Tag: ASIC

ASIC Class Order Clarifies Fee and Cost Disclosure

ASIC today released a class order clarifying key fee and cost disclosure requirements for Product Disclosure Statements (PDS) and periodic statements for superannuation and managed investment products.

The class order, which ASIC consulted on in September 2014. addresses:

  • Disclosure of costs of investing in interposed vehicles
  • Disclosure of indirect costs
  • Removal of doubt that double counting of some costs for superannuation products is not required, and
  • The appropriate application of the consumer advisory warning.

The class order will apply to all PDS for superannuation and managed investment products from 1 January 2016. It will also apply to periodic statements that must be given for these products by 1 January 2017 or later.

Commissioner Greg Tanzer said, ‘For consumers to make effective decisions about their investments and superannuation they need information they can trust and that allows them to compare across products. These changes will help industry to improve the quality of their disclosure and promote consistency between products.

‘Consumers can have more confidence that industry is disclosing fees and costs more accurately and in the same manner, ensuring comparisons between products are made on the same basis.’

Housing Finance Regulation – Tweaked, Not Reformed

Fresh on the heels of the FSI report, the core thesis of which is that the Australian Banks are too big to fail, so capital buffers must be increased to protect Australia from potential risks in a down turn (a “mild” crash could lead to the loss of 900,000 jobs and a $1-2 trillion or more cost to the economy), it was interesting to see the publication yesterday by APRA of the guidelines for mortgage lending, and ASIC’s targetting interest only loans. This action is coordinated via the Council of Financial Regulators (CFR). This body is the conductor of the regulatory orchestra, and has only had an independant website since 2013.  It is the coordinating body for Australia’s main financial regulatory agencies. It is a non-statutory body whose role is to contribute to the efficiency and effectiveness of financial regulation and to promote stability of the Australian financial system. The Reserve Bank of Australia (RBA) chairs the Council and members include the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), and The Treasury. The CFR meets in person quarterly or more often if circumstances require it. The meetings are chaired by the RBA Governor, with secretariat support provided by the RBA. In the CFR, members share information, discuss regulatory issues and, if the need arises, coordinate responses to potential threats to financial stability. The CFR also advises Government on the adequacy of Australia’s financial regulatory arrangements.

Whilst FSI recommended beefing up ASIC, and introducing a formal regulatory review body, it did not fundamentally disrupt the current arrangements. Interestingly, CFR is a direct interface between the “independent” RBA and Government.

So, lets consider the announcements yesterday. None of the measures are pure macroprudential, but APRA is reinforcing lending standards by introducing potential supervisory triggers (which if breached may lead to more capital requirements, or other steps) using an affordability floor of 7% or more (meaning if product interest rates fell further, banks could not assume a fall in serviceability requirements) and at least an assumed rise in rates of 2% from current loan product rates. In addition, any lender growing their investment lending book by more than 10% p.a. will be subject to additional focus (though APRA makes the point this is not a hard limit). These guidelines relate to new business, and does not directly impact loans already on book (though refinancing is an interesting question, will existing borrowers who refinance be subject to new lending assessment criteria?) ASIC is focussing on interest-only loans, which are growing fast, and are often related to investment lending.

The banks currently have different policies with regards to serviceability buffers. Analysts are looking at Westpac in the light of these announcements, because it grew its investment housing lending book fast, uses 180 basis points serviceability buffer and an interest rate floor of 6.8%. Investment property loans make up ~45% of WBC’s housing loan portfolio (compared with the majors average of ~36%), and has grown at ~12% year on year this financial year (compared with the average across the majors of ~10%). WBC made some interesting comments in their recent investor presentation relating to investment loans, highlighting that investors tended to have higher incomes than owner occupied loans.

WBCInvestorDec2014Other banks have different underwriting formulations with buffers of between 1.5% and 2.25% buffers. ASIC has of course also stressed that lenders must consider borrowers ability to repay and take account other expenditure. There is evidence of the “quiet word from the regulator” working as recently we have noted some slowing investment lending at WBC (currently they would be below the 10% threshold) and amongst some other lenders too. However, some of the smaller lenders may be impacted by APRA guidance, given stronger recent growth.

