AMP Financial Planning Pty Ltd (AMPFP) ceased providing managed discretionary account (MDA) services on 10 December 2019 following the imposition of tailored licence conditions by ASIC.
In March 2019, following a surveillance of
AMPFP’s MDA services and advice business, ASIC granted AMPFP’s
application to vary its Australian financial services (AFS) licence to
provide MDA services, subject to some tailored licence conditions (19-078MR).
The tailored conditions formalised commitments made by AMPFP, in
response to ASIC’s concerns, to improve monitoring and supervision of
its discretionary investment services and related financial advice.
Under the tailored licence conditions, a
Senior Executive of AMPFP was required to provide an acceptable
attestation to ASIC by 30 September 2019 confirming that AMPFP had
complied with and was complying with the tailored conditions. This was
to ensure that all of the required improvements to monitoring and
supervision practices had been implemented and were operating
effectively.
AMPFP did not provide ASIC with an acceptable attestation in relation to its provision of MDA services. The attestation provided by AMPFP had exceptions and ASIC informed AMPFP that the attestation was not acceptable to it, and AMPFP ceased providing MDA services in accordance with its licence conditions.
Background
MDAs create particular risks for retail
clients because when a client enters into a contract with an MDA
provider, they give the provider authority to make investment decisions
on their behalf on an ongoing basis without seeking the client’s prior
approval.
The risks increase if the person
recommending the MDA service and making or influencing the investment
decisions are the same because the clients may not be receiving
impartial advice about the decision to enter into or remain in the MDA
service. ASIC expects AFS licensees to consider the risks involved with
the financial advice and investment activities of their representatives
in their monitoring and supervision practices.
ASIC has commenced civil penalty
proceedings in the Federal Court against National Australia Bank Limited
(NAB) and seeks findings of several thousand contraventions of the ASIC
Act and the Corporations Act.
ASIC alleges that from December 2013 to February 2019, NAB:
engaged in Fees for No Service Conduct by
failing to provide ongoing financial planning services to a large
number of customers while charging fees to those customers;
failed to issue, or issued defective, fee
disclosure statements (FDSs). ASIC alleges that the defective FDSs
contained false or misleading representations in that they did not
accurately describe the fees the customer paid and/or the services the
customer actually received. The provision of the defective or
out-of-time FDSs terminated the ongoing fee arrangements between NAB and
its customers and it is ASIC’s case that consequently NAB was not
lawfully entitled to continue to charge the fees;
failed to establish and maintain compliance systems and processes to detect and prevent these failures; and
contravened its overarching obligations
as an Australian Financial Services licence holder to act efficiently,
honestly and fairly.
It is also ASIC’s case that NAB engaged in
unconscionable conduct from at least May 2018 by continuing to charge
ongoing service fees to certain customers when it knew that it had not
delivered the services and had issued defective FDSs or at least knew
that there was a real risk that it had engaged in this conduct. However,
NAB did not stop charging fees to its customers until 4 February 2019.
ASIC is seeking declarations, pecuniary
penalties and compliance orders from the Federal Court to prevent
similar contraventions occurring in the future.
‘Fees for No Service
misconduct has been widespread and is subject to ongoing ASIC regulatory
responses including investigations and enforcement actions. This
widespread misconduct was examined in some detail by the Financial
Services Royal Commission. ASIC views these instances of misconduct as
systematic failures, unfair to customers including those that are more
vulnerable.
‘When the Fees for No Service
misconduct is coupled with Fees Disclosure Statements inadequacies or
failings, customers are potentially placed in a more disadvantageous
position. The customer may not therefore have been provided with the
opportunity to know whether they have received the services for which
they have paid or the amount of fees charged to them’ said ASIC Deputy
Chair Daniel Crennan QC.
The maximum civil penalty for contraventions alleged against NAB are:
$250,000 per contravention for breaches
of s962P (charging ongoing fees after the termination of an ongoing fee
arrangement) and s962S (failing to provide a timely FDS);
$1.7 to $2.1 million maximum penalty
(depending on the time period) per contravention for breaches of s12CB
(unconscionable conduct) and s12DB (false or misleading
representations).
NAB received more than $650 million in
ongoing service fees from 2009 to 2018. NAB has stated that it has
provisioned more than $2 billion for Fee for No Service remediation
across all of its advice licensees.
Background
Fees for No Service conduct and
remediation of that conduct by NAB and other licensees was examined as
part of the Financial Services Royal Commission. ASIC has been
monitoring NAB’s (and other licensees’) remediation of its fees for no
service failures with the last update on its progress provided on 11
March 2019 (19-051MR).
