ASIC – Page 37 – Digital Finance Analytics (DFA) Blog

CGU Insurance and Accident and Health International to refund $2 million in ‘useless’ payday insurance premiums

Following concerns raised by ASIC, CGU Insurance Limited (CGU), together with Accident and Health International Underwriting Pty Ltd (AHI) have agreed to refund consumers over $2,000,000 in payday loan consumer credit insurance (CCI) premiums and fees. The insurance was sold by The Cash Store Pty Ltd (in liquidation) (The Cash Store) alongside payday loans to consumers.

The agreement follows earlier court action by ASIC against The Cash Store, in which the Federal Court found that The Cash Store had acted unconscionably in selling a payday loan CCI product (CCI product). The CCI product covered consumers against the risk of becoming unemployed, sick or dying during the period of the payday loans, which could be as short as one day, and was usually around two weeks.

ASIC’s court action against The Cash Store was in respect of its conduct between August 2010 and March 2012. In this period:

The Cash Store sold the CCI product to 182,838 customers
these customers paid $2,278,404 in premiums for cover
only 43 claims were paid to consumers, totaling only $25,118.

‘ASIC took action because we were concerned about the unfair sale of the payday insurance when it was highly unlikely that consumers would be able to make a claim. We therefore welcome CGU and AHI’s agreement to refund more than $2 million to these consumers,’ ASIC Deputy Chair Peter Kell said.

To address ASIC’s concerns and minimise the risk of this type of conduct occurring again, CGU and AHI have agreed to:

refund total amounts paid by consumers, together with interest, for all sales of the CCI product for which CGU was on risk for the product (including sales in 2013 when a modified version of the policy was reintroduced)
review claims it denied where the consumer did not meet the eligibility requirements for a claim at the point of sale under both the initial and modified versions of the policy
appoint an independent external firm to review its supervision of third parties
appoint an independent external firm to review AHI, a wholly owned subsidiary of CGU, who was responsible for underwriting the payday loan insurance product.

ASIC’s inquiries into the sale of the CCI product by The Cash Store and the role of other entities is ongoing.

Background

The Federal Court imposed the maximum penalty of $1.1 million on The Cash Store for engaging in unconscionable conduct in breach of section 12CB of the ASIC Act. The total penalty on The Cash Store and the loan funder, Assistive Finance Australia Pty Ltd (AFA) was $18.975 million, which included penalties for systemic breaches of the responsible lending requirements under the National Credit Act.

The Federal Court action related to the conduct of The Cash Store during the period from August 2010 to March 2012 when it sold the CCI product in connection with 182,838 of the total 268,903 credit contracts entered into in this period (or 68% of these contracts). The CCI product was developed and distributed by a number of entities, including AHI via an underwriting agency agreement with Allianz (up until March 2011), and later through an underwriting agency agreement with CGU (from March 2011).

CGU was the insurer for the CCI productfor two periods; between 1 March 2011 and 31 March 2012 and 1 April 2013 and 31 October 2013. AHI temporarily stopped issuing the CCI product between April 2012 and April 2013. While off the market, AHI modified some of the terms on which cover was offered and subsequently recommenced sales of the modified CCI product through The Cash Store from April 2013 until October 2013. ASIC was concerned that the modified CCI product, despite some improvements, continued to offer very limited benefit overall.

On 3 March 2015, ASIC announced that Allianz had agreed to refund approximately $400,000 in CCI product premiums. The total amount of refunds agreed to by Allianz, CGU and AHI is just under $2.5 million, covering all sales of the CCI product.

The Cash Store generally charged its customers a premium of about 3.38% of the loan amount for the CCI product. From August 2010 to October 2013, consumers paid approximately $2.5 million for the CCI product, with The Cash Store retaining approximately $1.34 million as income.

The court also found that The Cash Store and AFA each breached seven separate provisions of the National Credit Act on multiple occasions. On 19 February 2015 the Federal Court imposed record penalties of $18.975 million against The Cash Store and AFA.

