Tag: ASIC

ASIC makes product intervention order banning short term lending model

ASIC has used its product intervention power to ban a model of lending in the short term credit industry which has been found to cause significant consumer detriment.

In its first deployment of this power ASIC targeted a particular business model where a short term credit provider and its associate charged fees under separate contracts.

The law allows short term credit providers to remain exempt from credit licensing, conduct and responsible lending obligations under the National Consumer Credit Protection Act 2009, if the fees charged for a loan of up to 62 days do not exceed 5% of the loan amount and 24% per annum interest.

Under the short term lending model, the short term credit provider charged costs within these limitations, however its associate charged significant upfront, ongoing and default related fees under a separate contract for management and administrative services in relation to the loan. When combined, these fees can add up to almost 1000% of the loan amount.

The model has been used by Cigno Pty Ltd and Gold-Silver Standard Finance Pty Ltd, and more recently by MYFI Australia Pty Ltd and BHF Solutions Pty Ltd.

In making the order, ASIC considered:

  • submissions received in response to CP 316, with only 2 out of 35 submissions opposing ASIC’s proposed product intervention order;
  • data provided by industry participants, demonstrating the size and scale of the short term credit industry; and
  • ASIC complaints data in relation to the short term lending model, which comprised over 200 reports of misconduct, with the      majority being about excessive fees and charges.

The order does not seek to modify the existing exemption for short term credit; rather, it ensures that short term credit providers and their associates do not structure their businesses in a manner which allows them to charge fees which exceed the prescribed limits for regulated credit.

In announcing ASIC’s decision Commissioner Sean Hughes said “ASIC is ready and willing to use the new powers that it has been given. The product intervention power provides ASIC with the power and responsibility to address significant detriment caused by financial products, regardless of whether they are lawfully provided.

ASIC will take action where it identifies products that can or do cause significant consumer detriment. In this case, many financially vulnerable consumers incurred extremely high costs they could ill-afford, often leading to payment default that only added to their financial burden.”

The order is an industry wide order made by legislative instrument and will apply to any person that attempts to use this short term lending model or variations of the model. The order was registered with the Federal Register of Legislation on 12 September 2019 commencing on 14 September 2019 and remains in force for 18 months unless it is extended or made permanent. ASIC can extend the order’s duration or make it permanent, but only with Ministerial approval.

There are criminal and civil penalties for breaching the product intervention order, including up to 5 years imprisonment and fines of up to $1.26 million per offence.

Business Confidence Weakens Again! [Podcast]

We review the latest NAB survey, the Westpac ASIC case and the RBA’s latest excuses.

Digital Finance Analytics (DFA) Blog
Digital Finance Analytics (DFA) Blog
Business Confidence Weakens Again! [Podcast]
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ASIC Westpac HEM Battle Is Not Over, Yet…

The ABC, via Michael Janda is reporting that ASIC is appealing the recent judgment which found in favour of Westpac and their use of the Household Expenditure Measures benchmark.

This is important because the Federal Court’s decision in the landmark ASIC v Westpac test case on responsible lending laws could mean the poverty line becomes the new test for whether a loan is responsible or not.

Justice Perram’s judgment, should it stand, effectively validates the bank’s use of the HEM benchmark in assessing loan applications — a benchmark used in some way by most home lending institutions.

ASIC commissioner Sean Hughes said the regulator felt compelled to appeal after Justice Perram ruled that a lender “may do what it wants in the assessment process”.

“The Credit Act imposes a number of legal obligations on credit providers, including the need to make reasonable inquiries about a borrower’s financial circumstances, verifying information obtained from borrowers and making an assessment of whether a loan is unsuitable for the borrower,” he said in a statement.

“ASIC considers that the Federal Court’s decision creates uncertainty as to what is required for a lender to comply with its assessment obligation, nor does ASIC regard the decision as consistent with the legislative intention of the responsible lending regime.

“For those reasons, ASIC will appeal to the Full Court of the Federal Court.”

ASIC sues Bendigo and Adelaide Bank for use of unfair contract terms

ASIC has commenced proceedings in the Federal Court of Australia against Bendigo and Adelaide Bank concerning unfair contract terms in small business contracts.

ASIC alleges that certain terms used by Bendigo and Adelaide Bank in contracts with small businesses are unfair. If the Court agrees with ASIC, the specific terms will be void and unenforceable by the Bendigo and Adelaide Bank in these contracts.

ASIC alleges that certain terms used by the Bendigo and Adelaide Bank and are unfair, as the terms:

  • cause a significant imbalance in the parties’ rights and obligations under the contract;
  • were not reasonably necessary to protect the Bendigo and Adelaide Bank’s legitimate interests; and
  • would cause detriment to the small businesses if the terms were relied on.

Some of the unfair terms pleaded by ASIC include clauses that give lenders, but not borrowers, broad discretion to vary the terms and conditions of the contract without the consent of the small business owner, along with clauses that allow the bank to call a default, even if the small business owner has met all of its financial obligations.

