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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- Mortgage Brokers??BID (ASIC): the Australian Securities and Investments Commission (ASIC) has just released RG 273, which sets out its view on how mortgage brokers may comply with their best interests obligations which commence in January 2021. Consistent with the nature of the regime, and not unexpectedly, ASIC is taking a very broad approach! ASIC has set out three key stages at which the best interests duty is engaged: gathering information about the customer; making an individual assessment; and, presenting information and recommendations. The level of action that is required in any once circumstance will be highly fact specific. In relation to information-gathering, ASIC has relevantly stated at RG 273.42:A mortgage broker who providesincomplete or inaccurate informationas part of a home loan applicationwill not be acting in the customers best interests, even if the inaccurate information would increase the likelihood of approval or give the customer access to better terms.In relation to assessment i.e. as to what is in the customers best interests, ASIC has not prescribed any particular process or set of factors for brokers to consider. With that said, ASIC has stressed that costs should be prioritised. It has said at RG 273.54:Afailure to consider costand investigate the lowest cost options available to the customermay suggest non-compliancewith the best interests duty. Any situation where a higher cost loan is recommended will need to be supported by evidence demonstrating why that recommendation is in the customers best interests.In relation to presenting information and recommendations, ASIC has emphasised the educative role of mortgage brokers, instructed them to align the way they present options in a way that meets the customers expectations and also to provide detail as to why the particular option has been selected. That is particularly the case when all the options being presented are from the same credit provider. ASIC states at 273.90 of its guidance:When you recommend a product, we consider that you should present the information to the customer in a way thatclearly articulates how taking the recommended action would achieve their objectivesand be in their best interests (relative to the other options available).Mortgage brokers and other affected parties need to review their governance process and policies and procedures in order to ensure that an appropriate risk framework is in place. Timelines are tight, and appreciable penalties apply for breaches of the law. You can read more on the new guidancehere.
- ASIC v. Westpac (Legislation):the Full Federal Court (Middleton, Gleeson and Lee JJ) hasdismissed ASICs appealfrom Justice Perrams earlier decision regarding ASICs allegations against Westpac for contraventions of responsible lending provisions of theNational Consumer Credit Protection Act 2009 (Cth) (NCCP).In that earlier decision, Justice Perram sided with Westpac apropos its interpretation of the NCCPs scope insofar as it permits lenders to have discretion as to how to use customer information when assessing whether loans are suitable for customers i.e. they do not technically need to, and instead can rely on the ubiquitous HEM benchmark. The focus was on whether a declared living expensesprovided by a customer is a likely reflection of the consumers future expenditure if they enter into the credit contract. The court found that the NCCP did not require Westpac to consider the total figure for declared living expenses in each case for the purpose of assessing the consumers likely ability to meet their financial obligations. In the words of Lee J:It is a regime[i.e. the NCCP], however, which allows a licensee to take into account other information, including things such as the HEM benchmark and??as ASIC accepted??did not oblige Westpac to take into account all of the information it gathered.A really fascinating decision, and my top read for the week given its importance!
- Class Actions (Legislation):Victorias Andrews Government passed theJustice Legislation Miscellaneous Amendments Bill 2019(Vic), allowing plaintiff law firms to potentially take a cut of any judgment sum ie contingency fees as litigation funders do. And bringing back common fund orders. In a fragile COVID-19 market, desperately trying to be stabilised from opportunistic shareholder class actions by the Morrison Federal Governments changes to the class actions regime (AFSL requirement, continuous disclosure changes, etc), this is a move in the opposite direction. It will not doubt flame the fans of a growing fire around the class actions and litigation funding industry. It will also likely have the short term effect of moving more class actions to the Victorian courts. Expect other courts to follow with similar changes in due course though, starting with NSW. For an update on the recent back and forth in this space, please see this articlehere.
- Loan Deferrals (ASIC):ASIC has issued a warning that consumers and investors could be particularly at risk of harm in September 2020,which will mark the end of COVID-19 loan deferrals and payment schemes. ASIC asks banks and lenders to work with their customers in the lead-up to September. Interestingly, it has also established three task forces??false and misleading advertising, scams, and the appropriateness of financial advice??to focus on issues that have arisen during the pandemic. ASIC Chair James Shipton has stated:People are concerned about their financial wellbeing and are susceptible to making decisions that might not be in their best interest because theyve been taken advantage ofWe have to be very wary that people on the margin wont abuse this vulnerability by putting fellow Australians into more hardship by advising them inappropriately, by scamming them, or by trying to push a loan onto them.You can listen to ASICs warning inthis ABC Interview(18 minute mark), which I think is a rather clever diversification for ASIC from its usual media channels.
- Product Intervention (ASIC):The product intervention power is one of several post-Hayne regulatory tools available to ASIC. It allows ASIC to temporarily intervene in a range of ways, including to ban financial products and credit products when there is a risk of significant consumer detriment. ASIC has just now releasedits long-awaited guideRG 272 which primarily covers the scope of the power, when and how ASIC may exercise the power to make a product intervention order, and how a product intervention order is made. As to scope, ASIC has said its powers may be engagedat any point in the lifecycle of a productand could be the result of anintentional, reckless or inadvertent industry conduct. Factors that ASIC will take into account include the nature and extent of the detriment, the actual or potential financial loss to consumers resulting from the product and the impact that the detriment has had, will have or is likely to have on consumers. Usefully, ASIC has clarified that it does not intend to eliminate risky productssolely on the basis that a particular investment product has reduced in value and resulted in losses to consumers.The guide does not set benchmarks or thresholds apropos the exercise of the power, though ASIC does make clear that the the product intervention power is not limited to cases where products are inherently harmful..Finally, it is very clear from the guide that ASIC has a wide flexibility in terms of the method and manner in which its interventions take e.g. banning a product, requiring amendments or notifications to customers. This guide will be the subject of a lot of consideration in this coming weeks, but for now my key takeaways from reading the guide, is that: 1) ASIC has maintained a broad and principles-based approach to its use of the power (much like how RG 273 is structured), for example it has emphasised thatsignificant consumer detrimentmay arise from a products intrinsic design features or in the context of which it is offered (this is consistent with theASIC v. Cignodecision, which is presently on appeal: 2) ASIC will use this power in combination with other powers (most obviously the design & distribution powers, but also likely FAR down the track); and 3) ASIC is very keen to use this power, as it sees the product intervention power as a more targeted way of achieving regulatory outcomes.
Thought for the future:ASIC has come into possession of its product intervention power relatively late in the global story. The US, UK and HK all have a form of this power already. Given ASICs newfound desire to wield this tool, it strikes me that any Australian offering a product which has attracted regulatory ire overseas would be well placed to consider it now in the context of ASICs new capabilities. Watch this space for a comparative analysis in the coming weeks
(These views are my own and do not constitute legal advice. Photo credit Tom Wheatley)