Tag: ASIC

ASIC consults on updating its responsible lending guidance

ASIC has today issued a consultation paper to update its guidance on responsible lending (CP 309).

The changes appear mainly clarifications and tweaks to language rather than substantive changes. But it does underscore the lenders obligations to make reasonable inquiries when making a loan. Nothing here that would open the credit taps, that I can see.

They are asking questions about credit which currently falls outside the guidelines, such as SACC and Business loans.

They do address HEM benchmarks saying that ” A benchmark figure does not provide any positive confirmation of what a particular consumer’s income and expenses actually are”. Its a plausibility test.

We propose to clarify our guidance in RG 209 on the use of benchmarks as follows:

(a) A benchmark figure does not provide any positive confirmation of what a particular consumer’s income and expenses actually are. However, we consider that benchmarks can be a useful tool to help determine whether information provided by the consumer is plausible (i.e. whether it is more or less likely to be true and able to be relied upon).

(b) If a benchmark figure is used to test expense information, licensees should generally take the following kinds of steps: (i) ensure that the benchmark figure that is being used is a realistic figure, that is adjusted for variables such as different income ranges, dependants and geographic location, and that is not merely reflective of ‘low budget’ spending; (ii) if the benchmark figure being referred to is more reflective of ‘low budget’ spending (such as the Household Expenditure Measure), apply a reasonable buffer amount that reflects the likelihood that many consumers would have a higher level of expenses; and (iii)periodically review the expense figures being relied upon across the licensee’s portfolio—if there is a high proportion of consumers recorded as having expenses that are at or near the benchmark figure, rather than demonstrating the kind of spread in expenses that is predicted by the methodology underlying the benchmark calculation, this may be an indication that the licensee’s inquiries are not being effective to elicit accurate information about the consumer’s expenses

This is the ASIC announcement:

ASIC’s guidance has been in place since 2010 when the responsible lending laws were first introduced. Although the laws have not changed since 2010, ASIC considers it timely to review and update the guidance in light of its regulatory and enforcement work since 2011, changes in technology, and the recent Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Our review of RG 209 will consider whether the guidance remains effective and identify changes and additions to the guidance that may help holders of an Australian credit licence to understand ASIC’s expectations for complying with the responsible lending obligations.

ASIC welcomes submissions on the update of our guidance on responsible lending from any interested party. In the consultation paper we have asked a series of questions about specific matters. We are also keen to hear from stakeholders about any other issues considered important that are not dealt with in the consultation paper.

ASIC is also considering whether to provide an opportunity for key stakeholders to speak to the Commission at public hearings in addition to making written submissions.

Further information about the consultation and its progress will be available on the ASIC website.

“The responsible lending obligations are an integral part of the regulatory framework for all consumer loans” said ASIC Commissioner Sean Hughes. “ASIC wants to ensure its guidance provides industry with certainty, including as a result of emerging technology and initiatives such as open banking and comprehensive credit reporting. We encourage everybody to participate in this extensive consultation process”.

The consultation is open for a period of three months, with comments due by Monday 20 May 2019.

Background

Regulatory Guide 209 Credit licensing: Responsible lending conduct (RG 209) contains ASIC’s guidance on responsible lending for consumer credit. RG 209 was issued in 2010 and last revised in November 2014.

Since then there have been many matters that now mean it is timely for ASIC to update its guidance.

  • 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.

ASIC has also received anecdotal feedback that licensees may be applying the responsible lending obligations where the law does not require them to be applied (e.g. in small business lending). We are seeking feedback on whether there is a need to include some additional guidance in RG 209 which sets out particular examples where the law does not require responsible lending or related obligations to apply.

ASIC requires Commonwealth Financial Planning Limited to stop charging fees for ongoing services

ASIC says Commonwealth Financial Planning Limited (CFPL) has failed to provide ASIC with an attestation and with an acceptable Final Report from the independent expert, both of which were required under a Court Enforceable Undertaking (EU) entered into with ASIC in April 2018 in relation to CFPL’s fees for no service conduct.

As a result, CFPL is now required under the EU to immediately take all necessary steps to:

  • stop charging or receiving ongoing service fees from its customers; and
  • not enter into any new ongoing service arrangements with customers.

The EU, which commenced on 9 April 2018 and was varied on 20 December 2018, required CFPL to provide to ASIC by 31 January 2019:

  • a Final Report by the independent expert, Ernst & Young, on whether CFPL had taken reasonable steps to remediate customers impacted by CFPL’s fees for no service conduct and on the adequacy of CFPL’s systems, processes and controls; and
  • to provide an attestation from a Commonwealth Bank ‘accountable person’ under the Banking Executive Accountability Regime as to CFPL’s remediation program, and the adequacy of CFPL’s systems, processes and controls.

On 31 January 2019, Ernst & Young issued its second report under the EU, identifying further concerns regarding CFPL’s remediation program and its compliance systems and processes – including that there remains ‘a heavy reliance’on manual controls, which ‘have a higher inherent risk of failure due to human error or being overridden’.  Ernst & Young recommended CFPL address these issues within a further 120 days. 