On 28 November 2019, ASIC released Report 636 – compliance with the fee disclosure statement and renewal notice obligations (19-325MR).
As noted by Report 636, FDSs are intended
to help customers understand what services they have paid for, what
services they have received and how much those services cost, and to
enable them to make more informed decisions about whether their ongoing
fee arrangements with their adviser should continue. Not issuing or
issuing late or defective FDSs deprive customers of an opportunity to
make those important decisions.
ASIC’s action against NAB falls within
ASIC’s Wealth Management Major Financial Institutions Portfolio. The
Portfolio focuses on the financial services conduct of Australia’s
largest financial institutions (NAB, Westpac, CBA, ANZ, Macquarie and
AMP) with respect to credit and retail lending, financial advice, fees
for no service, superannuation trustees, insurance, unfair contract
terms and other licensee obligations, and other conduct arising from the
Financial Services Royal
ASIC’s decision to update RG 209 followed a
number of developments since the guidance was last updated in late
2014. These developments have included:
ASIC regulatory and enforcement actions, including court decisions
ASIC thematic reviews on various parts of the industry such as interest-only loans
the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry
recent and upcoming initiatives such as comprehensive credit reporting and open banking, and
changes in technology.
Following an extensive consultation, ASIC
has updated Regulatory Guide 209 (RG 209) to provide greater clarity and
support to lenders and brokers in meeting their obligations.
Importantly, ASIC has maintained principles-based guidance that supports
flexibility for licensees.
The changes include:
A stronger focus on the legislative purpose of the obligations—to reduce the incidence of consumers being encouraged to take on unsuitable levels of credit, and ensure licensees obtain sufficient reliable and up-to-date information about the consumer’s financial situation, requirements and objectives to enable them to assess whether a particular loan is unsuitable for the particular consumer.
More guidance to illustrate where a licensee might undertake more, or less, detailed inquiries and verification steps based on different consumer circumstances and the type of credit that is being sought. The updated guidance includes new examples about a range of different credit products including large and longer-term loans, credit cards and personal loans, small amount loans and consumer leases and different kind of consumer circumstances – such as first home buyers, existing customers, strata corporations, high net worth and financially experienced consumers.
More detailed guidance about how spending reductions may be considered as part of the licensee’s consideration of the consumer’s financial situation, requirements and objectives.
More detailed guidance about the use of benchmarks as a way to check the plausibility of expenses, as well as additional guidance about the HEM benchmark.
Clarity about more complex situations for some consumers – for example the different situations of consumers such as income from small business, casual employees, new employees, the gig economy, as well as joint and split liabilities and expenses.
ASIC has also included a section on the
scope of responsible lending, explaining the areas that are not subject
to responsible lending obligations – such as small business lending
irrespective of the nature of the security used for the loan.
The National Credit Laws provide consumers
with important protections when seeking credit directly from a lender
or through a broker. ASIC’s revised guidance is intended to assist
lenders and brokers to comply with their responsible lending obligations
and ensure that they do not recommend or provide credit that is
unsuitable.
ASIC Commissioner Sean Hughes said “ASIC
conducted extensive consultation on this important issue. The public
hearings and submissions highlighted the areas where industry sought
clarification from ASIC. We have listened carefully to all stakeholders
and addressed areas where we consider updated guidance would help. We
hope that today’s guidance will assist industry to more confidently make
responsible lending decisions and to facilitate good lending outcomes
for consumers.”
The guidance has also been updated to
reflect technological developments including open banking and digital
data capture services. RG 209 notes the cost and ease of access to
transaction information will be improved over time, which should improve
lenders’ overall view of a consumer’s financial situation.
ASIC has also published its response to
submissions made to Consultation Paper 309 and a tool to assist users of
RG 209 to navigate the updated structure of the document.
The Australian Securities and Investments Commission (ASIC) and
Australian Prudential Regulation Authority (APRA) have committed to
strengthen engagement, deepen cooperation and improve information
sharing.
The agencies today published an updated Memorandum of Understanding (MoU).
The updated MoU follows on from the recommendations of the Royal
Commission into Misconduct in the Banking, Superannuation and Financial
Services Industry[1]. APRA and ASIC are also working closely with Government on the legislative changes required to implement these recommendations.
ASIC Chair James Shipton said the updated MoU builds on the open and
collaborative relationship across all levels of the agencies.
‘ASIC and APRA will continue to proactively engage and respond to
issues efficiently to deliver positive outcomes for consumers and
investors.
‘The MoU facilitates more timely supervision, investigations and
enforcement action and deeper cooperation on policy matters and internal
capabilities.’
APRA Chair Wayne Byres said enhanced cooperation reinforced the twin
peaks model of regulation that has operated in Australia for more than
20 years.
