Japan and Australia cooperate on fintech

The Japan Financial Services Agency (‘JFSA’) and Australian Securities and Investments Commission (‘ASIC’) today announced the completion of a framework for co-operation to promote innovation in financial services in Japan and Australia.

This Co-operation Framework recognises the global nature of innovation in financial services. In this environment, this Framework enables the JFSA and ASIC to share information and support the entry of innovative fintech businesses into each other’s markets.

This Framework will help open up an important market for Australian fintechs. The Japanese economy is the third largest in the world, with services – including financial services – accounting for about three quarters of GDP.

In recent years, the JFSA has been actively involved in encouraging fintech through a range of measures including the modification of the legal system to enable financial groups to invest in finance-related IT companies more easily and establishing a legal framework for virtual currency and Open API. This Framework will encourage Japanese fintech start-ups to engage with innovative financial businesses globally.

ASIC Commissioner John Price said, ‘Japan has been a world leader in technology for a long time. As we move into a new era of financial regulation, we look forward to sharing experiences and insights with our colleagues at the JFSA.’

Shunsuke Shirakawa, JFSA Vice Commissioner for International Affairs, said, ‘We are delighted to establish this Co-operation Framework with ASIC. ASIC is one of the leading Fintech regulators that actively promote fintech by taking progressive actions including setup of the Innovation Hub.

‘We believe that this Framework further strengthens our relationship and facilitates our co-operation in further developing our respective markets.’

The Co-operation Framework will enable the JFSA and ASIC to refer innovative fintech businesses to each other for advice and support via ASIC’s Innovation Hub and the JFSA’s FinTech Support Desk.

It also provides a framework for information sharing between the two regulators. This will enable the JFSA and ASIC to keep abreast of regulatory and relevant economic or commercial developments in each other’s jurisdictions, and help to inform domestic regulatory approaches in the context of a rapidly changing global financial environment.

A formal ‘Exchange of Letters’ ceremony between Australian Ambassador to Japan, the Hon Richard Court AC and State Minister of Cabinet Office, Takao Ochi, took place in Tokyo today to seal the Framework.

This Co-operation Framework further underlines the strength and closeness of the broader Australia-Japan trade and investment relationship.

Background

ASIC is focused on the vital role that fintechs are playing in re-fashioning financial services and capital markets. In addition to developing guidance about how these new developments fit into our regulatory framework, in 2015, ASIC launched its Innovation Hub to help fintechs navigate the regulatory framework without compromising investor and financial consumer trust and confidence.

The Innovation Hub provides the opportunity for entrepreneurs to understand how regulation might impact on them. It is also helping ASIC to monitor and understand fintech developments. ASIC collaborates closely with other regulators to understand developments, and to help entrepreneurs expand their target markets into other jurisdictions.

To date, fintech referral and information-sharing agreements have been made with the Monetary Authority of Singapore, the United Kingdom’s Financial Conduct Authority, Ontario Securities Commission and Hong Kong’s Securities and Futures Commission. In addition, information-sharing agreements have been signed with the Capital Markets Authority, Kenya and Otoritas Jasa Keuangan, Indonesia.

Informally, ASIC has also met with numerous international fintech businesses referred to us by industry or trade bodies, including delegations from the United Kingdom and the United States.

ASIC and AFP investigating bank levy leak

From Investor Daily.

The corporate regulator is working with the Australian Federal Police on an investigation into “suspicious trading” of major bank shares ahead of the announcement of the new bank levy in May’s federal budget.

ASIC officials confirmed to the Senate joint committee members on Friday that the regulator is conducting an inquiry into “suspicious trading” in conjunction with an AFP investigation into the leak of the bank levy prior to the release of the budget on 9 May.

In response to a question from Labor Senator and committee deputy chair Deborah O’Neill, ASIC commissioner Cathie Armour said the regulator is looking at trading in days before the release of the federal budget.

“As you can imagine, there is a high volume of activity in those stocks so it’s not a straightforward exercise,” Ms Armour said.

“We are working together with the AFP and considering whether there was any information that was inappropriately shared with third parties before the announcement.”

However, while ASIC is “making inquiries”, there is no formal investigation underway as yet, according to ASIC senior executive leader for markets enforcement Sharon Concisom.

Ms Concisom said the ASIC investigation has included interviews, but has not resulted in the issuance of Section 19 notices, which compel people to co-operate with ASIC.

Such notices would require a formal investigation, which is not yet underway, she said.