On the same day, CBA’s accountable person provided a written update to ASIC on the remediation program and work being done in relation to CFPL’s systems, processes and controls. Having regard to the concerns raised by the independent expert and the contents of CBA’s written update, ASIC considered that the notification did not meet ASIC’s requirements under the EU for an acceptable attestation.

As a result, ASIC’s requirement under the EU that CFPL stop charging or receiving ongoing service fees and not enter into any new ongoing service arrangements, has been triggered. ASIC included this requirement in the EU to ensure that if CFPL were not able to satisfy ASIC that the fees for no service conduct would not be repeated, CFPL would have to stop charging ongoing service fees so as to significantly reduce any further risk to clients. Existing clients will continue to receive services under their ongoing service agreements but will not be charged by CFPL.

ASIC has received CFPL’s confirmation that it is complying with this requirement to stop entering into new ongoing service agreements and to cease charging existing clients fees under these agreements. This requirement will continue until CFPL is able to satisfy ASIC that all of the outstanding issues have been remedied. ASIC will be monitoring CFPL’s compliance with this obligation.

ASIC has also been informed by CFPL that it is now in the process of transitioning its ongoing service model to one whereby customers are only charged fees after the relevant services have been provided. ASIC will monitor CFPL’s transition to the new model.

Background

Under CFPL’s remediation program overseen by ASIC, CFPL has to date reported to ASIC that it has paid approximately $119 million to customers impacted by its fees for no service conduct.

ASIC calls audit quality into question

ASIC has found auditors may not be guaranteeing financial statements are free of misinformation, with a review by the watchdog showing a lack of justification for greenlighting reports across a number of audit areas; via InvestorDaily.  

The ‘Audit Inspection Report for 2017–18’ showed auditors at the six largest auditing firms did not obtain reasonable assurance that financial reports were free from material misstatement across 20 per cent of the 347 key audit areas.

The report covered a review of 20 firms, including the six largest with eight other national and network firms and six smaller companies, over January 2017 to 30 June 2018.

In comparison, auditors at the prominent players lacked reasonable assurance in 23 per cent of the audit areas in the previous 18-month period ending 31 December 2016.

Looking at 98 audit files from firms of all sizes, ASIC found auditors failed to guarantee freedom from misstatement in 24 per cent of the audit areas, a slight decrease from 25 per cent in the prior 18-month period.  

Although the findings do not necessarily mean the financial reports audited were materially misstated, ASIC noted audit quality supports financial reporting quality and is in the interests of directors and audit committees to support the examination process.

“We recognise the efforts by firms to improve audit quality and the consistency of audit execution, which is reflected in some improvements in findings collectively for the largest six firms,” John Price, commissioner, ASIC said.

“However, the overall level of findings still suggests that further work and, in some cases, new or revised strategies, are needed to improve quality.”

ASIC said its inspections focus on higher risk audit areas, selecting more of the complex, demanding and challenging audits and some more significant or higher risk areas of the reports.

The regulator believes sustainable improvements in audit quality require a focus on culture and talent by firms, with all staff needing to brace improvement and being held accountable and firm leadership giving strong and consistent messages that it is not negotiable.

Lenders commit to improve credit card practices following ASIC review

ASIC has released Report 604  Credit card lending in Australia – An update (REP 604), which sets out the changes being made by lenders to help consumers with credit card debt.

In July 2018, ASIC released Report 580 Credit card lending in Australia (REP 580), which found more than one in six consumers is struggling with credit card debt. 

 The report made it clear that ASIC expects credit providers to:

  • take proactive steps to address problematic credit card debt and products that do not suit consumers
  • minimise the extra credit provided to consumers who regularly exceed their credit limit, and
  • allocate repayments for all credit cards in the more favourable way required for cards entered into after July 2012.

ASIC engaged with the ten largest credit providers that were part of our review (American Express, ANZ, Bendigo and Adelaide Bank, Citigroup, CBA, HSBC, Latitude, Macquarie, NAB and Westpac) and sought their commitment to change. Their commitments are described in their report released today.

Although these commitments are not required by the law, they are important in ensuring that the credit card market works for consumers, including vulnerable consumers. 

Across the board, lenders have committed to changes to address the concerns by ASIC: 

  • 9 large credit providers committed to taking proactive steps to help consumers with problematic credit card debt
  • 4 committed to fairer approaches for balance transfers, and
  • 9 credit providers have committed to lower the amount by which consumers can exceed their credit limit.

Many credit providers are trialling measures — such as tailored communications and/or structured payment arrangements — to help consumers with potentially problematic credit card debt or who are failing to repay balance transfers.

Others are taking a fairer approach to balance transfers, such as by allowing interest free periods on new purchases and enhancing disclosure about cancelling old credit cards.

Macquarie, CBA and HSBC are the most progressed with implementing changes around credit card lending. Although American Express has committed to some changes, other lenders have proposed more comprehensive measures.

‘ASIC expects that all credit card lenders will address the issues raised in our review,’ ASIC Commissioner Sean Hughes said. ‘We will be monitoring lenders over the next two years to make sure they have taken action to address our concerns, and to ensure that consumer outcomes are improving in the credit card market.’