‘ASIC and APRA share an interest in protecting the financial
wellbeing of the Australian community and achieving a fair, sound and
resilient financial system,’ Mr Byres said.
‘Strengthening engagement is a key priority of the ASIC Commissioners
and APRA Members. We will continue to work closely together to enhance
regulatory outcomes and achieve our respective mandates.’
This MoU, which will be reviewed on a regular basis, is only one
aspect of how ASIC and APRA are establishing closer cooperation. Led by
ASIC Commissioners and APRA Members, the agencies are regularly meeting
under a revised engagement structure and working together on areas of
common interest, including data, thematic reviews, governance and
accountability. Both agencies are committed to detecting prudential and
conduct issues early and working to revolve them efficiently and
effectively.
The updated MoU is available on the ASIC website here.
The use and regard to expenditure benchmarks is “an area that is ripe for further guidance from ASIC”, and will be a focus of the updated RG 209 guidance next month, the financial services regulator has suggested. Via The Adviser.
Speaking at the parliamentary joint
committee on corporations and financial services hearing on its
oversight of the Australian Securities and Investments Commission (ASIC)
and the Takeovers Panel on Tuesday (19 November), chairman James
Shipton and commissioner Sean Hughes revealed some of the specific
issues that will be addressed in its upcoming revised guidance on responsible lending.
The chair told the parliamentary
joint committee that there was a need for “more contemporaneous”
guidance around responsible lending, particularly given the increasing
number of online lenders, the upcoming open banking scheme and increased
data, the evolution of business practices, updates to technology, and
automatisation of systems.
Commissioner Hughes elaborated that
the “greater use of technology and technological tools to verify borrow
information in real time” and have it “fully verified using technology
solutions within 58 minutes” was an advancement that was not available
when the National Consumer Credit Protection Act(NCCP) was written 10 years ago.
Another area that required updating was around expense benchmarks used to verify borrower expenses – such
as the Household Expenditure Measure (HEM) – particularly given the
fact that some categories of expenses are not included in HEM, such as
certain medical costs, superannuation contributions and mortgage
repayments.
Commissioner Hughes said: “We are not
requiring lenders to scrutinise how many cups of coffee you are having,
whether you are going to an expensive gym and all those things. That is
not what our guidance requires.
“What our guidance is suggesting (and I emphasize suggesting)
is that lenders could have regard to unusual patterns and expenditure,
which take a borrower outside normal patterns for that person.”
He continued: “There are some
categories of expense that require a lender to go above and beyond the
standardised benchmark. So, this is something we’ve recognised through
the consultation process that we have undertaken. It’s been something
that all the submissions have commented on, and we think it’s an area
that is ripe for further guidance from ASIC.”
Mr Hughes later told the committee that another area ASIC will be “zeroing in on” will be the level of enquiries needed for refinances, among other activities.
He said: “[W]hat we do want to
preserve, as part of our guidance in the next version, is the concept of
scalability. And this is something that other submitters [to the
consultation] have commented on as well.
“So for instance, if I use the
example of a borrower who is seeking to refinance an existing loan that
retains the same overall credit headroom – perhaps swapping out another
security, taking advantage of lower interest rates – we would say that,
if all other things haven’t changed and the borrower’s
capacity to repay the loan remains the same and their income seem
stable, that would not require a lender to do the forensic detailed
examination of how many cups of coffee, or gym memberships, etc., they
have that might be required in other instances.”
Other areas that the new guidance
will reportedly clarify include detailing situations where the
responsible lending guidance does not apply (such as small-business
lending) as well as when the guidance does apply outside of mortgages
(such as for credit cards and unsecured personal loans).
However, Mr Shipton emphasised that ASIC’s
new guidance will be “principles-based” rather than dogmatic, and
“provide discretion by financial institutions and lenders, to be able to
exercise their good professional discretion in determining these
areas”, given that there is “always going to nuance” and “unique
situations” in providing finance.
He continued: “There will never be able to be a set of rules or guidance written which will be able to precisely convey and allow for every precise circumstance. That’s why principles-based guidance is important. That’s what we’re going to, that’s what we’re going to be aiming to do.”
Today I would like to address some of the issues that have been
raised in relation to responsible lending and demonstrate two facts.
First, that the concerns are misplaced. Second, the principles
underpinning these provisions remain sound, even in the changed economic
environment since 2010.
At the outset I want to emphasise that our guidance is just and only that,
guidance. It does not have the force of law. The fact that we are
updating our guidelines, does not change the law, which has been in
place since 2010. However, what has been made abundantly clear to us in
the course of our consultations, is that industry would welcome more
assistance in interpreting how to meet responsible lending obligations.