What does this all mean. First, we see now what APRA meant in their earlier remarks “collecting additional information, counselling the more aggressive lenders, and seeking assurances from Boards of our lenders that they are actively monitoring lending standards. We’re about to finalise guidance on what we see as sound mortgage lending practice”. Second, we do not think this will materially slow down housing investment lending, and this is probably what the RBA wants, given its belief consumer spending should replace mining investment as a source of growth.  The regulators are trying to manage potential risks in the system, by targetting higher risk lending whilst letting housing lending continue to run. Third, it leaves open the door to macroprudential later if needed. Lastly, existing borrowers may be loathe to churn if they are now required to meet additional buffers. This may slow refinancing, and increase longevity of loans in portfolio (and loans held longer are more profitable for the banks).

 

ASIC To Investigate Interest-Only Loans

In a parallel announcement, ASIC will conduct a surveillance into the provision of interest-only loans as part of a broader review by regulators into home-lending standards. The probe will look at the conduct of banks, including the big four, and non-bank lenders and how they are complying with important consumer protection laws, including their responsible lending obligations. The review follows concerns by regulators about higher-risk lending, following strong house price growth in Sydney and Melbourne.

Through the Council of Financial Regulators, ASIC, APRA, the Reserve Bank of Australia (RBA) and the Treasury are working together to monitor, assess and respond to risks in the housing market. Interest-only loans as a percentage of new housing loan approvals by banks reached a new high of 42.5% in the September 2014 quarter (this includes owner-occupied and housing investment loans). ASIC Deputy Chairman Peter Kell said, ‘While house prices have been experiencing growth in many parts of Australia, it remains critical that lenders are not putting consumers into unsuitable loans that could see them end up with unsustainable levels of debt. ‘Compliance with responsible lending laws is a key focus for ASIC. If our review identifies lenders’ conduct has fallen short, we will take appropriate enforcement action.’

Background

The Australian Prudential Regulation Authority (APRA) announced today it has written to all authorised deposit-taking institutions (ADIs) to set out plans for a heightened level of supervisory oversight on mortgage lending in the period ahead. See the earlier DFA post in relation to this.

With interest-only loans, a borrower’s repayment amount will only cover the interest on the loan. The principal amount borrowed will not reduce unless the borrower chooses to make extra repayments. Paying interest-only means that a borrower will pay more interest over the term of the loan. Some borrowers choose interest-only loans to maximise the amount they can borrow, especially if it is for investment purposes. Loans are usually only interest-only for a set period of time, after which the borrower will either need to increase their repayments to start reducing the principal, or repay the loan in full.

Although interest-only loans can be appropriate in the right circumstances, interest-only loans can raise a number of risks, such as:

  • Whether the borrower can only afford a loan because it is interest-only
  • Whether the borrower can afford principal and interest repayments at the end of the interest-only period, and
  • Whether the borrower understands the impact of not making principal and interest repayments.

The responsible lending obligations require credit licensees to ensure that consumers are only placed in credit contracts that meet their requirements and objectives and that they can meet their repayment obligations without substantial hardship. In doing this, credit licensees must make reasonable inquiries into an individual consumer’s specific circumstances and take reasonable steps to verify the consumer’s financial situation.

In August 2014, the Federal Court handed down its first decision on the responsible lending obligations: ASIC v The Cash Store (in liquidation) [2014]. The Federal Court’s decision made it clear credit licensees must, at a minimum, inquire about the consumer’s current income and living expenses to comply with the responsible lending obligations. Further inquiries may be needed depending on the circumstances of the particular consumer.

In response, in November 2014 ASIC updated Regulatory Guide 209 Credit licensing: Responsible lending conduct to incorporate the general findings of the Federal Court on the responsible lending obligations for credit licensees. ASIC also updated RG 209 to make it clear that credit licensees cannot rely solely on benchmark living expense figures rather than taking separate steps to inquire into borrowers’ actual living expenses.

ASIC On Payday Lenders Again

ASIC crackdown stops another payday lender from overcharging consumers.

Fast Easy Loans Pty Ltd has agreed to refund more than 2,000 consumers a total of $477,900 following ASIC’s concerns that it charged consumers a brokerage fee where it was prohibited from doing so.

