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Anti-money laundering reforms
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Australia is to implement new global standards aimed at cracking down on money laundering and terrorist financing, the Minister for Justice and Customs, Senator Chris Ellison, has announced .

The Australian financial sector and other industry areas will be consulted as part of the implementation of a range of global anti-money laundering standards issued by the Financial Action Taskforce on Money Laundering (FATF), a 33-member international body of which Australia is a founding member.

Senator Ellison said the Government will now proceed with a fundamental overhaul of Australian legislation, including the Financial Transaction Reports Act 1988.

The new standards will oblige Australia to expand customer due diligence requirements for financial institutions and extend anti-money laundering obligations to non-financial businesses and professions such as real estate agents, dealers in precious metals and stones, accountants, trust and company service providers, legal professionals and notaries.

See the 40 recommendations at Anti-Money Laundering Reform Online

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APRA PROPOSES CHANGES TO HOME LOAN RISK WEIGHTING
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In a discussion paper released on 27 November, the Australian Prudential Regulation Authority (APRA) proposes the introduction of more detailed criteria for authorised deposit‑taking institutions (ADIs) to qualify for the concessional risk‑weighting of residential mortgage lending for capital adequacy purposes.

APRA’s proposal follows its earlier survey of the experience of ADIs with “low doc” loans, which are written with considerably less documentation and verification of income and serviceability than “conventional” mortgage lending. APRA has also noted that, in some cases, ADIs are offering loans originated via mortgage brokers and other third‑party channels, without independently verifying relevant information about the borrowers.

Most loans made by ADIs have a 100 per cent risk‑weight for capital adequacy purposes. However, a concessional risk‑weight of 50 per cent applies to loans that are fully secured by registered mortgage over a residential property, provided certain criteria are satisfied. This concession reflects the very low loss rates historically associated with mortgage lending in Australia. It also reflects the fact that conventional mortgage lending by ADIs has involved them undertaking a comprehensive assessment of the ability of the borrower to service the loan, as well as ensuring that the property is appropriately valued.

APRA’s proposed new criteria are:

an ADI must have documented procedures in place to assess the ability of potential borrowers to meet repayment obligations;
an ADI must have established verification procedures to substantiate critical data provided by potential borrowers;
where an ADI does not use a formal valuation, its lending procedures must detail the criteria used to justify the purchase price, or other means of valuation, as an indication of the value of the residential property;
where an ADI requires a formal valuation for a home loan, all residential properties securing the loan must be subjected to an independent valuation;
loans will only be eligible for the concessional risk‑weighting if they are secured against properties zoned residential or where the ADI can demonstrate the marketability of the property would be of a similar nature to properties with such zoning;
a 100 per cent risk‑weight will be assigned to loans that do not fulfil the criteria set out above unless (1) the loan‑to‑valuation ratio (LVR) at origination is 60 per cent or less or (2) the loan is fully mortgage insured with a mortgage insurer rated at least A, in which case the risk‑weight will be 50 per cent; and
where an ADI outsources any part of the credit process to a third party, the arrangement must comply with APRA’s prudential standard APS 231 Outsourcing, and the ADI’s lending criteria must be met at all times.

A full copy of the discussion paper is available on APRA’s website.

ADIs and other interested parties have the opportunity to comment on the proposed changes before they are finalised. The consultation period will end on 30 January 2004. The intended date for implementing the proposed changes is 1 July 2004.

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Harassment by debt collectors
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Esanda Finance Corporation Ltd will pay a customer and his wife $20,000 compensation after the Federal Court declared it acted unconscionably and used undue harassment when its debt collectors and tow truck operators entered the customer's home and pinned him to the ground while they re-possessed a car.

The ACCC instituted proceedings against Esanda, Capalaba Pty Ltd trading as Nationwide Mercantile Services (NMS), and six individuals (three debt collectors and three tow truck operators). It was alleged that the customer was subjected to physical force, undue harassment, and unconscionable conduct in breach of the Trade Practices Act 1974*. The ACCC also alleged a number of individuals breached the Western Australian Fair Trading Act 1987.

Esanda consented to Federal Court declarations that:

- Esanda acted unconscionably by serving a demand notice in a way that conveyed or was capable of conveying that Esanda would not, or could not lawfully, re-possess the car without a court order and then had the car re-possessed without an order; and also by failing to stop or suspend orders to its agents to re-possess the car when it had reasonable cause to believe that a physical confrontation may occur if the re-possession was attempted or carried out.

- Esanda acted unconscionably by its agents entering the customer's home by jumping a gate for the purpose of opening the garage from the inside; and by not stopping the re-possession when they had reasonable cause to believe a physical confrontation may occur.