Put simply, this is what we are endeavouring to achieve. We are not, and
never have sought to impede the flow of credit to the real economy.
I want to take this opportunity to reflect upon three broad questions
that keep recurring in the work we are doing to update our guidance:
Why does responsible lending matter?
Why is ASIC updating its guidance, and why now?
What does an update to the guidance mean in practice for lenders and what will it achieve?
And importantly, along the way I will respond to some misconceptions
about responsible lending. There are some myths that need busting to
address exaggerated and inaccurate criticisms about our consultation on
revising this guidance.
Why does responsible lending matter?
Responsible lending is fundamentally about the credit industry’s
commitment to dealing fairly with its customers. Ensuring robust and
balanced standards of responsible lending to consumers has been, and
will continue to be, a key priority for ASIC.
Consumer credit is part of the life blood of our society and economy. A report by Equifax Australia in July 2019 estimated that 4.4million applications for consumer credit were expected to be made in the 6 months to the end of the year[1].
Inappropriate lending can have devastating consequences for
individuals and families, and on a broader scale, can undermine
confidence in financial markets.
Australia introduced a national consumer credit regime in 2009 to
avoid excesses in lending and predatory lending to consumers. In the
preceding period, the impact of the financial crisis had revealed a
number of shortcomings in policies and practices at financial
institutions abroad. Some of these practices were clearly aimed at
taking advantage of vulnerable borrowers.
Although lending standards in Australia were not as lax as other
countries, during the pre-crisis period the share of ‘low doc’ loans
written in Australia had grown strongly in the lead up to the crisis[2].
The responsible lending law reforms were introduced to Parliament to
curb undesirable market practices that many were concerned about at the
time, including[3]:
providing or recommending inappropriate, high cost and potentially unaffordable credit;
upselling of loans to higher amounts than were necessary to fulfil the consumer’s needs;
unscrupulous lenders providing consumers with unaffordable loans
that will default – thus facilitating the recovery of the equity in the
consumer’s home; and
inadequate financial disclosure, poor responses to financial difficulty and unsolicited credit limit increases.
The core principle behind this regime is simple and has not changed
since 2010 – despite what many critics and commentators have been
saying. A licensee must not enter into, or suggest or assist a customer
to enter into, a contract that is unsuitable. None of this is new. To
ensure this outcome the licensee must:
First – gather reliable information that will inform the licensee
about what the consumer wants and their financial situation. This
involves making reasonable inquiries about the consumer’s requirements
and objectives in relation to the credit product, and the consumer’s
financial situation, and taking reasonable steps to verify the
consumer’s financial situation.
And then, second – assess whether the contract will be ‘not unsuitable’ for the consumer.
Why is ASIC updating its guidance on responsible lending and why are we doing it now?
Since the introduction of the responsible lending laws, ASIC has
regularly reviewed industry practices and identified a range of
compliance issues. Some examples of our work include:
In 2015 we reviewed industry’s approach to providing interest-only
home loans. We identified practices that could result in borrowers being
unable to afford their loan repayments down the track, and we suggested
to lenders that they needed more robust processes to improve the
accuracy of their assessments regarding capacity to repay.
This was followed in 2016 by our review of large mortgage broker
businesses. This review resulted in ASIC setting out further actions
which credit licensees could take to reduce the risk of being unable to
demonstrate compliance with their obligations.
Alongside our industry reviews, we’ve undertaken a number of
enforcement actions to improve compliance. Our actions against The Cash
Store, Bank of Queensland, BMW Finance, Channic, Motor Finance Wizard,
ANZ (Esanda), and Thorn Australia send a clear message to industry and
consumers that ASIC will take action to stamp out irresponsible and
predatory lending, and deter breaches of the law.
More recently, the Royal Commission into the financial services
sector found some major shortcomings in the way in which responsible
lending laws were being applied by lenders.
At this point, I should say something briefly about the decision in
the proceedings that ASIC took against Westpac in 2017 – the so-called
‘Wagyu and Shiraz’ case. This preceded the Royal Commission, and
Commissioner Hayne did not directly address ASIC’s case against Westpac.
ASIC was unsuccessful in this matter and while we respect the judgment,
we have lodged an appeal.[4]
Almost every commentator has criticised this decision and suggested
that ASIC’s appeal creates avoidable uncertainty. Our objective in
appealing this decision is, in fact, to clarify the application of the
law. And we believe that doing so is in the best interests of both
consumers and lenders. It is an important part of ASIC’s mandate to
clarify the law where there is uncertainty, and thereby support and
guide industry to understand their obligations.