In REP 580, ASIC committed to conduct a follow-up review to see if there is an improvement in outcomes for consumers. ASIC will also not hesitate to use its future enforcement powers if necessary to bring about needed changes. 

Background

In July 2018, ASIC published its report on credit card lending in Australia. 

ASIC’s review of credit card lending found:

  • In June 2017 there were almost 550,000 people in arrears, an additional 930,000 with persistent debt and an additional 435,000 people repeatedly repaying small amounts.
  • Consumers carrying balances over time on high-interest rate cards could have saved more than $621 million in interest in 2016–17 if they had carried their balance on a card with a lower interest rate
  • 63% of consumers did not cancel a card after a balance transfer and a substantial minority of consumers increased their total debt after transferring a balance.

Since REP 580 was released ASIC has prescribed a three-year period for credit card responsible lending assessments. This means that credit providers must not provide a credit card with a credit limit that the consumer could not repay within three years. This reform commences on 1 January 2019. More information about the reform is available in Report 590 Response to submissions on CP 303 Credit cards: Responsible lending assessments (REP 590).

The Government has implemented other reforms to help prevent problematic credit card debt. This includes banning unsolicited credit limit increase invitations and making it easier for consumers to cancel credit cards.

ASIC’s MoneySmart website has information for consumers about choosing and using credit cards, including information about balance transfers, how to pay off multiple cards and how to cancel a credit card. 

Consumers can also use MoneySmart’s credit card calculator to work out the fastest way to pay off their card and how much they can save by paying it off sooner.

The Council Of Financial Regulators Speaks

A welcome move, the shadowy Council Of Financial Regulators has started publishing minutes of its quarterly meetings. However, group think, and self-interest is all over it.  Specifically the comments about tighter credit, and the need to continue to lend (to keep the debt bomb ticking a bit longer! Also how does independence of the RBA work in this context?

They noted that non-ADI lending for housing has been growing significantly faster than ADI housing lending and there is some evidence that non-ADI lending for property development is also increasing quickly.

As part of its commitment to transparency, the Council of Financial Regulators (the Council) has decided to publish a statement following each of its regular quarterly meetings. This is the first such statement.

The statement will outline the main issues discussed at each meeting. From time to time the Council discusses confidential issues that relate to an individual entity or to policies still in formulation. These issues will only be included in the statement where it is appropriate to do so.

The Council of Financial Regulators (the Council) is the coordinating body for Australia’s main financial regulatory agencies. There are four members: the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), the Australian Treasury and the Reserve Bank of Australia (RBA). The Reserve Bank Governor chairs the Council and the RBA provides secretariat support. It is a non-statutory body, without regulatory or policy decision-making powers. Those powers reside with its members. The Council’s objectives are to contribute to the efficiency and effectiveness of financial regulation, and to promote stability of the Australian financial system. The Council operates as a forum for cooperation and coordination among member agencies. It meets each quarter, or more often if required.

At each meeting, the Council discusses the main sources of systemic risk facing the Australian financial system, as well as regulatory issues and developments relevant to its members. Topics discussed at its meeting on 10 December 2018 included the following:

  • Financing conditions. Members discussed the tightening of credit conditions for households and small businesses. A tightening of lending standards over recent years has been appropriate and has strengthened the resilience of the system. At the same time, members agreed on the importance of lenders continuing to supply credit to the economy while they adjust their lending practices, including in response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Members discussed how an overly cautious approach by some lenders to incorporating relevant laws and standards into loan approval processes may be affecting lending decisions. Members observed that housing credit growth has moderated since mid-2017, with both demand and supply factors playing a role. The demand for credit by investors has slowed noticeably, largely reflecting the change in the dynamics of the housing market. In an environment of tighter lending standards, the decline in average interest rates for owner-occupier and principal and interest loans suggests that there is relatively strong competition for borrowers of low credit risk. Credit to owner-occupiers is continuing to grow at 5 to 6 per cent.
  • Non-ADI lending. The Council undertook its annual review of non-bank financial intermediation. Overall, lending by non-ADIs remains a small share of all lending. However, non-ADI lending for housing has been growing significantly faster than ADI housing lending and there is some evidence that non-ADI lending for property development is also increasing quickly. The Council supported efforts to expand the coverage of data on non-ADI lenders, drawing on new data collection powers recently granted to APRA.
  • Housing market. Members discussed recent developments in the housing market. Conditions have eased, but this follows a period of considerable strength in the market. Housing prices have been declining in Sydney, Melbourne and Perth, but are stable or rising in most other locations. The easing in the housing market is occurring in a period of favourable economic conditions, with low domestic unemployment and interest rates and a supportive global economy. The Council will continue to closely monitor developments.
  • Prudential measures. APRA briefed the Council on its latest review of the countercyclical capital buffer, the results of which will be published in the new year. It also provided an update on its residential mortgage measures, including the investor lending and interest-only lending benchmarks. In line with APRA’s announcement in April 2018 that it would remove the investor lending benchmark subject to assurances of the strength of lending standards, the benchmark has now been removed for the majority of ADIs. The interest-only lending benchmark, introduced in 2017, has resulted in a reduction in the share of new interest-only lending, along with the share of interest-only lending that occurs at high loan-to-valuation ratios.
  • Financial sector competition. The Council discussed work by its member agencies in response to the Productivity Commission’s Final Report of its Inquiry into Competition in the Australian Financial System. The Council strongly supports improved transparency of mortgage interest rates and a working group is examining a number of options. The Council also discussed the Productivity Commission’s recommendations relating to lenders mortgage insurance and remuneration of mortgage brokers. Both the Productivity Commission and the Financial System Inquiry recommended a review of the regulation of payments providers that hold stored value – referred to in legislation as purchased payment facilities (PPFs). The Council released an issues paper in September and held an industry roundtable in November. Members considered the feedback received from these processes and received an update on progress with the review.
  • Limited recourse borrowing by superannuation funds. Members discussed a report to Government on leverage and risk in the superannuation system, as requested in the Government’s response to the Financial System Inquiry. The use of limited recourse borrowing arrangements remains relatively small, but has risen over time. Leverage by superannuation funds can increase vulnerabilities in the financial system, though near-term risks have reduced with the shift in dynamics in the housing market.
  • International Monetary Fund’s Financial Sector Assessment Program (FSAP). The FSAP review of Australia was conducted during the course of 2018; preliminary findings were presented to the Australian authorities in November. The Council held an initial discussion of the main FSAP recommendations and how they could be addressed. The FSAP will be finalised in early 2019, at which time summary documents will be published. (Further information on the FSAP review was published in the Reserve Bank’s October 2018 Financial Stability Review.)