ASIC chairman Greg Medcraft said it was important that the general public understood the regulator is looking into the matter seriously.

Mr Medcraft encouraged people with knowledge of the leaks to volunteer the information to the regulator.

“Come to us before we come to you,” warned Mr Medcraft.

Hong Kong and Australia seal agreement on fintech cooperation

The Hong Kong Securities and Futures Commission (‘the SFC’) and ASIC today signed a Co-operation Agreement which provides a framework for cooperation to support and understand financial innovation in each economy.

This Cooperation Agreement builds on the already close ties between ASIC and the SFC, as well as the Australia-Hong Kong trade and investment relationship more broadly. Hong Kong is already Australia’s seventh most important destination for services exports, valued at AUD$2.4 billion last year, and sixth largest source of services imports, valued at AUD$3 billion.

The agreement will enable the SFC and ASIC to refer innovative fintech businesses to each other for advice and support via ASIC’s Innovation Hub and its Hong Kong equivalent, the SFC’s Fintech Contact Point. This means Australian fintech businesses wishing to operate in Hong Kong will now have a simple pathway for engaging with the SFC, and vice versa.

The Innovation Hub and Fintech Contact Point offer assistance to innovative fintech businesses to understand the regulatory regimes in each of their jurisdictions.

Signing the Agreement, ASIC Commissioner Cathie Armour said, ‘Financial services are a major contributor to Hong Kong’s US$316 billion economy. The Cooperation Agreement is a significant boost for Australia’s burgeoning fintech sector and will ease entry into this important market for innovative Australian businesses.’

The agreement also provides a framework for information sharing between the two regulators. This will enable ASIC to keep abreast of regulatory and relevant economic or commercial developments in Hong Kong and to use this to inform Australia’s regulatory approach.

This is the fourth fintech referral agreement ASIC has entered into, following on from agreements with the United Kingdom, Singapore and Ontario. This agreement with Hong Kong expands our network of fintech cooperation to a critical financial hub in our region.

Background

ASIC is focused on the vital role that fintechs are playing in re-fashioning financial services and capital markets. In addition to developing guidance about how these new developments fit into our regulatory framework, in 2015, ASIC launched its Innovation Hub to help fintechs navigate the regulatory framework without compromising investor and financial consumer trust and confidence.

The Innovation Hub provides the opportunity for entrepreneurs to understand how regulation might impact on them. It is also helping ASIC to monitor and understand fintech developments. ASIC collaborates closely with other regulators to understand developments, and to help entrepreneurs expand their target markets into other jurisdictions.

To date, fintech referral and information-sharing agreements have been entered with the Monetary Authority of Singapore, the United Kingdom’s Financial Conduct Authority and Ontario Securities Commission. In addition, information-sharing agreements have been entered with the Capital Markets Authority, Kenya and Otoritas Jasa Keuangan, Indonesia.

For more on the work of ASIC’s Innovation Hub including our current regtech report visit the Innovation Hub website.

Snapshot of Marketplace Lending in Australia

ASIC has released a report today on its first survey of various participants in the marketplace lending industry.

Marketplace lending allows investors to invest in loans to consumers and small and medium enterprises (SMEs). It has the potential to provide another avenue of funding for business and consumers.

ASIC conducted the survey on a voluntary basis between November and December 2016 and focused on marketplace lending providers’ business models and activities for the financial year ended 30 June 2016.

Here are the main findings:

Loan origination fees accounted for approximately 83% of total fee revenue and the remainder of the revenue was almost exclusively generated from investors. The high proportion of origination fees may be partly explained by the fact that most providers have not been operating for a long period of time—any fees collected through interest payments may not be fully realised until future years.

Respondents promoted their product to a range of different borrowers, which fell broadly under the category of consumers (i.e. individuals) or non-consumer/business borrowers, such as SMEs, self-managed superannuation funds (SMSFs) and agribusiness.

As at June 2016, the eight entities who responded to the second part of the survey reported a total of 7,448 borrowers, consisting of 7,415 consumer borrowers and 33 business borrowers.

The survey results indicate that the industry is predominantly comprised of investors that are wholesale clients. However, some respondents that are currently wholesale-only providers have indicated that they intend to broaden their marketplace lending product offering to retail client investors in the future. The fact that many providers operate registered schemes seems to suggest that they may have plans to, or may wish to have the option available to, offer their marketplace lending product to retail client investors in the future.