From September 2010 to June 2013, Fast Easy Loans Pty Ltd (Fast Easy) acted as the broker for a related lender, Easy Finance Loans Pty Ltd (Easy Finance), and unlawfully charged consumers a brokerage fee in excess of certain state and territory interest rate caps. In charging a brokerage fee, Fast Easy engaged in credit activities without a credit licence.

Fast Easy and Easy Finance operated under a previously commonly promoted business model where consumers dealt with both a broker and a payday lender at the same time, with the entities having the same directors and owners and operating out of the same premises. One reason for using this model was to provide a means (via the broker entity) to charge consumers an amount in excess of state and territory interest rate caps.

Commonwealth legislation introduced a cap on payday loans in July 2013 which supersedes the state and territory-based interest rate caps, and together with further Regulations in June 2014, make it clear that broker costs do not sit outside the small amount loan cap.

Deputy Chairman Peter Kell said, ‘ASIC will act to prevent payday lenders structuring their business to improperly impose fees and charges on consumers.

‘Our message to the industry and those who advise payday lenders is clear; if you set up business models to avoid the small amount loan cap, ASIC will take action’, Mr Kell said.

In response to ASIC’s concerns, Fast Easy has agreed to refund all affected consumers in Queensland, New South Wales and the Australian Capital Territory any amounts paid in brokerage fees above the state-based interest rate caps of 48% by November 2014.

Although the brokerage fee did not exceed any applicable interest rate caps in other states, Fast Easy has also put in place steps to notify consumers in Northern Territory, Western Australia, South Australia, Victoria and Tasmania (where the same 48% state interest rate cap law did not apply) that they can claim a refund for the brokerage fee that was charged.

Easy Finance has also engaged an external legal firm to conduct a compliance review on their current business model to ensure it meets the requirements of the National Consumer Credit Protection Act 2009.

ASIC’s action against Fast Easy means that since 2010, close to $2 million dollars has been paid in refunds to over 10,000 consumers who have been overcharged when taking out a payday loan. Further, payday lenders have been issued with just under $120,000  in fines in response to  ASIC concerns about their compliance with the credit laws.

Background

Under the National Consumer Credit Protection Act 2009 (National Credit Act), individuals or businesses who engage in credit activities are required to hold an Australian credit licence.

Any person who does engage in credit activities (such as acting as a broker) without the appropriate licence must not demand or receive any fees or charges from a consumer (s32 National Credit Act)

Prior to July 2013, some States and Territories held laws capping the cost of credit for small amount loans. These laws were superseded by the Commonwealth cap which was introduced in July last year.

A small amount loan, in general terms, is a loan where the amount borrowed is $2000 or less and the term is between 16 days and one year. From 1 July 2013, only the following fees can be charged on small amount loans:

  • a monthly fee of 4% of the amount lent
  • an establishment fee of 20% of the amount lent
  • Government fees or charges
  • enforcement expenses, and
  • default fees (the lender cannot recover more than 200% of the amount lent).

A Guide To Dealing With Debt Collectors

The Australian Competition and Consumer Commission (ACCC) and the Australian Securities and Investments Commission (ASIC) have launched Dealing with debt collectors: Your rights and responsibilities a free guide that helps consumers in trouble with debt understand their options so they know how to deal with collectors and creditors.

The consumer guide explains:

  • People’s legal rights and responsibilities if they owe a debt;
  • Where to seek help to work out a budget, negotiate a repayment plan, apply for hardship or better understand their financial and legal options;
  • What to do if a debt collector contacts them;
  • What sort of behaviour by debt collectors is not acceptable;
  • How to dispute an alleged debt or its amount; and
  • What to do if they are being taken to court.

Dealing with debt collectors also summarises how and when debt collectors can contact someone and provides examples of inappropriate behaviour by debt collectors.

‘If consumers are having problems repaying their debts, it’s important to take action without delay. This free guide explains the options available to consumers to help them cope with the situation and hopefully get back on track’, said ASIC Deputy Chairman Peter Kell.

‘The ACCC and ASIC encourage consumer advocacy groups and financial counsellors to refer consumers to the booklet to help them understand their legal rights and responsibilities if they owe a debt’, added Mr Kell.