ASIC is also seeking a declaration from the Federal Court that the same terms in any other small business contract are also unfair.

Background

If the Federal Court finds that any of the terms of the standard form contracts are unfair, the unfair terms are void (it is as if the terms never existed in the contracts). ASIC is seeking that the terms are declared void from the outset – not from the time of the court’s declaration. The remainder of the contract will continue to bind parties if it can operate without the unfair terms.

Since 1 July 2010, ASIC has administered the law to deal with unfair terms in standard form consumer contracts for financial products and services, including loans.

With effect from 12 November 2016, the unfair contract terms provisions applying to consumers under the Australian Consumer Law and the ASIC Act were extended to cover standard form ‘small business’ contracts.

Small businesses, like consumers, are often offered contracts for financial products and services on a ‘take it or leave it’ basis, commonly entering into contracts where they have limited or no opportunity to negotiate the terms. These are known as ‘standard form’ contracts. Small businesses commonly enter into these ‘standard form’ contracts for financial products and services, including business loans, credit cards, and overdraft arrangements.

The unfair contracts law applies to standard form small business contracts entered into, or renewed, on or after 12 November 2016 where:

  • the contract is for the supply of financial goods or services (which includes a loan contract);
  • at least one of the parties is a ‘small business’ (under the ASIC Act, a business employing fewer than 20 people is a ‘small business’); and
  • the upfront price payable under the contract does not exceed $300,000, or $1 million if the contract is for more than 12 months.

In March 2018, ASIC released Report 565: Unfair contract terms and small business loans. The report:

  • Identifies the types of terms in loan contracts that raise concerns under the law;
  • Provides details about the specific changes that have been made by the ‘big four’ banks to ensure compliance with the law; and
  • Provides general guidance to lenders with small business borrowers to help them assess whether loan contracts meet the requirements under the UCT law

ASIC sues Bank of Queensland for use of unfair contract terms

ASIC has commenced proceedings in the Federal Court of Australia against the Bank of Queensland concerning unfair contract terms in small business contracts.

ASIC alleges that certain terms used by Bank of Queensland in contracts with small businesses are unfair. If the Court agrees with ASIC, the specific terms will be void and unenforceable by the Bank of Queensland in these contracts.

ASIC alleges that certain terms used by the Bank of Queensland are unfair, as the terms:

  • cause a significant imbalance in the parties’ rights and obligations under the contract;
  • were not reasonably necessary to protect the Bank of Queensland’s legitimate interests; and
  • would cause detriment to the small businesses if the terms were relied on.

Some of the unfair terms pleaded by ASIC include clauses that give lenders, but not borrowers, broad discretion to vary the terms and conditions of the contract without the consent of the small business owner, along with clauses that allow the bank to call a default, even if the small business owner has met all of its financial obligations.

ASIC is also seeking a declaration from the Federal Court that the same terms in any other small business contract are also unfair.

Background

If the Federal Court finds that any of the terms of the standard form contracts are unfair, the unfair terms are void (it is as if the terms never existed in the contracts). ASIC is seeking that the terms are declared void from the outset – not from the time of the court’s declaration. The remainder of the contract will continue to bind parties if it can operate without the unfair terms.

Since 1 July 2010, ASIC has administered the law to deal with unfair terms in standard form consumer contracts for financial products and services, including loans.

With effect from 12 November 2016, the unfair contract terms provisions applying to consumers under the Australian Consumer Law and the ASIC Act were extended to cover standard form ‘small business’ contracts.

Small businesses, like consumers, are often offered contracts for financial products and services on a ‘take it or leave it’ basis, commonly entering into contracts where they have limited or no opportunity to negotiate the terms. These are known as ‘standard form’ contracts. Small businesses commonly enter into these ‘standard form’ contracts for financial products and services, including business loans, credit cards, and overdraft arrangements.

The unfair contracts law applies to standard form small business contracts entered into, or renewed, on or after 12 November 2016 where:

  • the contract is for the supply of financial goods or services (which includes a loan contract);
  • at least one of the parties is a ‘small business’ (under the ASIC Act, a business employing fewer than 20 people is a ‘small business’); and
  • the upfront price payable under the contract does not exceed $300,000, or $1 million if the contract is for more than 12 months.

In March 2018, ASIC released Report 565: Unfair contract terms and small business loans. The report:

  • identifies the types of terms in loan contracts that raise concerns under the law;
  • provides details about the specific changes that have been made by the ‘big four’ banks to ensure compliance with the law; and
  • provides general guidance to lenders with small business borrowers to help them assess whether loan contracts meet the requirements under the UCT law.

Suncorp completes Guardian Advice remediation program

ASIC says Suncorp Life and Superannuation Limited (Suncorp) has recently completed a remediation program, which impacted over 4,000 clients of Suncorp-owned GuardianFP Limited (Guardian Advice).