- Esanda used undue harassment by its agents' and/or sub-agents' repeated attendances at the customer's home, including surveillance, and its agent approaching the customer's wife at work, claiming the vehicle had been sold, hidden and/or stolen and demanding its location.

NMS consented to a declaration that it used physical force when its tow truck operators physically restrained the customer while the car was being removed. The debt collectors consented to declarations that they aided and abetted and were knowingly concerned in NMS's use of physical force.

NMS and the three debt collectors consented to declarations that they aided and abetted and were knowingly concerned in Esanda's unconscionable conduct and undue harassment.

After a trial, the tow truck operators were found to have aided and abetted and to have been knowingly concerned in Esanda's unconscionable conduct by not stopping their attempts to re-possess the car when they had reasonable cause to believe a physical confrontation may occur if they continued.

Two tow truck operators were found to have contravened section 23 of the WA Fair Trading Act by physically restraining the customer while the vehicle was being removed.

The court made orders:

- restraining Esanda from engaging in similar conduct in the future;

- requiring Esanda to change some of its procedures and instructions to its agents;

- requiring Esanda to pay $20,000 compensation to the customer and his wife;

- reducing the amount of the loan by $1892.73; and

- pay the ACCC's costs.

The court restrained the collection agents from engaging in similar conduct in the future, ordered them to attend compliance seminars and pay costs.

Justice Malcolm Lee said the conduct was "clearly unfair or unreasonable".

This is the first time that the prohibition on the use of physical force in section 60 has been considered by the courts.

Justice Lee said that section 60 of the Act is "intended to govern relations between trading corporations and consumers by providing that a corporation is not to resort to harassment, or the use of physical force, in support of a demand for the payment by a consumer for goods or services supplied to the consumer".

He considered the Act to set "a norm of corporate conduct in which the use of physical force, or undue harassment, by a corporation in such circumstances is deemed to be unacceptable".

BACKGROUND

In July 1998 Esanda loaned $15,092.02 to a consumer to buy a car, secured by a chattel mortgage over the car. By April 2000, the arrears exceeded $1,800 and, by service of a notice, Esanda demanded that the consumer fix his default under the mortgage. On 20 June 2000 the car was repossessed with $2,180 outstanding.

The allegations made against Esanda and other respondents by arise from the manner in which the re-possession occurred. Esanda instructed agents and sub-agents to recover the car, on terms that no remuneration would be paid unless the agents succeeded re-possessing the vehicle or obtaining payment in full of the arrears due. The agents and sub-agents of Esanda contacted the consumer, or made it known that the consumer's movements were being monitored. Additionally, an Esanda agent went to the consumer's wife's work in circumstances which caused her embarrassment and humiliation. On 20 June 2000 three debt collectors and three tow truck drivers went to the customer's home to seize the car. One agent jumped a gate and opened the garage door from inside. A tow-truck was reversed into the garage. As the operator's were connecting the customer's car to the tow-truck, the customer ran into the garage in an agitated state. In the scuffle that ensued two operators pinned the customer to the ground and kept him there. After the customer's car was towed away the operators 'got up off' the customer and ran out of the garage.

More about debt harassment

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Financial Sector Bill
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On 4 November 2003, the House of Representatives agreed to the 3 amendments made by the Senate to the Financial Sector Legislation Amendment Bill (No 2) 2002. The amendments clarify the implementation of the "fit and proper" test to be applied by APRA for directors and officers of Approved Deposit-taking Institutions. The Bill is waiting for Royal Assent.

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Misleading advertising
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In ACCC v Commonwealth Bank of Australia [2003] FCA 1129, an advertisement with bold headlines that "no establishment fee" was payable for a home loan, when in fact customers had to either already hold or obtain two or three additional bank products to take up the offer of “no establishment fee”, was held to be misleading. The Federal Court said that the addition of the words "terms and conditions apply" did not override a false representation that is bold in its initial assertion.

Read the full judgment

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Importance of protecting product names
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In a competitive industry, where considerable amounts are spent on marketing, organisations are growing more protective of their investments.

In a recent Trade Mark case, Credit Union Services Corporation (Australia) Limited failed in its opposition to an application by St George Bank to register "Freedom" as a trade mark.

If you are promoting a product or service name that gives you a competitive edge then protect it. See our article (PDF).

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Another ASIC mortgage broker investigation
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The Australian Securities and Investments Commission (ASIC) has accepted an enforceable undertaking from Express Loans and Finance Pty Ltd, operators of the Express Loans mortgage broking business (Express Loans). The undertaking provides for the payment of compensation to past clients who lost money due to its advertising and broking practices.