Loans available on marketplace lending platforms may either be secured or unsecured. Two respondents provide loans on an unsecured basis only, while one respondent indicated that all its loans are secured (such as by way of a charge against all the borrowers’ assets or by registered first mortgage). The remaining respondents indicated their loans may either be secured or unsecured. The security is held for the benefit of the investors.

In most cases, requests for loans are assessed and assigned a risk grade and interest rate before they are made available for viewing and selection by investors. Most respondents indicated that interest rates are generally set by the provider and investors do not determine or influence the rate. Investors may choose the loans they wish to invest in based on the interest rate and/or risk grade allocated to the loan.

Loan amounts offered to consumer borrowers typically range from $5,000 to $80,000, while for business and other non-consumer borrowers, the amounts range from $2,001 to $3,000,000. None of the respondents provide small amount credit contracts or ‘payday loans’.

Most respondents indicated that they provide a grace period for borrowers in the event of missed or late repayments. All respondents indicated that reminders and direct engagement with the borrower are undertaken by the platform provider and that a repayment arrangement may be agreed with the borrower. Referrals to external collections agencies would be made if the loan remained delinquent. In one case, it was noted that recovery action would require the consent of the lenders for the particular loan. One respondent noted that problem SME loans require a more tailored process compared to consumer loans. Most respondents indicated they do not stress test their loan book, largely due to the relative newness or small size of current loan books which would not produce any meaningful assessment. However, two respondents do undertake some testing.

Commissioner John Price said, ‘As a relatively new industry, it is important for ASIC to engage with and better understand the business models of marketplace lending providers.

‘The survey responses have provided valuable insights into these businesses. We acknowledge and appreciate the participation of survey respondents’, he said.

Report 526 Survey of marketplace lending operators (REP 526) summarises ASIC’s findings from the 2016 Marketplace Lending Industry Survey and outlines ASIC’s role and recent activities in regulating the sector.

The responses to the survey showed that during the 2016 financial year, $156 million in loans were written to consumers and SMEs. Respondents reported a total of 3,201 investors and 7,448 borrowers as at 30 June 2016. Provider revenue was predominately tied to loan origination, and respondents were aware of the conflicts that arose as a result. The number of complaints received by providers was generally low at this stage.

Since the commencement of ASIC’s Innovation Hub in March 2015, ASIC has engaged with 34 marketplace lending providers to assist them to better understand the requirements under Australia’s regulatory framework. This has included specific regulatory guidance and examples of good practice.

ASIC has also granted waivers of some obligations under the law to facilitate six marketplace lending business operations, while maintainingappropriate investor protections.

ASIC will continue to monitor developments in the marketplace lending sector. ASIC is keen to assist marketplace lending providers and engage with new fintech businesses and industry organisations through its Innovation Hub.

Background

In Australia, there is no bespoke regulatory regime for marketplace lending. The regulations that apply to marketplace lending depend on how the business is structured, what financial services and products are being offered and the types of investors and borrowers involved.

In most cases, ASIC has identified that the provision of marketplace lending products involves the operation of a managed investment scheme, which would require the marketplace lending provider to hold an Australian financial services licence. Where the loans made through the platform are consumer loans (i.e. loans to individuals for domestic, personal or household purposes), an Australian credit licence is alsorequired.

Insurer report card would be ‘disastrous’

From Investor Daily.

A consumer-driven report card of life insurer claim denials, as proposed by ASIC, would result in “disastrous outcomes” for the industry, says an industry consultant.

Professional Opinions director Doron Samuell says a consumer report card highlighting the claim denial rates of life insurers is “ill-conceived” and would be “a pointless and potentially dangerous exercise”.

ASIC and APRA launched the pilot phase of a project in early May to collect and publish life insurance claims data, including claims handling time frames and dispute levels, on a per insurer basis.

Mr Samuell said ASIC is changing the drivers of insurance decision from accuracy to popularity, and it is “inviting disastrous outcomes”.

“While it is perfectly appropriate for regulators to monitor the life industry, they make no mention of the potential consequences of their costly meddling,” he said.

“Executives in every insurance company will be devising strategies to focus on performing well in those tables. The most obvious way to achieve those outcomes is to pay more claims.”

Mr Samuell said insurers will understand that the lowest decline and complaint rates will be most popular with consumers.

He said the only parties who could complain about such an outcome are shareholders and their views won’t be heard.