Representatives of the Australian Competition and Consumer Commission and the Australian Taxation Office attended the meeting for discussions relevant to their responsibilities.

ASIC’s recent initiatives to strengthen underwriting standards

Cathie Armour, Commissioner, Australian Securities and Investments Commission spoke at at the Australian Securitisation Conference 2018.

She updated their views on responsible lending, and their new approach to getting better data on the sector.  They also to publish a consultation paper on RG 209 revisions and enhancements.

Responsible lending

The National Consumer Credit Protection Act includes an array of obligations designed to protect consumers. Chief among them are the responsible lending provisions – a set of obligations that require lenders and mortgage brokers to do three things before offering a loan to a consumer:

  • One – the lender or broker must make reasonable inquiries into the requirements, objectives and financial situation of the consumer.
  • Two – they then need to verify the financial situation of the consumer.
  • Three – the lender or broker must then make an assessment or preliminary assessment (respectively) of whether the proposed loan is unsuitable for the consumer.

Lenders also have an obligation not to enter into an unsuitable loan contract with the consumer.

The responsible lending provisions are not designed to protect those who invest in residential mortgage-backed securities or other consumer debt securities. However, by protecting consumers in the manner I’ve just described, the provisions necessarily afford investors some secondary protection.

This also means that a failure by a bank that either issues, or sells loans to issuers of, residential mortgage-backed securities to lend responsibly harms both borrowers and investors. As ASIC goes about its responsible lending work, we are cognisant of this fact.

That said, as we all appreciate, compliance with the responsible lending provisions by securitisers alone does not automatically mean a AAA grade rating for a tranche of securities. The provisions set the minimum standard.

ASIC expects and encourages lenders to think about how they can ensure loans provided to consumers are not only ‘not unsuitable’ in accordance with the language of the National Credit Act, but also ‘suitable’ – properly designed and priced to meet the needs of the consumer.

Responsible lending should not be a static, mechanical process devoid of common sense, nor a checkbox exercise. It should be a dynamic, evolving process that looks to continually improve credit quality through the adoption of new practices and new technology, underpinned by basic common sense.

Investors in residential mortgage-backed securities should be looking to those lenders that make this commitment to ongoing improvement.

I should also say something about low-doc loans at this point. As you’ll be aware, many mortgage pools will include some portion of low-doc loans. The definition of a low-doc loan can vary. Nevertheless, it must be said that the idea of a loan provided to a consumer after taking less than reasonable steps to verify the consumer’s financial situation (by obtaining and reviewing reliable documentation) is fundamentally incompatible with responsible lending.

Investors should be wary of the additional credit and regulatory risks that low-doc loans involve.

There is also a move away from what’s termed ‘low-doc loans’ to the more popular ‘non-confirming loans’. It is fair that all consumers capable of repaying a loan have the opportunity to apply for one, even where the consumer’s circumstances are unusual. But insofar as the phrase ‘non-conforming loans’ could be used as a euphemism for a low-doc or risky consumer loan, our warning remains: lenders and investors face not only higher credit risks, but also the risk of a regulatory response in these situations.

As we begin to see some examples of mortgage stress, particularly as interest rates rise, it becomes more important for investors to be discerning about the securities they invest in. Investors must consider how the mortgage lender goes about lending responsibly.