We decided to appeal because we consider that the decision creates
uncertainty about what a lender is required to do to comply with its
obligation to make an assessment of whether a loan is not unsuitable for
the borrower. And, if the judgment is to be understood as standing for
the proposition that a lender may do what it wants in the assessment
process (as His Honour found), then we consider that to be inconsistent
with the legislative intention of the responsible lending regime. The
Westpac case relates to the period between December 2011 and March 2015,
and although in the years since we have seen some improvements in
responsible lending standards amongst the industry, there is a real risk
that uncertainty in the approach required by lenders to comply with the
law could result in slippage by some lenders.
Put simply, we believe that the judgment left it too unclear what
steps are required of a lender. We are seeking clarity by appealing.
The proper forum to debate this is now the Full Federal Court. Like any
other litigant, we are availing ourselves of access to an appellate
body. We should not be criticised for accessing the Courts to resolve a
dispute, as all regulators do from time to time.
Notwithstanding our appeal in the Westpac case, we consider that ASIC
should still provide updated guidance mindful that the appeal has not
yet been heard. All of the ingredients necessary are there – judicial
decisions, ASIC enforcement action, thematic reviews, the Royal
Commission, changes to technology. The updated RG209 looks to build on
the existing guidance, which we believe is fundamentally sound, and to
bring those developments together in a single, instructive guide and to
clarify and provide more certainty to industry in key areas where we
can.
Some misconceptions about responsible lending
There are a number of myths and exaggerated claims about the supposed
effects of the responsible lending laws that need to be addressed.
These claimed effects are either not supported by the facts or data, or,
if they are real, they are the result of a fundamental misunderstanding
and misapplication of the law.
Let me address a few of the most significant.
The first is the suggestion that small business lending is negatively affected by the responsible lending obligations.
There has been a lot of misinformation published recently in the
media and in the current corporate reporting season about the effect of
the responsible lending requirements on small business lending.
The responsible lending obligations administered by ASIC apply to credit provided to individuals for:
personal, domestic and household purposes (this includes buying/improving a home); and
residential investment purposes (this includes buying/improving/refinancing residential property for investment purposes).
They apply also to loans to strata corporations for these same
purposes. This is the one, very niche, area of application of the
responsible lending obligations to an entity rather than an
individual.
Otherwise, a loan to a company (including small proprietary companies) for any purpose is not subject to the responsible lending obligations.
Where there is a loan to an individual, the purpose of the loan
determines whether the loan is subject to the responsible lending
obligations. The nature of any security for the loan does not affect
this test, nor does the source of income to pay the loan back. In other
words, it is not an asset test but a predominant purpose test.
A loan to an individual predominantly for a business purpose is not
subject to responsible lending obligations. ‘Predominant’ simply means
‘more than half’.
So, if someone borrows $500,000 of which $300,000 is to be used to
establish a small business, and the remainder for making home
improvements, the loan is not subject to the responsible lending
obligations.
Similarly, if a small business operator obtains a loan to purchase a
motor vehicle which is to be used 60% of the time for work purposes but
will also be available for personal use, the loan is not subject to the
responsible lending obligations.
A loan to an individual for business purposes secured over a borrower’s home is not subject to the responsible lending obligations.
Of course, a lender may choose to apply its responsible lending
processes to business loans for its own commercial reasons to manage its
credit risk portfolio or to meet its prudential obligations.
AFCA in its role as the dispute resolution scheme for the credit
industry deals with both small business loans and consumer loans. There
has been some confusion in industry about whether the responsible
lending obligations are going to be applied by AFCA in relation to small
business loans. In evidence at ASIC’s public hearings in August this
year, AFCA undertook to clarify this misunderstanding in its forthcoming
guidance to its members.
There has also been a suggestion that ASIC’s guidance and
consultation has caused increases to credit application processing times
or rejection rates.
Contrary to some anecdotal statements, the evidence and data do not
point to ASIC’s guidance in RG 209 or our consultation to revise this
guidance, as having caused increases in credit application processing
times or rejection rates.
We do accept that, following the commencement of the Royal
Commission, lenders began to review their approach to responsible
lending and to tighten standards. And that these reviews, prompted by
the Royal Commission and not by ASIC’s guidance (which,
remember, has been unchanged since November 2014), have resulted in
them seeking more detailed information from borrowers and necessitated
some systems upgrades and staff training.
To the extent this had any effect on processing times, it was only at
the margins. In coming to that conclusion, we have actively sought
information about processing times.
The Australian Banking Association (ABA) recently disclosed
information to ASIC that shows, on average, approvals for mortgage loans
for ABA members in late 2018 took 4 days longer than they had in early
2018, but that by mid-2019 this had decreased to be just 2 days longer.