Payday Lender Money3 refunds over $100,000 to consumers – ASIC

ASIC announced that Australia’s second-largest listed payday lender, Money3, has stopped offering its two payments ‘fixed fee’ loan arrangement and agreed to refund more than $100,000 to consumers following concerns raised by ASIC that it breached consumer credit laws and engaged in misleading conduct.

Money3’s ‘fixed fee’ loan (also promoted as a ‘LACC’ loan) required only two repayments despite having a term of 16 months. Under the terms of the contract, the first repayment (generally due a week after the loan was taken out) was for a nominal amount, and the much larger second repayment was due 15 months later. This second payment usually accounted for more than 90% of the total amount repaid.

ASIC was concerned that the product was likely to be unsuitable for most of the financially vulnerable customers who obtained it, and in breach of the national responsible lending obligations. Consumers may also have been misled into believing the terms of the loan enabled flexible repayments when the contract in fact disclosed that a large fee could be charged if the consumer asked for a variation of the repayment schedule. ASIC saw examples where the second repayment was as high as 170% of the customer’s Centrelink benefit for that pay period.

Money3 has agreed to finalise outstanding loans and will refund approximately 400 consumers a combined total more than $100,000. These refunds will ensure current consumers have not repaid any monies above the principal amount lent and a cost recovery fee.

ASIC Deputy Chairman Peter Kell said, ‘Small, high cost loans such as this with large one off payments are likely to be of limited benefit to customers who have no savings or savings history as they would be unable to finance the second repayment of the loan without considerable hardship.

‘The difficulties for these vulnerable customers are amplified where there is a large fee where the consumer wants to make any changes to the repayment schedule or amount.’

Money3 has changed the product and its marketing and all LACC contracts now have the repayments spread at even monthly intervals across the 16 months term of the contract.

Consumers are reminded that if they have entered into a credit contract and believe it was unsuitable and suffered a loss or damage they are able to access free internal and external dispute resolution services. Consumers who have previously repaid a LACC loan in full can approach Money3 directly and request a refund similar to what is being offered to current customers.

If a consumer is unable to resolve their complaint directly with the lender via its internal dispute resolution process, they should contact their credit provider’s external dispute resolution scheme, in this case, the Credit and Investments Ombudsman. Consumers may also seek legal advice.

Background

The tighter consumer credit rules for small amount lending included a cap on the fees that can be charged and a strengthening of responsible lending obligations.

For the period Money3 offered the loan, it entered into 24,547 contracts. As at 29 May 2015, 1941 remain on foot.

Australian Hedge Funds Snapshot

ASIC today published their report into the Australian Hedge Funds Industry. It draws from aggregated industry data and a survey to September 2014. Hedge funds comprise about 4% of managed funds in Australia, $95bn compared with $2,407bn. Superannuation funds accounted for approximately three-quarters of this total with nearly $1,789 billion in assets. The average Hedge Fund return last year was 4.2% (though with significant variations).There were 473 funds in operation and there are a large number of small funds.

Nearly 80% of the operating single-manager hedge funds and funds of hedge funds were domiciled in Australia. In terms of assets under management, just over 81% of single-manager hedge funds and 99% of funds of hedge funds were domiciled in Australia.

Since 2012, assets under management for funds of hedge funds have remained relatively flat at around $12 billion. This does not mirror the global sector where assets under management for funds of hedge funds have fallen by approximately 17% to US$457 billion over the same period

The majority of the Australian hedge funds sector comprises small-sized funds, with just over half (54%) of the sector holding assets under management of less than $50 million

The most common strategy employed by managers for operating single-manager hedge funds and funds of hedge funds was equity long/short (53.8%), with multi-strategy in second place (10.6%) and fixed income in third place (9.5%).

In the 12 months to 30 September 2014, the average annual net return for single-manager hedge funds and funds of hedge funds was 4.2%. This was down from the previous year when funds on average achieved a return of 14.4%. The third quarter of 2014 was the worst performing quarter for the year for the global hedge funds sector, posting returns of –0.4% for the year. Concerns over Greece leaving the Eurozone during this period caused equity markets to fall, which may have affected hedge fund investments. The year to 30 September 2014 saw returns for hedge funds globally fall to 3.3%, which highlighted the weakness in the sector in 2014 in comparison to the previous year when an average of 7.8% was posted for the same period.