ASIC’s recent responsible lending initiatives

ASIC’s recent responsible lending initiatives have been informed by three priorities:

  1. Promote responsible lending and appropriate responses to financial difficult
  2. Address the mis-selling of products and promote good consumer outcomes, and
  3. Respond to innovation in financial services and consumer credit and facilitate appropriate reform.

Let me update you on some our initiatives now.

Loan application fraud

ASIC has focused on loan application fraud for some time.

The falsification of loan documents by brokers and lender employees can undermine the integrity of the responsible lending provisions and lead to consumer harm where borrowers obtain loans they can’t afford. It can also harm investors if the loan is securitised.

Insufficient controls to address the risk of loan application fraud and incentive structures that reward poor behaviour jeopardise trust and confidence in the financial sector.

We recognise that lenders have a significant interest (both financial and regulatory) in detecting and responding to loan fraud and ensuring consumers can repay the loans offered to them.

In many cases where we are alerted to alleged loan fraud involving brokers or lender employees, the matters have been brought to our attention by industry, or an industry association, which has already suspended or terminated the individual’s employment, accreditation or aggregator agreement.

We have taken a strategic approach, including civil penalty proceedings against ANZ (Esanda) for breaches of the responsible lending provisions, as they relied on information in falsified payslips submitted by brokers where it had reason to doubt the reliability of that information.

In its judgment, the Court made clear that where unlicensed brokers submit loan applications in reliance on the ‘point of sale’ exemption in regulation 23 of the National Credit Consumer Protection Regulations, lenders have a greater obligation to exercise care. This was the basis for the higher penalties imposed on ANZ relating to the loans submitted by one of the brokers under the point of sale exemption.

In line with our strategic approach, we are undertaking an industry review to better understand the type and level of fraud faced by industry, and how industry goes about preventing, detecting and responding to it.

We are collecting information on industry controls and processes, with a view to promoting best practice. This will help us to improve public confidence in controls for preventing, detecting and responding to loan fraud.

We have met with all of the review participants and have commenced a data collection phase involving selected lenders and aggregators. We expect to release a report next year.

Motor vehicle finance

We are undertaking a review of the car finance industry’s compliance with regulatory obligations relating to responsible lending, collections and hardship.

Our recent work in the car finance industry has identified poor practices such as:

  • lenders offering loans to consumers that they cannot afford
  • lenders failing to make reasonable inquiries into, and to verify information about, the consumer’s financial situation, and
  • consumers being denied important protections under the National Credit Act because of car dealers misrepresenting the loan as a business loan.

We are collecting information from several car financiers to:

  • understand current trends and practices in the car finance industry
  • assess the adequacy of their responsible lending, hardship and debt collection processes, and
  • identify areas of concern or risks that might affect consumers.

We plan to use the findings from the review to drive improved standards of conduct and compliance with regulatory obligations across the industry, including financiers who regularly issue consumer debt securities.

We expect all participants will improve their practices and develop remediation programmes to respond to past instances of poor conduct.

Where we identify concerns, we will be commencing investigations with a view to enforcement action. We have already seen BMW Finance pay $77 million in Australia’s largest consumer credit remediation program. Other financiers engaging in similar conduct can expect a strong response.

We recently issued pilot surveys to participants to obtain feedback on the availability of the data required for the review, with the aim of understanding the systems and methods of data collection and storage. We will use the information provided to further refine our future data requests.

Recurrent data requests

We have also commenced a pilot to obtain home loan data on a recurrent basis.

We will review the results of the pilot in 2019 to assess how to roll out recurrent data requests more broadly.

We will be able to use this data in a number of ways, including to identify potential trends and issues that can help us prioritise regulatory actions and provide feedback to industry. We also envisage releasing the aggregated data to inform consumers and investors more broadly.

We acknowledge that recurrent data collection will have a cost impact on industry, which is why conducting the pilot is so important. We are working with industry and other parts of the government to do this in the most efficient way possible.

By obtaining recurrent granular data, our vision is to reduce the need for ad-hoc and bespoke data collection exercises. This may reduce some costs for the industry in the long run.

Review of Regulatory Guide 209

We are planning to consult on our responsible lending guidance in Regulatory Guide 209 (RG 209).

ASIC first published RG 209 in February 2010 to provide guidance on the processes that we expect licensees to have in place to ensure that consumers are not provided with unsuitable loans.

The Regulatory Guide was last updated in November 2014 following the Cash Store decision.

We believe it’s timely to review the guide, so we can ensure our guidance remains current, addresses emerging issues, and provides a clear indication of what our expectations are.

Since the last revision, there have been a range of developments, including:

  • thematic ASIC reviews, including ASIC Report 445 and Report 493, which looked at interest-only lending and the conduct of lenders and brokers respectively
  • law reform in relation to credit cards, with the potential for small amount credit contract and consumer lease reforms
  • judicial commentary and enforcement outcomes, such as in the Channic, Esanda and Thorn matters, and
  • commentary from the Royal Commission.

We are still at a reasonably early stage in scoping the kinds of changes or additions that we think would be useful to update.

We intend to engage quite actively about the range of issues that should be addressed, and the approach that we propose to take.