During ASIC’s recent public hearings in August, we asked some of the
major banks and other lenders about changes to loan application times
and rejection rates:
one bank confirmed it has not experienced material changes and approved between 80-85% of applications; and
two banks attributed any changes they have experienced to changes in demand for credit and changes in the bank’s own processes.
And, illustrative of the fact that adherence to responsible lending
laws does not have to spell lengthy processing times, Tic:Toc (a smaller
on-line lender) told us that their fastest time from a consumer
starting an application to being fully approved is 58 minutes. And that
includes full digital financial validation of the consumer’s financial
position.
The ABA has not indicated any direct impact by ASIC on ABA members’
processing times. The reasons given for an increase in approval times
instead included:
a new APRA reporting framework (inspection of record keeping);
an APRA review leading to internal changes to processes and procedures;
satisfying new risk limits imposed on certain lending by APRA;
AFCA decisions influencing interpretation of regulatory requirements; and
reinterpretation by the ABA members of responsible lending requirements.
Anecdotally, we have also heard of instances where front-line lending
officers are seeking to escalate loan approval decisions to their
managers, which may also have added to perceived delays.
Finally, there has been a suggestion that responsible lending has had a negative effect on economic growth.
We do not accept this. The evidence and data available to ASIC do not
suggest that the decision to update our guidance has contributed to the
current state of the economy by limiting access to credit.
Indeed, lending trend reports published by the ABA show that banks
are still lending – approval rates remain between 85-90% for home
lending and 90-95% for business lending (the latter of course should not
be captured by our guidance on the responsible lending obligations).
Instead, the main reason for slower credit growth has been a decline
in the demand for credit. Statements made during ASIC’s public hearings,
other information we have collected from industry, and recently
published economic statistics all support this view.
And, in fact, there are signs that this may be turning around.
The Australian Bureau of Statistics reported that (in seasonally
adjusted terms) lending commitments to households rose 3.2% in August
2019, following a 4.3% rise in July. Earlier this week, CBA announced a
3.5% increase in home lending and 2.8% in business lending for the 3
months to October.
This pick-up in recent approvals lends further support to the view
that it is not responsible lending obligations that have been dampening
credit availability. So too do the following sources:
The Reserve Bank of Australia (RBA) continues to comment on the
impact on credit of the construction cycle and of reduced demand for new
housing. The RBA found that housing turnover had declined to
historically low levels (below 4%) and has only just begun to rise.
The ABA lending trend report states that a significant shift in
market sentiment within the housing sector – following the election
outcome, RBA cash rate cut, and lowering of APRA’s serviceability floor –
is likely to be a key driver of a boost in investor loan applications.
In addition, the RBA’s recent Financial Stability Review explained
that uncertainty about the outlook for global economic growth has
increased in the last 6 months, with a greater chance of weak growth.
The Review refers to regulatory measures introduced in December 2014 and
in early 2017 (being the prudential measures put in place) as a ‘speed
bump’ for investment lending and interest-only lending. The Review also
refers to ‘tighter standards’ implemented by lenders, relating to their
own credit risk appetite and policies – these are adopted by banks to
manage their own credit risk exposure, rather than for the purpose of
complying with responsible lending obligations. And, finally, the Review
points to an increase of credit approvals in recent months which the
RBA expects to flow through to higher lending.
What does an update to the guidance mean and what will it achieve?
Our Regulatory Guides are intended to be useful and informative
documents and there has been a great deal of anticipation about the
upcoming revision. There are a few key points I would like to make about
what an update to our guidance means and will achieve.
First – our regulatory guidance was last updated in November 2014,
and the responsible lending obligations themselves have not materially
changed since 2010. For a topic like responsible lending, where the
application of the law continues to be clarified through court
decisions, and where the industry’s technologies and systems evolve and
change, it is appropriate to conduct periodic reviews and updates of our
guidance.
Second – the consultation process has involved multiple steps. We
allowed three months to receive submissions, in order to get thoughtful
and broad feedback. We exercised our power to conduct public hearings –
for the first time in more than 15 years. This proved to be a very
useful and respectful forum to talk to industry participants about their
views. We have also recently concluded a group of round-table sessions
with stakeholders including ADIs, non-bank lenders, brokers, providers
of small amount credit contracts and consumer leases, and consumer
representative groups. This enabled us to test and distil the
conclusions we were drawing on necessary changes.
Third – it is critical everyone is clear that our guidance does not,
and the revised guidance will not, create new obligations. Simply
because it cannot do that. Our regulatory guides are just that – guidance – about approaches that licensees can adopt to reduce the risk that they fail to comply with the responsible lending laws.