ACCC Deputy Chair Delia Rickard said: ‘It is important for consumers to be aware of their rights when dealing with debt collectors and to know how to complain.

The ACCC and ASIC continue to receive complaints about the behaviour of some debt collectors and creditors. Consumers should expect to be treated professionally and in a manner that complies with Commonwealth consumer protection laws.

‘Where creditors or collectors disregard consumer protection laws and the rights of consumers, we will consider appropriate enforcement action against them’, added Ms Rickard.

Dealing with debt collectors: Your rights and responsibilities can be downloadedfrom ASIC’s MoneySmart or from the ACCC’s website.

Background information

In November 2013, the ACCC prosecuted a company ‘Excite Mobile Pty Ltd’, for engaging in false, misleading and unconscionable telemarketing practices, and using undue coercion in relation to debt collection. The Federal Court ordered the company to pay a penalty of $455,000 and the company’s two directors were ordered to pay penalties totaling $95,000 between them (refer to 266/13 MR).

In 2011, ASIC commenced proceedings in the Federal Court of Australia against one of Australia’s largest debt collection companies. In 2012, the Court found ACM Group Limited had harassed and coerced debtors and engaged in ‘widespread’ and ‘systemic’ misleading and deceptive conduct when recovering money (refer: 12-261 MR).

In July 2014,the ACCC and ASIC updated their industry guidance Debt collection guideline for creditors and collectors to reflect significant changes to the law, such as the introduction of the Australian Consumer Law in 2011 and changes to privacy laws in Australia. This industry guidance provides information and case studies for creditors and debt collectors about:

  • When it is appropriate to contact a debtor, including what constitutes contact and reasonable contact hours, methods or frequency of contact
  • How the need for collection activity will be greatly reduced when debtors act promptly and responsibly, and collectors are flexible, fair and realistic
  • New communication technologies developed since the initial publication, including the use of social media platforms and auto dialers, and the potential pitfalls to avoid in using such technologies; and
  • Key considerations when resolving debtor complaints and disputes.

Regulatory guide 96 Debt collection guideline: For collectors and creditors (RG 96)

ASIC’s MoneySmart website

ASIC’s MoneySmart website at moneysmart.gov.au has comprehensive and impartial information and tools for consumers about all aspects of personal finance, including managing loans and credit.

Debt collection industry research

The ACCC is also undertaking a research project into the debt collection industry to examine a number of concerns about debt collection practices.

The research is intended to inform the ACCC’s understanding of how the industry operates, in particular, the business models adopted in the industry and the influence this may have on activities that take place when collecting debts from consumers. The findings from the research will inform future initiatives designed to address the problems or issues identified.

It is expected that a research report will be issued in mid-2015.

Super Needs To Get It’s House In Order – ASIC

In a speech today by Greg Medcraft, Chairman, Australian Securities and Investments Commission “ASIC explained: Who is the corporate watchdog, what does it do and why should Australians care?” at the National Press Club of Australia, he was critical of the super industry:

Around 14 million Australians have a super account. Generally, super doesn’t have a guaranteed outcome – which is why you should be interested in your super. And one day, each and every one of you will retire. Super is often invested in equity and debt capital markets and the funds management sector – all of which are regulated by ASIC. And, with super growing, our regulatory perimeter is increasing. In fact, as of the middle of this year, Australia had super assets of $1.85 trillion, with Treasury estimating that by 2030 this will increase to $5.1 trillion. Ladies and gentlemen, my point is this – we matter to Australians because of superannuation. We matter because most Australians have a lot of skin in the game. And that is the game ASIC is in.

Super generally doesn’t guarantee an outcome. Because of this, Australian investors need to have trust and confidence in financial advice. In fact, Australian investors deserve to have trust and confidence in financial advice. I have long been passionate about lifting trust and confidence in this sector. Only one in five Australians get financial advice. With recent high – profile cases of advisers mis-selling financial products, this is sadly no surprise. The industry needs to get its house in order.

ASIC To Monitor CBA Financial Planning Businesses

ASIC has appointed KordaMentha Forensic to examine two of the Commonwealth Bank of Australia (CBA)’s financial planning arms’ compliance with new Australian financial services licence (AFS) conditions.