“Insurers would be wise to replace their claims departments with an enlarged accounts payable service,” Mr Samuell said.

“Disability insurance premiums continue to rise. With ASIC’s new initiatives, it is foreseeable that it will be a giant nudge towards market unsustainability.”

ASIC last year released the findings of its industry-wide life insurance review, saying it found “a clear need for public reporting on life insurance claims outcomes at an industry and individual insurer level”.

Aggregators to ‘audit’ and number brokers under ASIC regime

From The Adviser.

ASIC’s remuneration review could see lenders and aggregators increase their scrutiny of mortgage brokers, who would be identified using a “unique number”.

The sixth proposal of ASIC’s review of mortgage broker remuneration states that lenders and aggregators should improve their oversight of brokers and broker businesses.

ASIC expects aggregators to actively monitor the consumer outcomes being obtained at a broker and broker business level, including those relating to loan pricing, features, clawbacks, refinancing and default rates, and distribution of loans among lenders. Aggregators are expected to retain this information and provide it to ASIC as the regulator looks to continually monitor outcomes across the third-party channel.

“The aggregators will need to gather more information on their brokers, where their loans are going and what type of loans they are writing. Aggregators will need tools to audit and ensure brokers are doing the right thing by the consumer,” Outsource Financial CEO Tanya Sale told The Adviser.

“ASIC will be asking the aggregators what processes they have in place to ensure that the consumer outcomes are being met,” Ms Sale said.

While this creates additional work for aggregators, it could also have a significant impact on the way brokers run their businesses. However, Ms Sale believes brokers should embrace change and consider the opportunities.

“Don’t look at the glass half empty. Realise we are going to make an even bigger impact now. We will have even further information and processes to help us better understand the wants and needs of consumers,” she said.

ASIC has also recommended that lenders increase their oversight of aggregation groups. Lenders are expected to provide consistent reporting to aggregators to allow adequate oversight of brokers.

If implemented by Treasury, these recommendations will mean lenders, aggregators and brokers will need to implement new reporting processes to meet the new regime. This was highlighted in ASIC’s review, where the regulator states that “a consistent process” must be used by lenders to identify each broker or broker business. The regulator suggested using a “unique number” provided by the aggregator to identify each broker.

Ms Sale believes the provision of “good consumer outcomes” must include educating clients.

“How can we provide good consumer outcomes if the consumers don’t understand the lending process?” she said, adding that aggregators have “a big part to play” in providing the tools to their members to be able to educate their clients.

Macquarie Bank to address inadequacies within their wholesale FX businesses

ASIC has today accepted an enforceable undertaking (EU) from Macquarie Bank Limited in relation to the bank’s wholesale foreign exchange (FX) businesses, following an ASIC investigation.

ASIC is concerned that the bank failed to ensure that its systems and controls were adequate to address risks relating to instances of inappropriate conduct identified by ASIC.

ASIC Commissioner Cathie Armour said, ‘The wholesale spot foreign exchange market is one the world’s largest financial markets and the proper functioning of this market is of vital importance to the Australian economy.’

‘ASIC has now accepted undertakings from some of Australia’s largest market participants to put in place forward looking processes and controls to ensure that their foreign exchange businesses provide financial services honestly, efficiently and fairly.’

‘ASIC will continue to ensure that there can be ongoing confidence in how our financial institutions conduct themselves now and into the future,’ Ms Armour said.

ASIC identified the following conduct by employees of Macquarie in its spot FX business between 1 January 2008 and 30 June 2013:

  • On a number of occasions, Macquarie employees disclosed to external third parties confidential details of pending client orders including identification of a client;
  • On a number of occasions, Macquarie employees inappropriately disclosed to external third parties confidential and potentially material information about Macquarie’s trading activity associated with large pending AUD orders; and
  • On a number of occasions, when the market approached the trigger price of a stop loss order, Macquarie spot FX traders responsible for managing the order traded in a manner that may have been intended to cause the trigger price to trade when it might not have traded at that time.

ASIC is concerned that Macquarie did not ensure that its systems, controls and framework for supervision and monitoring were adequate to prevent, detect and respond to such conduct, which had the potential to undermine confidence in the proper functioning and integrity of the market.

Macquarie will develop a program of changes to its existing systems, controls, training, guidance and framework for monitoring and supervision of employees in its spot FX and non-deliverable forwards businesses to prevent, detect and respond to:

  1. inappropriate disclosure of confidential information to external market participants; and
  2. inappropriate order management and trading in respect of stop loss orders.