We hope to publish a consultation paper on RG 209 later this year or early next year and will give stakeholders such as the Australian Securitisation Forum the opportunity to make submissions.

Product intervention powers

Treasury recently released draft legislation to introduce design and distribution obligations for persons providing financial services, and a product intervention power for ASIC.

The design and distribution obligations will apply to issuers or distributors of financial products. It is not proposed that these obligations will apply to credit licensees.

However, to complement these obligations, the Government is also introducing a product intervention power for ASIC. This power would enable us to make orders for up to 18 months prohibiting specified conduct in relation to a product, or even ban a product, where we identify a risk of significant consumer detriment. This power is proposed to apply to both financial and credit products.

Under the proposed legislation, this power will only apply prospectively; that is, it will not apply to products that have already been provided. We will need to consult the affected parties prior to making an order.

While the current proposed changes are welcome, we have submitted to the Government that we think the design and distribution obligations should be expanded to cover products regulated by the National Credit Act.

Responsible lending surveillance

Very briefly, I also want to mention a targeted surveillance activity we undertook last year. We reviewed the credit assessment processes of several lenders to assess their compliance with the responsible lending provisions. The participating entities included some issuers of residential mortgage-backed securities.

Following our work, we have seen the participating credit providers improve their processes for the collection and verification of information about the consumers’ financial situation. Industry can expect these kinds of surveillance activities to continue, and regulatory action to follow where breaches of the responsible lending provisions are identified.

Regulatory environment and the future

This is a unique and turbulent time for the financial services industry.

Royal Commission

Three of the rounds of hearings of the Royal Commission have touched on credit matters. Many of the issues raised were already under consideration by ASIC and our work on some of these matters is continuing.

The Royal Commission has produced an interim report that covers the first four rounds of public hearings, including the first round on consumer credit. We have made submissions to the Royal Commission on the content of the interim report.

We look forward to continuing to assist the Government in improving the regulatory framework for financial services in Australia.

ASIC’s enforcement initiatives

ASIC has received additional funding from Government to assist ASIC to accelerate its enforcement in financial services and credit.

Industry should recognise that ASIC will have even greater capacity to pursue breaches of the law we administer and we have very clearly heard the message that the community expects us to utilise court processes as much as possible.

Implementing new supervisory approaches

A key part of our work over the next year will be implementing new supervisory approaches. This work follows additional funding which was recently announced by Government to progress our strategic priorities.

One of our key new initiatives is a Corporate Governance Taskforce, which will undertake targeted reviews of corporate governance practices in large listed entities. This will allow us to shine a light on ‘good’ and ‘poor’ practices observed across these entities.  Poor corporate governance practices have led to significant investor and consumer losses as well as a loss of confidence in our markets.

We are also implementing a new and more intensive supervisory approach by regularly placing ASIC staff onsite in major financial institutions to closely monitor their governance and compliance with laws – we call this new programme of work close and continuous monitoring.

These new approaches will help us realise our vision for a fair, strong and efficient financial system for all Australians.

Other initiatives of interest to ASF members

Before I go, there are just a couple of other areas of ASIC work that I want to highlight to you.

  • Benchmarks Reforms : In July ASIC established a comprehensive regulatory regime for financial benchmarks. This followed on from the work of industry and ASX in May when the new methodology for BBSW came into effect.  But it is important for Australian market participants to engage with the changes to LIBOR which will occur at end of 2021. It is critical for all market participants to plan for a post LIBOR world.
  • Wholesale Market Conduct:  We are examining aspects of conduct in the FX Market. We recently reported on High Frequency Trading in the AUD/USD cross rate (Report 597) and we found high frequency trading was 25% of the total, down from a high of 32% in early 2013. We are also examining the practice ‘last look’ and plan to publish our observations and findings in due course.

ASIC puts spotlight on the rapidly growing buy now pay later industry

ASIC has released its first review of the rapidly growing buy now pay later industry. The review of this diverse and evolving market has found that buy now pay later arrangements are influencing the spending habits of consumers, especially younger consumers. One in six users had either become overdrawn, delayed bill payments or borrowed additional money because of a buy now pay later arrangement.

They estimate 2 million active buyers use these services.

… and transactions are increasing.

They show that much of the revenue generated comes from merchant fees, but also includes some missed payment and other consumer fees.

A buy now pay later arrangement allows consumers to purchase and obtain goods and services immediately but pay for that purchase over time. While some buy now pay later providers offer fixed term contracts up to 56 days for amounts up to $2,000, other providers offer a line of credit for amounts up to $30,000.

ASIC found that the number of consumers who have used buy now pay later has increased five-fold from 400,000 to 2 million over the financial years 2015-2016 to 2017-2018. The number of transactions has increased from about 50,000 during the month of April 2016 to 1.9 million in June 2018. At 30 June 2018, there was $903m in outstanding buy now pay later balances.

ASIC Commissioner Danielle Press said ‘Although our review found many consumers enjoy using buy now pay later arrangements and plan to continue using them, there are some potential risks for consumers in using these products.