ASIC accepted the enforceable undertaking following an investigation which found that some of Express Loans' advertising and broking practices misled borrowers and deposit bond issuers.

Express Loans, based in western Sydney, placed advertisements containing statements including '100% Home Loans Available', 'No deposits' and '100% Loans Available' in the Yellow Pages, Real Estate Magazines, the Daily Telegraph and a number of local newspapers.

ASIC was concerned that this advertising had misled, or would be likely to mislead consumers into believing that 100 per cent home loans were available without any deposit or other security.

ASIC was also concerned by Express Loans' broking practices.

Express Loans obtained deposit bonds on behalf of clients, so that they could exchange sale contracts without having to pay a deposit. ASIC received complaints from clients who used a deposit bond on the understanding that Express Loans had arranged a 100 per cent loan. However, the clients found that, at the completion of the sale, less than 100 per cent finance was available. A number of these clients were unable to source other funds, were unable to purchase the property, and were sued by the insurance company that provided the deposit bond.

ASIC's investigations also found that on a number of occasions Express Loans had prepared deposit bond applications, and provided letters of loan approval on Express Loans letterhead, that incorrectly stated that the client had loan approval for 100 per cent of the purchase price of the property. In fact, there was either no loan approval, or loan approval for a lesser amount.

As part of the enforceable undertaking accepted by ASIC, Express Loans has agreed to:
write to all past clients who may be affected by Express Loans advertising or broking practices;
appoint an independent reviewer to consider claims by past clients;
advertise 'no deposit' or '100 per cent' home loans only if any special conditions are clearly explained;
state that a client has loan approval only if the loan approval has been received from the relevant mortgage originator or lender.

Express Loans will also cease charging an up front fee for its services prior to the arrangement of credit.

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Who can be a Director or Senior Manager of an ADI?
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The Financial Sector Legislation Amendment Bill (No 2) 2002 was passed by the Senate on 30 October 2003 with 3 amendments and now goes back to the House of Representatives. The amendments clarify the implementation of the "fit and proper" test to be applied by APRA in when making an assessment as to whether an affected person is fit and proper to act as a director or senior manager of an ADI.

Read the Bill

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First Home Owners Grant
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The Queensland Government has introduced the First Home Owner Grant Amendment Bill 2003 to tighten the eligibility criteria for the Commonwealth's First Home Owner Grants.

The Bill will restrict the circumstances in which the grant may be paid to applicants under the age of 18 by way of giving a discretion to the Commissioner of State Revenue to deal with applications on a case-by-case basis. The Bill also contains an anti-avoidance provision to enable the Commissioner to ensure that the grant scheme is not otherwise exploited.

In addition, the Bill will include a 6-month residency period that will require applicants to live in the home as their principal place of residence for at least 6 months (subject to the Commissioner's discretion to reduce the residency requirement in appropriate circumstances). If applicants do not fulfil the residency requirement within the existing 12-month period of the eligible transaction, they would be required to repay the grant. These residency requirements will begin on 1 January 2004.

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Consumer Credit Code Update
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At the recent Credit Law conference Ian Clyde, the current chair of UCCCMC, announced that a draft Bill to amend the Code to deal clearly with electronic transacting issues is currently being prepared and is likely to be released for public comment around the end of the year. It is hoped that the amendments will take effect mid next year.

Ever since the Code came into operation there have been differing views as to the extent to which credit providers can transact with their customers electronically - eg whether account statements can be given electronically. Hopefully the proposed amendments will clarify the legal position.

Chris Batt, the former chair of UCCCMC, gave a presentation on Comparison Rates and later led a discussion group on the topic. I think it is fair to say that it is recognised that there are issues with the legislation, but it is too early to form a view as to whether the provisions are likely to be extended beyond their 'sunset' date, either at all or in some amended form.


Shannon Adams
Partner
Norman Waterhouse Lawyers
email: sadams@normans.com.au
website: http://www.normans.com.au

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Banking and Financial Services Ombudsman Annual Report
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The 2002/03 Annual Report of the Banking and Financial Services Ombudsman (BFSO) shows that the number of disputes referred to the Ombudsman has decreased for the first time in many years.

However the ombudsman Mr Neave said while the fall in disputes was pleasing, there was still cause for concern that banks often only responded to complaints after intervention by the Ombudsman's office.

"The number of cases dealt with by the Scheme in the year to 30 June 2003 shows that the number of new cases received declined by 13.3 per cent," Mr Neave said.

"This decline in disputes indicates that banks themselves are dealing more effectively with their customers and taking steps to avoid escalation of disputes which require assistance from our office.