Turning to the survey, Retail direct investors accounted for 17% of the investors by net asset value in the surveyed hedge funds. This is a 7.3% increase from the 9.7% reported in ASIC’s 2012 hedge funds survey.

The vast majority of funds’ reported turnover was in interest rate derivatives and fixed income derivatives. Interest rate derivatives were the most highly traded individual asset class at $510.5 billion, reflecting their importance in managing interest rate exposure.

War on Banking’s Rotten Culture Must Include Regulators

At conferences in Sydney last week, the heads of ASIC (Greg Medcraft) and APRA (Wayne Byres) agreed on a few things: banking culture is rotten; culture is “hard” to deal with; and regulators are basically at a loss on what to do about it.

As reported in The Conversation, Medcraft said:

“When culture is rotten it often is ordinary Australians who lose their money. And that is my point – markets might recover but often people do not. So that is why we need to clean up culture because people suffer. And people are sick of it. They want to have trust and confidence in the institutions they are dealing with.”

Medcraft wants to be able to criminally charge banks and their directors when company culture has allowed for staff misconduct.

Medcraft’s outrage disguises the fact that Australia’s regulators may have had something to do with fostering a “rotten” banking culture. For example, when the Four Pillars were fined some A$1.7 billion and censured by the New Zealand High Court for Tax Avoidance neither regulator censured the boards or senior management of four banks, or even commented at the time on the cultural messages such behaviour would inevitably reinforce.

To give ASIC credit, in another speech last week Commissioner Greg Tanzer outlined a very long laundry list of things ASIC is now going to look at relating to culture, including: reward structures; whistleblowing policies; conflicts of interest; complaints handling; and corporate governance.

The regulators might wish to look the latest research showing the avoidance culture behind the risk taking by Australian bankers.

Or the experience overseas showing the difficulties of actually changing banking culture.

But the problem is wider than individual banks and includes the culture of the banking and regulatory system itself.

A system beset by groupthink

While Australian regulators bemoan the industry’s culture problem, the Irish parliament is holding yet another inquiry into the tragedy that beset the Irish banking system before the global financial crisis. Irish finance leaders have fronted the inquiry, singing from the same songbook. From bankers, regulators, auditors, the media, to academics, commentators and managers of construction companies, (almost) all were repeating the same thing – ‘No one – but no one – saw it coming’.

There were a few exceptions who had been off-key before the crisis, including Professor Morgan Kelly and a brave regulator, Con Horan, who had warned of the impending calamity but was told not to rock the boat. Aside from those notable exceptions, everyone else appeared to be on same page.

In behavioural economics, such “concurrence” across a group is called groupthink. Everyone in Ireland, or at least those in charge of the financial system, believed the economy would keep growing forever. And why not, as Ireland was in the midst of a 25-year boom – sound familiar?

Groupthink (or more properly in this case “systemsthink” because the whole system was deluded) is unhealthy because, not only do people start to think alike, it is only a short step to believing people who are singing a different tune should be excluded and thrown out of the chorus. Dissent can be destructive, but the role of the Devil’s Advocate is well-understood to be valuable, drawing out important questions people would rather not answer.

But it’s not only in Ireland that people are afraid of rocking the boat. In Senate hearings this week into high credit card interest charges, RBA Assistant Governor Malcolm Edey admitted the Reserve and Treasury were aware of the problem, but said it was not up to them to question Australia’s banks on card rates. He recommended ASIC or APRA be the people to ask, if one was really worried. Since the RBA, APRA, ASIC and the Treasury are the four members of the Council of Financial Regulators (CFR), one would have thought that one of their regular meetings would have been an ideal opportunity to bring this issue up – but no one did.

It is the primary role of Australia’s banking regulators to promote systemic stability. But what if the whole system, including banking regulation, is deluded (as happened in Ireland)?