‘The typical buy now pay later consumer is young with 60% of buy now pay later users aged between 18 to 34 years old.  We found that buy now pay later arrangements can cause some consumers to become financially overcommitted and liable to paying late fees.’

One in six users had either become overdrawn, delayed bill payments or borrowed additional money because of a buy now pay later arrangement. Most consumers believe that these arrangements allow them to buy more expensive items than they would otherwise and spend more than they normally would. Providers also use behavioural techniques which can influence consumers to make a purchase without careful consideration of the costs.

‘The exponential growth in this industry, along with the risks we have identified, means this will remain an area of ongoing focus for ASIC. One area we will be targeting is where consumers are paying more than they need to for using a buy now pay later arrangement’, said Ms Press.

Given the potential risks to consumers, ASIC supports extending the proposed product intervention powers to all credit facilities regulated under the ASIC Act. Product intervention powers will provide ASIC with a flexible tool kit to address emerging products and services such as buy now pay later arrangements. This will ensure ASIC can take appropriate action where significant consumer detriment is identified.

Background

Buy now pay later arrangements allow consumers to defer payment for purchases from participating merchants and obtain the goods and services immediately.

Under the arrangement, consumers are generally not charged interest. However, some arrangements have an establishment fee and account-keeping fees. Consumers may also be charged a fee if they miss a payment.

Buy now pay later arrangements are available from a range of merchants. For example, these arrangements could be used to finance high-value purchases such as solar power products, health services, travel, and electronics. Buy now pay later arrangements are also available for everyday purchases from retailers such as Big W, Target, Harris Scarfe and Kmart.

These arrangements are not regulated under the National Credit Act and as a result providers are not required to be licensed or to comply with the responsible lending laws that prohibit a lender from providing credit that would be ‘unsuitable’ for the consumer. However, these arrangements are considered ‘credit facilities’ under the ASIC Act meaning that ASIC can take action where a buy now pay later provider engages in conduct that is misleading or unconscionable.

ASIC’s review

ASIC undertook a proactive review of these arrangements to develop a broad understanding of this growing industry and to identify potential risks for consumers. The review examined six providers, four of which are part of larger ASX-listed companies. The buy now pay later arrangements we reviewed were: Afterpay, zipPay, Certegy Ezi-Pay, Oxipay, BrightePay and Openpay.

To better understand how this industry is working in practice, we considered qualitative and quantitative data from July 2016 to June 2018. We also relied on independent consumer research which involved a survey of 600 randomly selected consumers who had recently used a buy now pay later arrangement.

ASIC also tested each of the providers performance in areas such as transparency, dispute resolution and hardship. As a result, all of the providers have made improvements that will benefit consumers. For example, all of the providers are now members of the new Australian Financial Complaints Authority, and all of the providers are reviewing their standard form contracts for potentially unfair contract terms.

ASIC will continue to collect data to monitor the adequacy of consumer protections in this sector and review changes made by buy now pay later providers.

ASIC’s MoneySmart website explains how buy now pay later services work and how consumers can avoid getting into financial trouble when using them.

ASIC ‘strongest message’ to banks was a press release

The chair of ASIC told the royal commission that ASIC’s strongest message to banks was an expression of disappointment in a press release, via  InvestorDaily.

James Shipton, chair of ASIC, was again on the stand during day five of the seventh round of the royal commission and told the commission that ASIC often sent to the banks the strongest message it could.

“We sent the strongest message we could have which was a public expression of disappointment, and also a private expression of disappointment,” said Mr Shipton.

“That is the strongest message you could have sent Mr Shipton?” said Ms Orr.

“That is what I have been advised,” said Mr Shipton.

Mr Shipton was responding to questions from counsel assisting Rowena Orr about the commissions response to NAB’s spot foreign exchange business.

ASIC entered an enforcement undertaking with NAB and it was negotiated that the bank would pay a $2.5 million community benefit and develop a program of changes within its foreign exchange business to prevent, detect and respond to conduct.

It was to be assessed by independent expert Promontory in November 2017, yet the commission heard that by March 2018, Promontory produced a report that it was unable to assess the program.

“Progress in developing the program has been slow. There appears to have been no comprehensive risk assessment across NAB’s spot foreign exchange business against the enforceable undertaking requirements and relevant regulatory standards and guidance,” said Promontory.

It was then decided that, despite the enforceable undertaking requiring it to take action, ASIC gave NAB another three months to deliver the program without any action taken against them for not complying.

Mr Shipton said that it was a reasonable decision and that NAB did face negative consequences for their failure to comply with the undertaking.

“Our approach, we wish our approach was stronger, but we sent the strongest message we could,” he said.

Mr Shipton throughout day 5 continued to assert that ASIC had made mistakes but that it hadn’t failed.

“I prefer mistakes. I use the expression mistakes because failings to me means there has been no success, no functioning and that we haven’t been doing it at all. And we have,” he said.

Another ‘mistake’ of ASICs was to offer infringement notices ahead of litigation, suggested Ms Orr, who questioned why the notices had to be voluntarily entered into by the entity.

“Why do you need to get an indication as to whether they will accept and pay it?  The parking inspector doesn’t seek an indication from the person he’s giving a parking fine to as to whether they will accept and pay it,” she said.