Fourth – The submissions were wide ranging, but many made the point
that they were looking for more guidance not less, albeit while
retaining flexibility to exercise judgments in implementing responsible
lending practices.
We made it very clear in the consultation paper that we wanted to update and clarify our existing guidance and provide additional guidance.
When we release the updated regulatory guide in a few weeks, I urge
licensees to take the guidance on board and to compete with each other
on the quality of products and services to consumers. Not focus on
processes which merely seek to achieve a minimum level of compliance.
Conclusion
In conclusion, I hope that I have given context for what we are doing
and why, and busted some myths about the practical effects of
responsible lending.
We all have a role to play to ensure that both consumers and
investors can continue to have confidence in the efficient and fair
operation of our credit markets. As the leaders and responsible managers
of our credit institutions, it falls to you to implement processes that
ensure consumers are provided with products that are affordable for
them and suit their needs.
We intend for our update to Regulatory Guide 209 to provide greater
clarity to industry. All the same, there is little doubt that we will
continue to be engaged in conversation with industry about responsible
lending.
In a fresh blow to Westpac, the Federal Court this morning delivered the corporate regulator a win in its appeal against a previous ruling on Westpac’s telephone campaigns. Via Financial Standard.
The full court this morning
said ASIC’s appeal will be allowed with costs, while Westpac-related
companies’ cross-appeal will be dismissed.
In 2014 and 2015, Westpac ran telephone and snail-mail campaigns to encourage customers to roll over external superannuation accounts into their existing accounts with Westpac Securities Administration Limited and BT Funds Management.
ASIC was primarily concerned with the telephone calls.
The
corporate regulator claimed that the two Westpac companies had breached
their FoFA-stipulated best interest duty by advising rollovers to
Westpac-related super funds without a proper comparison of options, as
required by law.
And so, it initially launched civil penalty proceedings against the two Westpac subsidiaries in December, 2016.
The
Federal Court handed down its judgment in January this year, with a
mixed outcome. It decided that ASIC had failed to demonstrate that the
two Westpac companies had provided personal financial product advice to
15 customers in regards to the consolidation of superannuation accounts.
However,
the judge added the Westpac subsidiaries contravened the Corporations
Act in 14 of 15 customer phone calls by implying the rollover of super
funds into a BT account was recommended. This came about through a
“quality monitoring framework” where BT staff were coached in sales
technique.
ASIC appealed the January judgment. Westpac also made a counter appeal.
ASIC has imposed additional licence conditions on the Australian
financial services (AFS) licence of IOOF Investment Services Ltd (IISL)
as part of an application by IISL to vary its licence.
IISL sought a variation to its licence to facilitate the transfer of
managed investment scheme, investor directed portfolio services (IDPS)
and advice activities from IOOF Investment Management Ltd (IIML) to
IISL. The transfer is part of a reorganisation of the broader corporate
group (IOOF Group).
In granting the licence variation, ASIC has decided to impose
additional conditions relating to the governance, structure and
compliance arrangements of IISL.
ASIC’s decision to impose additional licence conditions took into
account concerns highlighted by the Financial Services Royal Commission
about the real and continuing possibility of conflicts of interests in
IOOF Group’s business structure, ASIC’s past supervisory experience of
these entities and material supplied by IISL as part of its licence
variation application. IISL agreed to the imposition of the additional
licence conditions.
In summary, the additional conditions specifically cover:
governance – by requiring that IISL has a majority of
independent directors with a breadth of skills and background relevant
to the operation of managed investment schemes and IDPS platforms;
the establishment of an Office of the Responsible Entity (ORE) – that is adequately resourced and reports directly to the IISL board, with responsibility for:
oversight of IISL’s compliance with its AFS licence obligations;
ensuring IISL’s managed investment schemes are operated in the best interests of their members; and
overseeing the quality and pricing of services provided to IISL by all service providers (including related companies),
the appointment of an independent expert, approved by ASIC, to report on their assessment of the implementation of the additional licence conditions.
ASIC Commissioner Danielle Press said, ‘ASIC is serious about
improving the quality of governance and conflicts management across the
funds management sector and ensuring that investors’ best interests are
the highest priority of fund managers.
‘ASIC will use its licensing power, including through the imposition
of tailored licence conditions to address governance weaknesses, the
risk of poor conduct or vulnerabilities to conflicts of interest in a
licensee’s business model.’
A former Macquarie banker says hazy guidelines around lending will cause problems for the next six months following the Westpac case, predicting the big four banks will corner ASIC and demand clearer standards, according to an exclusive in InvestorDaily today.