Seeking solutions

So how could a Devil’s Advocate be introduced into the regulatory process? The recent Murray Inquiry into the Financial System made one recommendation that could help. The inquiry recommended the establishment of a new Financial Regulator Assessment Board (FRAB), which would be asked to “assess how regulators have used the powers and discretions available to them”.

The Murray inquiry envisaged that this new board would consist of knowledgeable experts, crucially not tied to regulators, with a diverse membership that would “act as a safeguard against the FRAB being unduly influenced by the views of one particular group or industry sector”. The Inquiry also recommended that FRAB’s assessments of regulators should be made public. The creation of the FRAB is awaiting the government’s response to the Murray proposals.

Experts, such as Dr Andy Schmulow, suggest the FRAB proposal may however be dead on arrival, due to push-back from regulators. That is a pity, as regulators should welcome the creation of such an independent body, even though they know it may cause them some uncomfortable moments along the way. Constructive questioning of perceived wisdom will enhance rather than reduce systemic stability, which is after all the goal of banking regulation.

By Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre at Macquarie University. Article published in The Conversation

ASIC Welcomes Improved Credit Card Travel Insurance Disclosure

Following an ASIC review, credit card issuers and insurers have made improvements to disclosure for travel insurance provided through credit cards.

ASIC’s review of 17 credit card brands, issued by a range of credit card issuers, including the big four Australian banks, followed complaints made to ASIC from the general public and disputes data published by the Financial Ombudsman Service (FOS). These complaints included uncertainty around who was covered by the policy, the extent of exclusions and eligibility requirements.

Following the review, the credit card issuers and their insurers have agreed to make the following improvements:

clarify when the insurance cover is ‘activated,’ particularly where a minimum spend threshold needs to be met to activate the insurance cover
clarify if and when the use of reward points to pay for travel costs will activate the insurance cover
clarify whether supplementary cardholders can benefit from the policy
provide clearer and more prominent information about the documentation needed to make a claim.

Credit card issuers have also made improvements to their websites by making it easier to locate the insurance policy terms and conditions, and are now including direct links to the terms and conditions where none were provided previously.

Credit card issuers that also distribute standalone travel insurance have also made changes to their websites to clearly distinguish the standalone travel insurance policy from the credit card policy so that consumers do not mistakenly rely on the wrong policy.

ASIC’s Deputy Chairman Peter Kell, said, ‘As travel insurance may not be at the forefront of the consumer’s mind when obtaining a credit card, improved disclosure will help consumers understand and claim.’

‘Having travel insurance is essential for those heading on an overseas trip, to provide cover for when things go wrong. Credit card issuers and insurers must clearly set out what is and what is not covered by a policy, so that consumers can work out if they are adequately covered.’

Background

The credit card brands reviewed by ASIC included the big four Australian banks, as well as smaller Authorised Deposit-taking Institutions (ADI), and other non-ADI credit card providers. Insurance was provided to the credit card issuers by three major insurers.

Credit card travel insurance is insurance that is available to credit card holders, usually with ‘premium’ credit cards that offer extra benefits with the credit card. It is often described as ‘complimentary’ travel insurance as it is offered as a feature of the credit card with no additional fee, although credit cards that provide ‘complimentary’ travel insurance typically have an annual card fee (ranging from $87 to over $500 per year).

ASIC’s review did not include standalone travel insurance. Standalone and credit card travel insurance can differ, so consumers should consider which product is suitable for their travel needs so that they are adequately covered. Consumers with specific needs (such as pre-existing medical conditions) are especially encouraged to review their insurance coverage.

Standalone travel insurance generally requires the consumer to apply for and pay a premium. Credit card travel insurance requires a minimum spend on the credit card for the cover to be activated. Of the policies reviewed, more than half required the full airfare for travel to be paid on the credit card, while less than half of the policies required a minimum spend of between $250 and $1,000 of prepaid travel costs on the card (such as travel ticket or accommodation costs).

ASIC enhances Financial Advisers Register

ASIC has now launched the second stage of the Financial Advisers Register (FAR) which now includes information about advisers’ qualifications, training and memberships of professional bodies.