ASIC will appoint an independent consultant to assess the program and its implementation. The program will incorporate changes already made by Macquarie as part of ongoing reviews of its businesses.

Upon implementation of that program, for a period of three years, Macquarie will conduct an annual internal review of the program, which will be independently assessed, and provide an annual attestation from its senior executives to ASIC.

Macquarie will also make a community benefit payment of $2 million to The Smith Family to support The Smith Family’s financial services program aimed at improving young people’s understanding of money management.

ASIC encourages market participants to adhere to high standards of market practice, including those set out in the Global Code of Conduct for the Foreign Exchange Market, published by the Bank of International Settlements (BIS Global FX Code). The BIS Global FX Code provides a global set of practice guidelines to promote the integrity and effective functioning of the wholesale FX market. Phase 1 of the Code was published in May 2016, and Phase 2 is due for publication in May 2017.

ASIC is grateful for the assistance of international regulatory counterparts in progressing the investigation.

Background

Prior to accepting these EU from Macquarie, ASIC’s FX investigation has seen ASIC accept enforceable undertakings from each of the Westpac Banking Corporation, Australia and New Zealand Banking Group Limited, National Australia Bank Limited and the Commonwealth Bank of Australia (refer: 17-065MR and 16-455MR). The institutions also made voluntary contributions totalling $11 million to fund independent financial literacy projects in Australia.

The wholesale spot FX market is an important financial market for Australia. It facilitates the exchange of one currency for another and thus allows market participants to buy and sell foreign currencies. As part of its spot FX business, Macquarie entered into different types of spot FX agreements with its clients, including Australian clients.

Spot FX refers to FX contracts involving the exchange of two currencies at a price (exchange rate) agreed on a date (the trade date), and which are usually settled two business days from the trade date.

Non-deliverable forwards refer to FX forward contracts which, at maturity, are settled by calculating the difference between the agreed forward rate and a settlement rate (which is usually determined by reference to a benchmark published exchange rate). A FX forward contract is an agreement between two counterparties to exchange currencies at a future date at a rate agreed upon in advance.

$200m+ Refunds Due From Major Financial Advisory Firms – ASIC

ASIC says AMP, ANZ, CBA, NAB and Westpac have so far repaid more than $60 million of an expected $200 million-plus total in refunds and interest for failing to provide general or personal financial advice to customers while charging them ongoing advice fees.

These institutions’ total compensation estimates for these advice delivery failures now stand at more than $204 million, plus interest. As foreshadowed in ASIC’s Report 499 Financial advice: fees for no service (REP499), ASIC can now provide an update on compensation outcomes to date.

Background

In October 2016 the Australian Securities and Investments Commission (ASIC) released REP499. The report covered advice divisions of the big four banks and AMP and described systemic failures to ensure that ongoing advice services were provided to customers who paid fees to receive these services, and the failure of advisers to provide such services. The report also discussed the systemic failure of product issuers to stop charging ongoing advice fees to customers who did not have a financial adviser.

At the time of the publication of the report compensation arising from the fee-for-service failures reported to ASIC was approximately $23.7 million, which had been paid, or agreed to be paid, to more than 27,000 customers.

Since REP 499 a further $37 million has been paid or offered to more than 18,000 customers. In addition, the institutions’ estimates of total required compensation for general and personal advice failures have increased by approximately 15% to more than $204 million, plus interest.

The table provides, at an institution level, compensation payments and estimates that were reported to ASIC as at 21 April 2017. Since that date compensation figures have continued to increase.

Group Compensation paid or offered Estimated future compensation   (excludes interest) Total (estimate, excludes   interest)
AMP $3,816,327 $603,387 $4,419,714
ANZ $43,818,571 $8,613,001 $52,431,572
CBA $5,850,827 $99,786,760 $105,637,587
NAB $4,641,539 $385,844 $5,027,383
Westpac $2,670,479 Not yet available $2,670,479
Total (personal advice   failures) $60,797,743 $109,388,992 $170,186,735
NULIS   Nominees (Australia) Ltd (1) Nil $34,720,614 $34,720,614
Total (personal and general   advice failures) $60,797,743 $144,109,606 $204,907,349

Source: Data is based on estimates provided to ASIC by the institutions and will change as the reviews to determine customer impact continue.

(1) For details, see the section on NAB below.