"However, during the year in review BFSO officers still answered a total of 44,304 calls, and received a total of 6,930 written complaints.

"These figures clearly indicate that more work still needs to be done by the banks to promote their internal dispute resolution mechanisms.

Mr Neave said the Scheme is able to admit non-bank members but the Annual Report just released covers the performance of banks only.

"In August 2003 the members of the Scheme approved a major change to the constitution of the Australian Banking Industry Ombudsman Scheme to enable non-banks to become members," he said.

"The name has been changed to the Banking and Financial Services Ombudsman which reflects the broader potential membership base and the fact that most Scheme members see themselves as not only providing banking services but broader financial services."

"During the year in review a total of 5,074 cases were considered to be within the Terms of Reference. Of these 87 per cent were resolved promptly after referral to the bank, and without significant involvement by BFSO.

"Despite the overall reduction in the number of cases closed this year, the number of closed investigations was 733, only six fewer than last year."

Mr Neave said disputes about consumer finance (29%), housing finance (21%) and deposit accounts (18%) represented the majority of cases received by the Scheme during the year in review.

Download a copy of the Latest Annual Report

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Privacy and financial advisers
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Question: I am a financial adviser (authorised representative) acting for a dealer group ('A'). I am considering transferring to another dealer group ('B'). What are the key privacy obligations towards clients to whom I provide advice?

The Office of the Federal Privacy Commissioner has released a Frequently Asked Question (FAQ) regarding the privacy obligations that financial advisors have when they choose to transfer between financial dealer groups.

"Customers wishes must come first when financial advisers consider what to do with clients' personal information when the advisers move from one financial dealer group to another," said Federal Privacy Commissioner, Malcolm Crompton.

"It's very important to ensure that clients (the individual receiving advice) know what is happening with their personal information and that they are given a clear and up-front choice about what they want done with their personal information.

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ASIC commences new proceedings against Henry Kaye and National Investment Institute
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On 7 October the Federal Court of Australia gave directions in new proceedings brought by the Australian Securities and Investments Commission (ASIC) against Mr Henry Kaye and National Investment Institute Pty Ltd (NII).

Mr Kaye and MII are involved in running investment training courses, which purport to teach people various methods for increasing their wealth through investment in property. The courses, which comprise seminars, conferences, workshops and other training programs, also promote and provide information about investment in mezzanine finance products and cost between $4,000 and $55,000 to attend.

These proceedings arise from conduct by Mr Kaye and NII following ASIC's acceptance of an enforceable undertaking (EU) from Mr Kaye, NII, Novasource Consulting Pty Ltd and Mr Alan Meagher on 30 July 2003. Neither Novasource Consulting Pty Ltd nor Mr Meagher are parties to the new proceeding.

ASIC alleges that NII and Mr Kaye have breached the compensation provisions of the EU. These provisions provide for the payment of compensation to people who paid money to attend courses conducted by NII, as a result of having relied on statements that courses or products were approved by ASIC (the ASIC approval statement).

ASIC's concerns relate to allegations that the defendants told potential refund claimants that:

a refund can only be obtained under the compensation provisions of the EU if the claimant can prove that an ASIC approval statement (as defined in the EU) was the sole factor that induced him/her to enrol in the courses and seminars offered by NII;

a claimant for a refund under the compensation provisions of the EU will be required to swear an affidavit, produce supporting documentation and be cross-examined by a Queen's Counsel retained by NII, and will go to jail for any false statement;

that an ASIC approval statement only appeared in one brochure distributed by NII and was alleged by ASIC in the original proceeding to have been made by only one of NII's authorised representatives and on only one occasion;

the Court made a finding in the original proceeding that the original defendants had not done anything wrong;

ASIC subjected the defendants to a thorough audit which extended over a period of eight months; and

having completed that audit, ASIC found nothing wrong with the activities of the defendants and gave the defendants a "clean bill of health".

ASIC contends that each of these statements are misleading or deceptive, or likely to mislead and deceive potential claimants under the compensation provisions of the EU.

The defendants gave permanent undertakings to the Federal Court that they will not make any of these statements again.

ASIC is seeking declarations from the Court that in making these alleged statements or representations, the defendants have breached a number of sections in the ASIC Act, the Corporations Act and/or the Trade Practices Act.

ASIC is also seeking orders requiring the defendants to forward letters, in terms specified by the Court, to all potential refund claimants, and to place newspaper advertisements to correct the alleged false or misleading statements.

Further, ASIC is seeking orders about the management of the compensation process under the enforceable undertaking so as to ensure that all enquiries by claimants or potential claimants concerning the lodgement of claims and the claims process generally, are handled by an independent party (which the defendants will be required to engage), rather than by the defendants.