Suncorp paid $1,431,167 in compensation to Guardian Advice clients who had received poor advice.

Suncorp undertook the remediation program after ASIC imposed additional licence conditions on the Australian financial services (AFS) license of Guardian Advice because a surveillance uncovered deficiencies in the life insurance advice provided by Guardian Advice to retail clients (15-003MR).

ASIC was concerned that Guardian Advice had failed to comply with its general obligations as an AFS licensee, including monitoring and supervising its representatives and ensuring they were adequately trained or competent. A number of clients suffered harm a result of these failures.

When Suncorp announced that it would exit the financial planning business carried on by Guardian Advice in November 2015, ASIC obtained a commitment from Suncorp that it would complete the remediation program provided for in the additional licence conditions and  fund the compensation of Guardian Advice clients (15-353MR).

Additionally, Suncorp undertook to compensate clients who may have been at risk of having received poor advice from ‘high-risk’ advisers, who were identified using a range of risk metrics applied to all advisers in the Guardian Advice network. Affected clients were also compensated under this remediation program.

Suncorp’s remediation program was overseen by independent experts.

Are Mortgage Brokers Working For You? [Podcast]

We look at the latest ASIC report on Mortgage Brokers, and the exposure draft of the Best Interest Obligations due to come in next year.

What questions should you be asking your Mortgage Broker?

https://asic.gov.au/about-asic/news-centre/find-a-media-release/2019-releases/19-232mr-asic-research-highlights-the-importance-of-reforms-for-mortgage-brokers-and-home-lending/

https://www.treasury.gov.au/consultation/c2019-403520

Digital Finance Analytics (DFA) Blog
Digital Finance Analytics (DFA) Blog
Are Mortgage Brokers Working For You? [Podcast]
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Are Mortgage Brokers Working For You?

We look at the latest ASIC report on Mortgage Brokers, and the exposure draft of the Best Interest Obligations due to come in next year.

What questions should you be asking your Mortgage Broker?

https://asic.gov.au/about-asic/news-centre/find-a-media-release/2019-releases/19-232mr-asic-research-highlights-the-importance-of-reforms-for-mortgage-brokers-and-home-lending/

https://www.treasury.gov.au/consultation/c2019-403520

ASIC research highlights the importance of reforms for mortgage brokers and home lending

ASIC has highlighted that some consumers are taking out home loans when cheaper alternatives may well exist. Brokers do not come out that well!

Today ASIC has released a report Looking for a mortgage: Consumer experiences and expectations in getting a home loan. As part of this research, ASIC followed over 300 consumers in the process of taking out a home loan and surveyed another 2,000 consumers.

This research examines consumer decision-making in relation to home loans to identify what factors influence their journey.  

Key findings from our research include:

  • consumers who visit a mortgage broker expect the broker to find them the ‘best’ home loan
  • mortgage brokers were inconsistent in the ways they presented home loan options to consumers, sometimes offering little (if any) explanation of the options considered or reasons for their recommendation
  • first home buyers were more likely to take out their loan with a mortgage broker. 

The report shows that consumers taking out a loan directly through a lender were more likely to be a refinancer or have had previous experience taking out home loans. Consumers who went directly to a lender valued convenience, with 69% taking out their loan with a lender they had an existing relationship with.

Taking out a home loan is a complex process and consumers told us it can be an ‘overwhelming’ experience. Although most consumers set out to find the best loan they could, 1 in 5 consumers believed that they could have got a better interest rate on their home loan or were not sure whether they had even got a good rate.

In launching ASIC’s report, Commissioner Sean Hughes said, ‘A home loan is one of the most important financial commitments a consumer will make. Lenders, brokers and aggregators must step up to make it easier for consumers to meaningfully compare loan options and for brokers to communicate how a home loan option has been selected for them.’ 

‘ASIC strongly supports the recent Government announcement to enact a best interests duty for mortgage brokers. Importantly, the implementation of such a duty will align the role of brokers to the reasonable expectations of consumers.’

‘Our research also suggests that some consumers are taking out home loans when cheaper alternatives may well exist. We are working with other regulators to develop a new home loan interest rate tool to improve price transparency for consumers to compare options. We expect this tool will be made available on ASIC’s MoneySmart website next year.’

Background

In March 2017, ASIC published the findings of our review into the effect of remuneration structures in the mortgage broking market on the quality of consumer outcomes: see Report 516 Review of mortgage broker remuneration (REP 516). We found that current remuneration practices create conflicts of interest that may contribute to poor consumer outcomes.

As part of this review we also found that consumers who obtained their loan through a broker:

  • borrow more
  • have higher loan to valuation ratios
  • spend more of their wage on a mortgage
  • take out more interest-only loans
  • get the same rate as customers that go directly to a lender.

ASIC’s MoneySmart website has information for consumers about choosing a home loan and using a broker.

Consumers can also use MoneySmart’s mortgage calculator to compare home loans and work out whether they can save money by switching to another mortgage.