During
a panel discussion at The REAL Future of Advice Conference in Vietnam
this week, former Macquarie head of sales and distribution for
mortgages, Tim Brown, noted the recent Federal Court decision ruling in
the favour of Westpac.
ASIC
had taken Westpac to court over allegations it breached lending laws
between 2011 and 2015 by using the household expenditure measure to
estimate potential borrowers’ living expenses.
ASIC had argued the benchmark was too frugal and that customers’ expenses were higher.
Mr
Brown, who is currently the chief executive of Ezifin Financial
Services, called the current lending landscape a “minefield” where
lenders “can’t get clarification from ASIC” over standards for
evaluating consumers’ eligibility for mortgages.
“I
think the problem with this whole expense discussion, as I was pointed
out earlier on is that a lot of the assessors put their own personal
assessment on what someone else spends money on, which is where the
problem lies,” Mr Brown said.
“It needs to be much more factual.
“I
think it is going to be a problem for at least another six months until
some of the banks get together with ASIC and say look we need to get
some clear guidelines around this. Because they’re basically saying HEM
isn’t acceptable anymore.”
Mr
Brown noted when he first started lending, brokers would sit with
clients, go through their expenses and make sure they had enough
capacity to meet any future increases and interest rates, by using HEM
and allowing up to two and a half per cent above the current rate.
Reflecting on his expenses when buying his first house, said he did not think he would have passed current standards.
“But
within the first six months of buying a home, and we know this
factually and we’ve recently seen ASIC having these discussions, that
most people will reduce their discretionary spending by 20 per cent.
“Now,
most assessors in the past could make that decision without any
concern. But in the current environment, they are afraid to make those
decisions now because there’s a way around it and ASIC might review
that. And this comes back to this personal assessment of someone else’s
opinion on what someone should have a discretionary not a discretion.
“Because
ASIC just goes ‘well you know best endeavors, you know, whatever you
think is reasonable.’ And then they’ll charge you if they don’t think
it’s reasonable.”
‘We want some direction’
Talking
about missing clarity from ASIC, Mr Brown said: “The banks are sick of
this game that they’re playing with ASIC at the moment and eventually
the four of them will get together and say look, you need to give us
some clear guidelines.”
“At
the moment, I think the industry bodies are trying to come together
with something they can take to ASIC both from a vendor’s perspective
and also from a MFAA (Mortgage and Finance Association of Australia) and
FBAA (Finance Brokers Association of Australia).”
Mr Brown noted every time he had been on a panel, he had been asked about the Westpac decision.
“There’s obviously a real concern among the number of people at the moment,” he said.
ASIC says Australian financial services (AFS) licence holder ClearView Financial Advice Pty Ltd (ClearView) has completed a review and remediation program for over 200 clients who received poor life insurance advice.
Under this program, ClearView reviewed 4,269 advice files from 279 of
its advisers and remediated clients who had suffered loss. 215 clients
were offered $730,138 in financial compensation and 21 clients received
non-financial remediation through reissued advice documents and fee
disclosure.
ASIC first identified issues of non-compliant advice by ClearView’s
representatives during an industry-wide review of retail life insurance
in 2014 (14-263MR).
A sample review of ClearView’s advice files highlighted broad areas
of concern such as inadequate needs analysis for client, insufficient
explanation about the pros and cons of using superannuation to fund
insurance premiums, inadequate consideration of premium affordability
issues and poor disclosure about replacement products. ASIC raised these
issues as well as some concerns related to the conduct of Jason
Churchill, one of ClearView’s advisers at the time.
In 2016, ASIC accepted an enforceable undertaking (EU) from Mr
Churchill for failure to meet his obligations as a financial adviser (16-008MR).
Under the EU, Mr Churchill agreed to undergo additional training,
adhere to strict supervision requirements and have each piece of advice
audited by his authorising licensee before it was provided to clients.
Separately, ClearView undertook to review advice previously provided by
Mr Churchill and remediate clients who had received inappropriate
advice.
ClearView also began a review of the personal insurance advice
provided by its advisers to determine if there was a systemic issue
related to the broad areas of concern identified by ASIC and engaged
Deloitte to provide independent oversight. This review found that a
number of ClearView’s advisers did not undertake adequate ‘needs
analysis’ for clients.
The needs analysis is a critical part of the financial advice
process. It enables advisers to understand their clients’ financial
situation, needs and objectives, and provides the basis for the
financial advice.
To identify all instances of this issue and to remediate any
adversely affected clients, ClearView undertook a full review and
remediation program in accordance with Regulatory Guide 256: Client review and remediation conducted by advice licensees
(RG 256). Deloitte oversaw the review and remediation program to
ensure that it was conducted in accordance with the principles set out
in RG 256.
