Keeping on top of the latest financial services regulatory & compliance trends?
Investing time in your professional development within a rapidly changing financial services industry is challenging. To meet that challenge, the Australian regulators weekly wrap is designed to keep you at forefront of your practice by quickly setting out the top 5 developments from the past week, analysis and practical considerations for the future.
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- Product intervention power (ASIC):following its first victory against Cigno Pty Ltd (which is now subject to appeal),ASIC is doubling down against the Gold Coast payday lender and has releasedConsultation Paper 330(CP 330) on the proposed use of its product intervention power to address significant detriment it has identified in the continuing credit industry. Under s. 204 of the National Credit Code (Sch 1 of the National Credit Act), a continuing credit contract means a credit contract under which: (a) multiple advances of credit are contemplated; and (b) the amount of available credit ordinarily increases as the amount of credit is reduced. Under s. 6(5) of the Code, the National Credit Code and the National Credit Act do not apply to the provision of credit under a continuing credit contract under certain set circumstances. A practical example of a continuing credit contract which ASIC is now targeting with its PIP power is as follows: BHF Solutions Pty Ltd (BHFS) provides loans under a continuing credit contract to retail customers and charges a fixed fee for each advance of funds under the contract, up to a maximum of $120 in a 12-month period; (b) an associate of BHFS, Cigno, enters into a services agreement with those retail clients, and charges various fees fast-track processing to obtain the loan from BHFS and loan management, etc. Those fees can make the original costs of the loan add up to 490% of the original lending! Neither BHF or Cigno hold an Australian Credit Licence given the above-mentioned continuing credit contract exemption. That makes it hard for ASIC and AFCA to regulate them. Understandably, the conduct regulator is concerned that the continuing credit products are likely to result in significant detriment due to borrowers incurring very high cost credit, relative to the loan amount. ASIC is also concerned that continuing credit products are being issued to vulnerable clients, including many who are already in financial difficulty. ASIC is seeking the publics input on the proposed intervention order by Thursday, 6 August 2020. For my part, I am very supportive of the ban
- Capital treatment (APRA):on 23 March 2020,APRA announcedthat ADIs i.e. banks that offered borrowers impacted by the COVID-19 pandemic with an option to defer repayments for a period of up to six months need not treat the repayment deferral period as a period of arrears for capital adequacy and regulatory reporting purposes.APRA now plans to extend this regulatory treatment to cover a maximum period of 10 monthsfrom the start of a repayment deferral, or until 31 March 2021, whichever comes first. APRA has stated that its expectation is that ADIs grant new or extended loan repayment deferral arrangements after undertaking an appropriate credit assessment to ascertain if an extension or new deferral is appropriate for the particular borrower given their circumstances. (APRA will also provide an adjustment to the normal regulatory treatment of loans that are restructured.) ADIs are expected to have a comprehensive plan that demonstrates how they will systematically work through the large volume of impacted customers, as well as avoid operational constraints as deferral periods come to an end. APRA will also require ADIs to provide regular disclosures regarding the status of their deferred, restructured and impaired loan portfolios. A sensible move, and forerunner of extensions to other wholesale COVID-19 changes perhaps i.e. suspension of insolvent trading laws?
- Complaints (AFCA):the Australian Financial Complaints Authority (AFCA) has released itsFY19/20 12-month snapshots. My top read for the week (it is quite useful work by AFCA), it shows that Australians in dispute with their bank, insurer, super fund or financial firm have lodged more than 80,000 complaints in the last 12 months, with AFCA securing $258.6 million in compensation and refunds direct to consumers. (Securing is AFCAs word, and one I highlight as another subtle indication of the fact that it is in my view a regulator, despite protestations to the contrary.) People made 80,546 complaints to AFCA between 1 July 2019 and 30 June 2020. This is a 13.7% increase in monthly complaints compared to the last financial year (FY18/19). Since the virus was declared a pandemic in March, AFCA has received 4,773 complaints relating to COVID-19. Most of these complaints have been about general insurance claims (1,813) with more than 1,500 of these being travel insurance complaints. Expect that number to increase, as the impact of COVID-19 is prolonged and stimulus measures decrease over time. The really fascinating statistic to me is that findings on systemic issues (92, in total) and possible serious contraventions and other breaches reported under s. 1052E(1) of theCorporations Act 2001(Cth) to ASIC, APRA or the ATO. (37, in total). A number of organisations who may have thought they were dealing with an isolated dispute, or disputes, clearly how found themselves with a much larger issue on their hands. AFCAs powers have increased in recent years, and will continue to do so e.g. when it gets its remediation powers. Clearly it intends to use these powers!
- Financial reporting (ASIC):ASIC has provided further information on focus areas for financial reporting in the COVID-19 environment for years ending 30 June 2020. Given the adverse impacts on many entities from the COVID-19 pandemic, ASIC has told directors, preparers and auditors that they should each focus on: asset values, provisions, solvency and going concern assessments, events occurring after year end and before completing the financial report, and disclosures in the financial report and Operating and Financial Review. Assumptions underlying estimates and assessments for financial reporting purposes should be reasonable and supportable. Useful information from ASIC, and which can be accessed via itsFAQs page. In particular, as ASIC has also stated that it will review the full-year financial reports of about 200 larger listed entities and other public interest entities as at 30 June 2020. Its reviews will focus on entities and industries adversely affected by the current conditions, so the guidance about what to focus on now is a sensible approach.
- COVID-19 deferrals (Banks):Australias banks will implement a new phase of support to assist customers to get back to making their repayments, as customers approach the end of their six-month loan repayment deferral period. Customers with reduced incomes and ongoing financial difficulty due to COVID-19 will be contacted as they approach the end of their deferral period, to ensure that wherever possible they can return to repayments through a restructure or variation to their loan. The banking industry has together developed this next phase of support following discussions with APRA and ASIC to provide the appropriate regulatory treatment. (This agreement has been reached pursuant to the interim authorisation granted by the ACCC, and implementation is subject to notification to the ACCC.) It is a sensible transition strategy, to progressively wean individuals and businesses off the COVID-19 relief measures as the economy re-opens. It will be quite a logistically tricky exercise, especially with all the new regulations e.g. new Code of Banking Practice, hawkish regulators and the sheer scale of the task??over 800,000 individuals deferring their repayments throughout this crisis.
Thought for the future:more and more, the COVID-19 relief measures are being discussed in terms of their finality. Some will cease overnight, some will be extended e.g. APRAs capital treatment while others will most likely be progressively phased out. My sense is that this is what will occur with the insolvency relief laws. I doubt insolvent trading, and the changes to bankruptcy notices / statutory demands will disappear all at once.
(These views are my own and do not constitute legal advice. Photo credit Tom Wheatley)