KordaMentha Forensic will report regularly to ASIC the results of their review of past activities by Commonwealth Financial Planning Limited (CFPL) and Financial Wisdom Limited (FWL) to identify high-risk advisers and affected customers, and CFPL and FWL’s compliance with the new conditions.

ASIC will release the findings, and CFPL and FWL will be required to address any deficiencies identified.

ASIC imposed the conditions on CFPL and FWL – and flagged it would appoint an external compliance expert – after a scheme developed to compensate customers of former CFPL advisers was not applied consistently across all affected customers of the two businesses. This inconsistency disadvantaged some customers. The conditions include CFPL and FWL offering customers up to $5,000 to have their financial advice independently reviewed.

ASIC Issues Further Guidance On Super Forecasts

ASIC has issued further guidance to assist superannuation fund trustees to provide their members with retirement estimates. The changes will allow a superannuation fund to include an estimate of the age pension which might be available to the member along with the member’s superannuation benefit at retirement. The changes are to ASIC’s existing relief for retirement estimates. A superannuation forecast is an estimate provided to a super fund member of the balance of their superannuation investment at retirement, provided in the form of a statement (retirement estimate) or a calculator.  These estimates help members to engage with their superannuation. The revised guidance and relief also make a number of minor technical changes.

ASICSuper1 ASICSuper2ASICSuper3

ASIC Seeks To Stop Property Promoter’s Unlicensed Financial Advice on SMSFs

ASIC has commenced proceedings in the Supreme Court of New South Wales seeking interim and final orders to prevent property investment promoter, Park Trent Properties Group Pty Ltd (Park Trent), from carrying on an unlicensed financial services business.

Park Trent’s business promotes the use of self-managed superannuation funds (SMSFs) to purchase investment property.

ASIC alleges and is seeking declarations that Park Trent is unlawfully carrying on a financial services business without an Australian financial services (AFS) licence.

ASIC understands that Park Trent has advised at least 500 members of the public to establish and switch funds into an SMSF which are then used to purchase investment properties that are owned or promoted by Park Trent companies.

ASIC is also seeking orders requiring Park Trent to notify current and former clients about the proceeding and to post a notice regarding ASIC’s proceeding on its website.

ASIC Commissioner Greg Tanzer said, ‘Collectively, Australians hold over $1.85 trillion worth of assets in superannuation funds, with $557 billion held in SMSFs. It is important when making decisions regarding superannuation to consider obtaining appropriate advice from an authorised financial adviser.

‘Dealing with an authorised adviser affords specific protections under the law, such as acting in the best interests of clients, a duty to avoid conflicts of interest and providing access to dispute resolution schemes.’

The first hearing of the matter is listed for 26 November 2014.

ASIC Updates Responsible Lending Guidance

ASIC has updated its guidance for credit licensees on their responsible lending obligations.

Credit licensees cannot rely solely on benchmark living expense figures rather than taking separate steps to inquire into borrowers’ actual living expenses.

The updated guidance reflects:

  • a recent Federal Court decision that is relevant to all credit licensees regarding their responsible lending obligations
  • changes to statutory restrictions on charges for small amount credit contracts, and
  • clarification of existing guidance, and removal of some material that we consider to be repetitive or no longer necessary.

On 26 August 2014, the Federal Court handed down its first decision on the responsible lending obligations: ASIC v The Cash Store (in liquidation) [2014] FCA 926 (refer: 14-220MR).

The Federal Court ruled that The Cash Store Pty Ltd (in liquidation) and loan funder Assistive Finance Australia Pty Ltd had failed to comply with their responsible lending obligations in relation to their customers, the majority of whom were on low incomes or in receipt of Centrelink benefits.

The Federal Court’s decision makes it clear credit licensees must, at a minimum, inquire about the consumer’s current income and living expenses to comply with the responsible lending obligations. Further inquiries may be needed depending on the circumstances of the particular consumer.

ASIC has updated Regulatory Guide 209 Credit licensing: Responsible lending conduct (RG 209) to incorporate the general findings of the Federal Court on the responsible lending obligations for credit licensees.