Mr Shipton blamed ASICs response on limited resources but said they did not cosy up to the banks.

Mr Shipton said the commission still sought indication from entity’s around infringement notices but that it had changed the mindset around litigation.

“The starting point today would be to ask the question and turn our minds to why not litigate this demonstrable breach,” he said.

Westpac And ASIC Go Back To Court On HEM

From The Conversation

Very rarely does a judge tear up a multimillion-dollar penalty signed up to by both the regulator and the alleged perpetrator.

Yet that’s what Federal Court judge Nye Perram did on Tuesday, throwing out a A$35 million settlement between Westpac and the the Australian Securities and Investments Commission over its alleged failure to properly assess whether borrowers could meet their repayments before signing them up to mortgages.

Agreed settlements are common

In commercial litigation, as in most litigation, there is an emphasis on trying to settle matters early before they are heard in court.

In criminal law matters the prosecutions encourage early guilty pleas in exchange for lower penalties.

The Australian Securities and Investments Commission (ASIC) has been increasingly resorting to early settlements as a means of achieving cheaper and quicker outcomes.

The quick win for ASIC is an enforceable undertaking and a media release. The quick win for the other party is avoiding a drawn-out court case and being able to get on with its business.

Courts usually rubber-stamp them

Where the alleged breach of the law is serious, necessitating a large penalty, a judge has to formally approve the settlement, in a hearing until now regarded as something of a rubber-stamping exercise.

As the Hayne Royal Commission into the Misconduct in Financial Services has pointed out, the downside of such quick settlements can be that the facts aren’t established in court and the law isn’t tested.

Where they are established and the law is tested, as Justice Yates did earlier this year in Australian Transaction Reports and Analysis Centre versus Commonwealth Bank of Australia very big penalties can be handed down – A$700 million for more than 50,000 breaches of the Anti-Money Laundering and Counter-Terrorism Financing Act.

Along with it were landmark judgments that establish the scope of the law and tell firms what to avoid in the future.

This time the court said no

On Thursday Justice Perram in the Federal Court sought the right to do the same.

He rejected the joint application for settlement between ASIC and Westpac Banking Corporation for a penalty of A$35 million.

The problem, as he pointed out was that it was not clear from the agreed facts what actual contraventions of the National Consumer Credit Protection Act 2009 Westpac had been accused of.

He asked ASIC and the Westpac to redraft the agreed settlement and return to court by 27 November 2018.

To establish the law and what happened

The case matters because the Financial Services Royal Commission has been examining the use of computer programs to determine the ability of borrowers to repay loans.

It is possible that many Westpac loans were approved to customers who would have been found to be unable to meet the repayments had their individual circumstances been examined, and it is possible that is in breach of the law.

But without a clear judgment or a clear statement of facts for the court to examine, or a clear judgment from the court, it is impossible to tell.

That’s why Justice Perram said no, to establish what the law requires and what Westpac did.

Author: Michael Adams Professor of Corporate Law & Governance, School of Law, Western Sydney University

Westpac $35m Settlement Rejected – HEM Back In Play

The use of HEM may well be back in play, following the latest from the Westpac ASIC case.  Given that at some banks HEM is still being used for around half of applications, and the Royal Commission commented specifically in the use of HEM, perhaps the law needs to be changed.

The core of the argument is whether the loans were unsuitable, and that it seems would depend of the ultimate progress of the loan subsequently. In other words, it cannot be proved to be unsuitable until it falls over. ASIC would need to prove the loan was unsuitable!

Actually we think the law says lenders have to verify expenses, and in other cases, for example in pay day lending specific inquiries are required as part of the assessment.

But its a clear as mud at the moment!  When is unsuitable lending to be demonstrated. This will have a significant impact on any potential class actions.  Expect bank share prices to rise!

A federal court has rejected a $35million fine for Westpac after it admitted breaking responsible lending laws, via MPA.

Last year the Australian Securities and Investments Commission (ASIC) began proceedings against Westpac in relation to its use of the Household Expenditure Measure (HEM) when assessing home loans.

ASIC argued the bank failed to conduct proper assessments to ascertain whether borrowers could afford to repay their loans.

The $35m penalty was a negotiated settlement between the two parties after it admitted to using the HEM to assess borrowers’ living costs.

ASIC alleged the bank approved around 50,000 home loans based on a HEM benchmark, even though expenses were presumably higher.

Among the explanations of the reasons behind the decision to refuse the penalty, Justice Nye Perram said the court had been asked to determine whether Westpac was in contravention of Section 128 of the National Consumer Credit Protection Act 2009.

Justice Perram said this section merely prohibits the making of a credit contract where an assessment has not been carried out. Regardless of the bank using the HEM benchmark, an assessment was in fact carried out.

Justice Perram also said that although both parties had agreed on the sum, “the theoretical maximum penalty is therefore either $1.1 million or $1.7 million per contravention” depending on the dates of contravention.

Justice Perram said because the parties could not agree on what contravened the section, it was difficult to “judge the appropriateness” of the $35m figure.