneySmart new ‘Rent vs buy’ calculator.

ASIC Deputy Chairman Peter Kell said the new calculator developed in partnership with the Department of Human Services (DHS) will enable people who are considering a consumer lease to make an informed decision.

‘As part of ASIC’s ongoing work to enhance Australia’s financial literacy, this tool will assist people in understanding the real costs of consumer leases and compare them to other options,’ Mr Kell said.

‘Consumer leases may seem like an attractive option as the upfront costs are low, however, the ongoing payments can quickly add up.

‘ASIC continues to monitor firms offering credit to low income consumers to ensure they comply with responsible lending obligations. We have and will take action where we see vulnerable consumers at risk of inappropriate lending.’

A consumer lease is an agreement where an individual hires household goods, such as electrical appliances and furniture. The consumer receives the item straight away and makes regular payments until the term of the agreement finishes.

Under a consumer lease, a consumer does not have the right or obligation to purchase the goods at the end of the lease agreement, despite having often paid much more than the original purchase price of the goods.

‘It is not uncommon for consumers to pay three or four times more than the purchase price of the leased goods. In some cases it can be up to six times,’ Mr Kell said.

‘When entering into a lease, consumers need to consider the total cost, not just the monthly or fortnightly payments.

‘We encourage people to compare leases with other options such as buying the item outright, using another form of credit or interest-free deal, or seeing if they’re eligible for a no-interest loan.

‘Always carefully read the terms and conditions of any financial agreement and understand what you’re getting yourself into before signing the dotted line.’

ASIC Investigating Financial Benchmarks

ASIC is investigating a range of financial institutions to determine whether or not there has been benchmark-related misconduct in Australia’s financial markets. Their inquiries are still underway and, given the size and complexity of the relevant markets, will take some time to complete. They are looking at the activity of Australian financial institutions domestically and overseas, as well as foreign financial institutions that are active in Australia.

Benchmarks are of critical importance to a wide range of users in financial markets and throughout the broader economy. Different benchmarks affect the pricing of key financial products such as credit facilities offered by financial institutions, corporate debt securities, exchange-traded funds (ETFs), FX and interest rate derivatives, commodity derivatives, equity and bond index futures and other investments and risk management products.

In Australia, ASIC consider the following benchmarks to be of potential systemic importance:

  • Bank Bill Swap Rate (BBSW)
  • the Interbank Overnight Cash Rate (cash rate)
  • S&P/ASX 200 equity index
  • ASX Clear (Futures) Pty Ltd’s Commonwealth Government Securities (CGS) yields survey for settling bond futures
  • Consumer Price Index (CPI).

Internationally, they consider the IBOR interest rate benchmark family and the WM/Reuters and European Central Bank (ECB) foreign exchange (FX) ‘fix’ rates, among other benchmarks, to be systemically important.

Their investigations are informed by the conduct issues relating to financial benchmarks that have been observed overseas and which have formed the basis of significant settlements by financial institutions with foreign financial regulators. For example:

  • trading designed to move a benchmark rate so that the financial institution derives a benefit (e.g. by increasing the value of a derivative position held by the institution that references the benchmark)
  • inappropriate handling of client orders or positions (e.g. by deliberately triggering ‘stop-loss’ orders)
  • inappropriate disclosure of confidential client information (e.g. by disclosing client orders to traders at competing banks); and
  • inappropriate submitter conduct (e.g. by making submissions in order to reduce the institution’s borrowing costs).