The register, which has been available to the public since the end of March this year, can be searched on ASIC’s MoneySmart website www.moneysmart.gov.au. To date there have been more than 60,000 visits and more than 100,000 searches undertaken on the register.

There are more than 23,000 financial advisers now on the register. It contains details of persons employed or authorised – directly or indirectly – by Australian financial services (AFS) licensees to provide personal financial advice to retail clients on investments, superannuation and life insurance.

ASIC Deputy Chairman, Peter Kell said, ‘From today consumers will be able to see the qualifications and professional memberships in addition to the basic information about advisers already available on the register. We want consumers to be able to make an informed decision in their choice of adviser and the register is a good starting point.’

ASIC has also made available data from the Financial Advisers Register to the Australian Government website www.data.gov.au which can be downloaded free of charge. The data snapshot will enable easy and quick analysis of aspects of the financial advice industry.

The transition phase for the new register will end at the end of September 2015. From 1 October 2015 late fee penalties will apply. ASIC can take action for providing a false or misleading statement to ASIC under the Corporations Act.

ASIC Concerns Prompt Bank of Queensland to Improve Lending Practices

Bank of Queensland Limited (Bank of Queensland) has improved its lending practices following ASIC’s concerns about the way it assessed applications for home loans.

ASIC was concerned that Bank of Queensland was using a benchmark figure, the Henderson Poverty Index (HPI), to estimate the living expenses of consumers applying for home loans, rather than asking borrowers about their actual expenses.

In ASIC’s view, the lack of enquiry about actual expenses, and reliance solely on HPI (which is used as a measure for estimating the minimum amount of money families of different sizes need to cover basic essential needs) was not consistent with responsible lending obligations imposed by the National Credit Act.

Bank of Queensland has updated its home loan application forms to obtain more information about a customer’s living expenses. The bank will carry out an assessment of the suitability of a loan using the higher of either the living expense figure supplied by the customer or an appropriate benchmark figure.

ASIC notes that the bank will continue to review the circumstances of borrowers who go into hardship or default to ensure that they have not been disadvantaged by a loan provided prior to the change in policy.

ASIC Deputy Chairman Peter Kell said, ‘This outcome is part of ASIC’s ongoing focus on the lending industry’s compliance with responsible lending laws. Lenders must carry out inquiries to determine whether a credit contract will be unsuitable for a consumer. Using benchmark figures such as the Henderson Poverty Index alone to estimate a consumer’s financial position is not sufficient to meet this requirement.’

In November 2014, ASIC updated Regulatory Guide 209 Credit licensing: Responsible lending conduct (RG 209) to clarify that credit licensees cannot rely solely on benchmark living expense figures, and must also make inquiries about the borrowers’ actual living expenses.

ASIC acknowledges the co-operation of Bank of Queensland in resolving this issue.

AU$ Movements Before RBA Rate Releases Were “Normal” – ASIC

ASIC today released an update on their investigations into AU$ trading movements around the time of recent RBA target rate announcements. Whilst their investigations are ongoing, ASIC says the movements are related to liquidity positions and computer based trading, and do not indicate cases of market misconduct.

ASIC today provided an update on its investigation into the movements in the Australian dollar shortly before the Reserve Bank’s monetary policy decisions for February, March and April 2015.

The enquiry is investigating trading in the dollar in the minute prior to the RBA’s interest rate decision statement at 2.30pm.

ASIC has made extensive enquiries into the management of the information flow regarding the RBA’s interest rate decision prior to the announcement of this decision.

ASIC’s current focus is on reviewing the trading behaviour of a number of foreign exchange markets and platforms including interest rate futures markets and CFD platforms providing foreign exchange markets. Notices to produce trading information have been sent to many financial institutions and platform providers to understand the basis of the trading on these markets at the point in time of interest.

ASIC’s enquiries are ongoing as to the cause of the swings in the currency markets. Preliminary findings reveal moves in the Australian Dollar ahead of the announcement to be as a result of normal market operations in an environment of lower liquidity immediately ahead of the RBA announcement. The reduction in liquidity providers is a usual occurrence prior to announcement in all markets. Much of the trading reviewed to date was linked to position unwinds by automated trading accounts linked to risk management logic and not misconduct.