Key compensation developments

AMP

  • AMP’s total compensation estimate decreased from $4.6 million to $4.4 million as AMP reviewed customer files and data to determine compensation required, and revised its previous estimates.

ANZ

  • The total compensation estimate has increased from $49.7 million to $52.4 million due to the expansion of existing compensation programs and the identification of further failures by authorised representatives of two ANZ-owned advice businesses:
    • Financial Services Partners Pty Ltd; and
    • RI Advice Group Pty Ltd.
  • The largest component of ANZ’s compensation program relates to fees customers were charged for the Prime Access service, where ANZ could not find evidence of a statement of advice or record of advice for each annual review period.
  • In addition, ANZ found that further compensation of approximately $7.5 million is required to be paid to ANZ Prime Access customers for ANZ’s failure to rebate commissions in line with its agreement with customers. This compensation has not been included in the figures in this media release because it does not relate to a failure to provide advice for which customers were charged, but is noted for completeness and transparency.

CBA

  • There has been no substantial change in CBA’s compensation estimate, which remains at approximately $105 million, plus interest, the majority of which relates to Commonwealth Financial Planning Ltd (CFPL). The compensation estimate for CFPL results from a customer-focused methodology whereby, as well as providing refunds where the adviser failed to contact the client to provide an annual review, CFPL will provide fee refunds to customers where:
    • the adviser offered the customer an annual review and the customer declined, or
    • the adviser tried to contact the customer to offer a review, but was unable to contact the customer.
  • Some of the other licensees or banks covered by the ASIC fees-for-no-service project have not, at this stage, adopted a similar customer-focused approach to the situation in which a service was offered but not delivered.  ASIC continues to discuss the approach to this situation with these banks and licensees.

NAB

  • Since the publication of REP 499, by 21 April 2017, NAB reported to ASIC the further erroneous deduction of adviser service fees for personal advice from more than 3,000 customers of the following licensees:
    • Apogee Financial Planning Ltd: $11,978, from 11 customers;
    • GWM Adviser Services Ltd: $179,446, from 290 customers;
    • MLC Investments Ltd: $9,755, from six customers;
    • National Australia Bank Ltd: $2,777, from seven customers; and
    • NULIS: $173,120, from 3,310 customers.
  • In addition, the table shows the expected compensation of approximately $34.7 million by NAB’s superannuation trustee, NULIS Nominees (Australia) Limited (NULIS), for two breaches involving failures in relation to the provision of general advice services to superannuation members who paid general advice fees (other fees referred to in this release relate to personal advice). As announced by ASIC on 2 February 2017 ASIC has imposed additional licence conditions on NULIS following these and another breach: ASIC MR 17-022. The failure was by MLC Nominees Pty Ltd (and MLC Limited for the first of the two breaches).  Whilst on 1 July 2016 the superannuation assets governed by MLC Nominees were transferred by successor fund transfer to NULIS, and on 3 October 2016 NAB divested 80% of its shareholding in the MLC Limited Life Insurance business, accountability for this remediation activity (including compensation) remains within the NAB Group. The estimate of customer accounts affected has increased from approximately 108,867 to 220,460 since REP 499, reflecting the second of two breaches.

Westpac

  • REP 499 noted that Westpac had identified a systemic fees-for-no-service issue in relation to one adviser only, with compensation of $1.2 million paid in relation to those failures.
  • Following further ASIC enquiries, Westpac subsequently clarified that it has paid further compensation of approximately $1.4 million to 161 customers of that adviser and 14 further advisers, in respect for fee-for-no-service failures in the period 1 July 2008 to 31 December 2015.

Next steps

ASIC will continue to monitor these compensation programs and will provide another public update by the end of 2017.  In addition ASIC will continue to supervise the institutions’ further reviews to determine whether any additional instances are identified of fees being charged without advice being provided.

MoneySmart

Customers who are paying ongoing advice fees for services they do not need can ask for those fees to be switched off. Customers who have paid fees for services they did not receive may be entitled to refunds and compensation, and should lodge a complaint through the bank or licensee’s internal dispute resolution system or the Financial Ombudsman Service.

ASIC’s MoneySmart website has a financial advice toolkit to help customers navigate the financial advice process and understand what they should expect from an adviser. It also has useful information about how to make a complaint.

ASIC’s Michael Saadat on the remuneration review

From Mortgage Professional Australia.