In particular, ASIC has observed liquidity being withdrawn from the market at the same moment as participants already positioned were considering their risk exposure too large ahead of the announcement and reducing their position. This lack of liquidity distorted the execution logic in the algorithms of some participant systems. This, along with a fall in trading volumes leading up to the release of key market data, means trades may have had a more pronounced impact on the price than they otherwise would.

ASIC Update On CBA’s Financial Advice Compensation Programme

ASIC today released KordaMentha Forensic’s first report on past activities by Commonwealth Financial Planning Limited (CFPL) and Financial Wisdom Limited (FWL) to compensate clients, and to identify high-risk advisers and affected customers.

The report confirms the inconsistency and deficiencies of an original $52 million compensation scheme. These shortcomings, which disadvantaged some customers, led to ASIC imposing new Australian financial services (AFS) licence conditions on CFPL and FWL in 2014 .

The failings are being rectified through KordaMentha Forensic’s review. Following the release of today’s report, the first of three to be delivered to ASIC, Commonwealth Bank (CBA) will contact approximately 2740 customers to offer them up to $5000 to have their advice assessment reviewed and to seek independent advice.

KordaMentha Forensic’s second report will assess whether CFPL and FWL had a reasonable basis for identifying the clients and advisers for the original compensation scheme. If KordaMentha Forensic finds that other clients or advisers should have been captured, CFPL and FWL will be required to rectify this.

KordaMentha Forensic’s third report will provide an assessment of this work and CFPL and FWL’s compliance with the licence condition program.

Purpose and key findings of Comparison Report

KordaMentha Forensic’s Comparison Report reviews and compares CFPL and FWL’s processes for reviewing and communicating with two groups of clients:

Clients who received advice from banned former CFPL advisers Don Nguyen and Anthony Awkar, and who were remediated under a compensation program known as Project Hartnett; and
Certain clients of further former CFPL and FWL advisers, many of whom were offered compensation as a result of adviser misconduct, in a separate compensation program.

KordaMentha Forensic found three inconsistencies between the compensation programs which CFPL and FWL are required to rectify for affected clients:

Initial letter: In Project Hartnett, clients received a letter indicating that the advice they received was being investigated and that CFPL would contact them with the outcome. However, most clients assessed in the Compensation Program did not receive this letter. For those clients who did receive a letter, it was often inconsistent with the Project Hartnett letters (for example, some letters did not include the adviser’s name or alert the client that the licensee was investigating concerns it had with the adviser)
Offer of up to $5000 for independent advice: In Project Hartnett, clients who received advice which was implemented were generally (but not in all cases) sent a letter which included an offer of up to $5000 for independent professional advice to help them assess the validity of the licensee’s review and any compensation offer. In the Compensation Program, the offer was discretionary – and no clients were given this offer
Close-out letter: In Project Hartnett, clients who received the initial letter indicating there was an investigation being conducted into the advice provided to them, but who were determined not to be entitled to compensation, received a letter stating this result of the file review. However, in the Compensation Program, while some clients received a letter offering compensation or advising they were not entitled to compensation, most clients reviewed received no such communication. As a result they were not given an opportunity to participate in the review and decision making processes as to whether they were entitled to compensation

Following this report, the licensees will contact approximately 2740 clients offering them up to $5000 to have their financial advice independently reviewed and the other options available under the licence conditions. The licensees will also write to a further 1590 clients informing them that a review of their file found no evidence that they had received advice, but if that is not correct, the clients will be offered $5000 assistance and all the options available under the licence conditions.

KordaMentha Forensic’s work in preparation for this report also revealed that 86 clients under Project Hartnett did not receive the $5000 offer, and some clients did not receive an ‘Initial Letter’ explaining that their advice was being reviewed. CBA has given a commitment to ASIC that these clients will now be treated consistently with other clients under the licence conditions, including the $5000 offer.