As brokers, lenders and consumers go head-to-head over ASIC’s remuneration review, the man behind it gives MPA editor Sam Richardson an insider’s view

ASIC launched its review of broker remuneration in November 2015, and since then brokers have talked about little else. It’s very possible you’ve at some point criticised ‘those bureaucrats at ASIC’; if so, Michael Saadat is your man. You won’t find Saadat’s name in the review, but ASIC’s senior executive leader played a huge role in its production, staying behind the scenes. Now, two years later, he’s finally free to talk about the review and how it could change your business.

What ASIC wants
Over two years ASIC collected 200 million data points from 1.4 million home loans, before boiling that data down to 243 pages. “It was a very time-consuming process,” Saadat recalls. “Not only did we look at the raw data and provide conclusions, but we also controlled the data for customer characteristics.”

In their quest to achieve an ‘apples for apples’ comparison of broker and non-broker customers, Saadat and his team broke down comparisons into, for instance, the difference in loan amounts taken out by low-income customers going to brokers and to banks.

Now ASIC is explaining its methodology and the data it has collected to the industry.

“We’ve had a few roundtable discussions with stakeholders; we’re planning on having more, and when we speak at industry events or conferences we will definitely be discussing the report and taking questions from people who are interested in hearing more about it,” Saadat says. At the time of writing he was confirmed to speak at the Annual Credit Law Conference in October.

These discussions will chiefly concern ASIC’s six proposals. Firstly, ASIC wants to change the standard commission model to take into account factors other than loan size (1). It also recommends moving away from bonus commissions (2) and soft-dollar benefits (3). ASIC believes there should be clearer disclosure of ownership structures (4) and proposes establishing a new public reporting regime on consumer outcomes and competition in the home loan market (5). Finally, ASIC wants to improve the oversight of brokers by lenders and aggregators (6).

Now that the review has moved into the consultation phase, Saadat is effectively powerless. Under Minister for Revenue and Financial Services Kelly O’Dwyer, the Treasury will be managing the process, in which industry associations, lenders, aggregators, consumer groups and individuals can have their say on the proposals before the end of June. Saadat, however, will not be taking part: “We wouldn’t put in a submission to our own report.”

On the sidelines
ASIC is now consigned to the role of spectator, left on the sidelines, observing the furore surrounding the separate Sedgwick review, which published its final report a few weeks after ASIC’s.

Stephen Sedgwick’s Australian Bankers Association-sponsored review ran concurrently with ASIC’s, but Saadat insists there was no collaboration between the two. “[ASIC] did not share any data with him that has not been made public by ASIC,” he says.

Nevertheless, in its final report ASIC did repeatedly refer to Sedgwick’s review and was condemned for doing so by the MFAA and FBAA.

ASIC was right to refer to the Sedgwick review, Saadat insists: “We know the Sedgwick review only covers the banks, and that’s why we said in our report that the banks need to work with the rest of the industry in responding to [ASIC’s] recommendations.”

When writing his report, Saadat had no idea what Sedgwick’s recommendations would be; in fact Sedgwick’s final report was published just 30 minutes before Saadat talked to MPA.

Sedgwick’s recommendations go much further than ASIC’s, urging banks to decouple commission from loan size. ASIC had recommended a change to the standard commission model to avoid incentivising brokers to write larger loans, while recommending that banks work with brokers to develop a response.

Instead the major banks, on the day Sedgwick published his recommendations, all agreed to implement them in full by 2020. This unilateral decision bypassed brokers, ASIC and the Treasury’s consultation process.

Despite this, Saadat says he is “pleased that industry is working to improve remuneration structures to create better outcomes for consumers, and improved trust in the sector”.

Acknowledging the review and the banks’ response, he “encourage[s] all industry stakeholders to provide feedback to Treasury as part of the current consultation process”. Commissions, in Saadat’s view, “are obviously commercial arrangements, and it’s up to both individual banks, aggregators and brokers businesses to work out what those commercial arrangements should be”.

Expanding ASIC
Regardless of whether Saadat or Sedgwick get their way, ASIC’s remit looks likely to expand. Sedgwick and the banks want ASIC to enact regulation to facilitate a move to a new commission structure, while ASIC will play a role in implementing whatever rule changes the government decides to introduce after June. wFurthermore, Saadat explains, “ASIC’s ability to intervene may also be bolstered by law reform proposals that are currently being considered by government, including those recommended by the Financial System Inquiry”.

Already Saadat has more immediate work on his plate: a shadow-shopping of brokers by consumers, which he will start planning by the end of 2017. “It is early days,” Saadat says. “We’re planning on commencing that work before the end of this calendar year, and are still working through the detail.” Shadow shopping will take place, Saadat confirms, regardless of the Treasury’s ongoing consultation process on the remuneration review, and “once it kicks off it’s going to be a pretty significant piece of work”.

ASIC’s work will not end with commissions. Instead Saadat and his team are faced with a Sisyphean task. The role of referrers was flagged by the review for further investigation, while consumer groups have demanded more oversight of cross-selling. And, says Saadat, the data that was published was just the tip of the iceberg.

For now it’s up to the industry to make changes, he says. “It was more about us trying to get the industry to respond without being forced by legislation to have change imposed upon them. We think the industry has an opportunity to respond and to take positive steps to make changes that will deliver wimproved consumer outcomes without necessarily needing the government to legislate for changes.”

ASIC and ASBFEO hold banks to account on unfair contract terms

ASIC says following intervention by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) and the Australian Securities and Investments Commission (ASIC), the big four banks are taking action to protect small businesses from unfair terms in loan contracts.

Following a round table hosted by ASBFEO and ASIC, the big four banks have committed to a series of comprehensive changes to ensure all small business loans entered into or renewed from 12 November 2016 will be protected from unfair contract terms.

ASBFEO and ASIC have publicly raised concerns that lenders, including the big four banks, needed to lift their game in meeting the unfair contract terms legislation.

The big four banks have committed to:

  • Removing ‘entire agreement clauses’ from small business contracts. These are concerning terms that absolve the lender from responsibility for conduct, statements or representations they make to borrowers outside of the contract.
  • Removing financial indicator covenants from many applicable small business contracts. For example, loan-to-valuation ratio covenants that give lenders the power to call a default when the value of secured property falls, even where a small business customer has met financial repayments, will be removed.
  • Removing material adverse event clauses from all small business contracts. These are concerning terms that give lenders the power to call a default for an unspecified negative change in the circumstances of the small business customer.
  • Significantly limiting the operation of indemnification clauses. These are concerning terms that aim to broadly protect the lender against losses, costs, liabilities and expenses that arise even outside the control of the small business borrower.
  • Significantly limiting the operation of unilateral variation clauses. In addition to providing applicable small business customers with a minimum of 30 days notice for any contract changes, banks will clearly limit the circumstances in which unilateral variations can be made.

The banks have agreed to contact all small business customers who entered into or renewed a loan from 12 November 2016, about the changes to their loans. In many cases, banks have agreed to implement the changes so that they apply to all existing applicable small business customers.

The banks have agreed to significantly limit the operation of potentially concerning contract clauses (such as financial indicator covenants) to loan products where such clauses are essential to the operation of the product (such as margin lending contracts). Where such clauses continue to exist, banks will re-draft them to ensure that they are clear, transparent and limited to the appropriate circumstances.

ASBFEO and ASIC have made it clear to the banks that simply including the word ‘reasonable’ in contracts does not go far enough.

The ASBFEO, Kate Carnell, said that her role was to consider the interests of small business and to ensure that the unfair contract term legislation was working across all industries. She said it was clear what “unfair” means – to protect the interests of the advantaged party, in this case it is the banks, against the interests of small business.

Ms Carnell said: “The banks have been given every opportunity, including a one-year transition period from November 2015, to eliminate unfair contract terms from their loan agreements and their response has been unsatisfactory.”

ASIC Deputy Chairman Peter Kell said: “We made it clear that lenders had to significantly improve their lending agreements to small business to ensure they meet the new rules.”

“It is important that the banks have committed to improving
their small business loan contracts. ASIC will be following up with the big four banks – and other lenders – to ensure that small business contracts do not contain unfair terms.”

Background

From 12 November 2016, the unfair contract terms legislation was extended to cover standard form small business contracts with the same protections consumers are afforded. In the context of small business loans, this means that loans of up to $1 million that are provided in standard form contracts to small businesses employing fewer than 20 staff are covered by the legal protections.

In March 2017, ASBFEO and ASIC completed a review of small business standard form contracts and called on lenders across Australia to take immediate steps to ensure their standard form loan agreements comply with the law (refer: 17-056MR).

ASIC has released Information Sheet 211 Unfair contract term protections for small businesses (INFO 211) which gives guidance to assist small businesses understand how the law deals with unfair terms in small business contracts for financial products and services, and the protections that are available for small businesses.