The Federal Court adjourned the hearing of the case until 2 December 2003.

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New Model Direct Marketing Code
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Telemarketers will be prohibited from cold calling on Sundays and national public holidays under amendments to the Direct Marketing Model Code of Conduct.

Direct marketers would also be prohibited from sending commercial e-mails to consumers without their consent unless they had an existing relationship with the consumer.

When contacting consumers, direct marketers will be required to:

identify themselves and the direct marketer they represent;

state their purpose, and if calling from outside Australia, identify the country;

not state that they are undertaking market research when their purpose is a commercial one; and

provide details of the source from which the consumer's personal information was obtained if a consumer requests this.

The changes are among 14 recommended by a working party of senior Australian and State government officers who reviewed the Model Code for the Ministerial Council on Consumer Affairs (MCCA) and expected to be adopted by the majority of direct marketers across Australia.

The Code was introduced in 1997 and adopted by the Australian Direct Marketing Association ADMA), which represents over 500 member organisations and reportedly covers more than 80 per cent of the industry.

The Model Code is a voluntary statement of best practice for the direct marketing industry.

Download the Review Paper and the new Direct Marketing Model Code of Practice

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Car finance warning
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The Australian Securities and Investments Commission (ASIC) has accepted an enforceable undertaking from Automotive Financial Services Pty Limited (AFS) in relation to one of its products known as the 'Credit Protection Waiver Program'.

AFS is a credit provider offering finance to consumers for the purchase of motor vehicles. From July 1997 to October 2001, AFS also offered consumers the Credit Protection Waiver Program (the Program), which allowed consumers who purchased the Program to apply to have their loan repayments waived if they became disabled or unemployed, or died.

ASIC came to the view that the Program was an insurance policy, and that purchasers were therefore entitled to greater consumer protection in relation to it. AFS did not accept that the Program was an insurance policy.

'The undertaking ensures that consumers who purchased the Program will be protected by having the same rights as consumers who deal with insurance companies, such as access to independent dispute resolution. It will also ensure consumers have the protections of the Insurance Contracts Act', ASIC's Executive Director of Consumer Protection, Mr Peter Kell said.

The Insurance Contracts Act prevent insurers from denying claims where this would be unfair, such as in cases where there are unusual terms in the insurance policy that have not been disclosed or where a particular term operates unfairly.

As a result of this undertaking, AFS has agreed to review all claims for waiver of repayments that were initially rejected. The claims will be reviewed by an independent consultant, who will assess them in accordance with the provisions of the Insurance Contracts Act.

Where AFS incorrectly rejected a claim for waiver of repayments, the independent consultant can direct AFS to pay the claim and, if appropriate, also pay compensation to the borrower (for example, if the car was repossessed). Where borrowers made repayments while AFS was assessing their claim, AFS has agreed to refund these payments to the borrower, together with interest, where it originally failed to do so.

In addition, AFS has agreed to pay claims where the borrower was not in permanent employment when they took out the Program. Under the Program, borrowers in this position were not entitled to claim and should not have been sold the Program in the first place. This part of the undertaking addresses this mis-selling.

'The offer of financial and insurance products to consumers purchasing cars on credit can be complicated, and has been a problem area in consumer sales. These products typically offer to cover repayments for a limited period if the borrower becomes unemployed, disabled or dies', Mr Kell said.

'ASIC is currently scrutinising the sale of financial products through car dealers, and where appropriate, will take action to ensure the interests of consumers are protected', he said.

ASIC acknowledges the cooperation of AFS throughout this investigation.

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ASIC acts on mortgage broker advertising
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The Australian Securities and Investments Commission (ASIC) has accepted an enforceable undertaking from Fintrack Pty Ltd, Fintrack Financial Services (Aust) Pty Ltd (Fintrack) and its directors, Mr Richard Houston, Ms Alexandra Mollinex and Mr Graham Mollinex in relation to various statements made in Fintrack's advertising and promotional material.

ASIC was concerned that between 11 March 2002 and 2 June 2003, Fintrack, a Melbourne-based mortgage originator, made potentially misleading statements in television and radio advertisements, in promotional material on its website and in brochures.

The advertisements
Claims made in advertisements included that Fintrack was 'paid virtually the same commission guaranteeing impartiality and independence', and that Fintrack 'people were salaried, not commission-based'. Fintrack also stated that they 'compared home loans from all banks and lenders' and 'over 40 lenders'.

'In fact, Fintrack received different rates of commission and benefits depending on the lender with which it placed a borrower, with some lenders paying significantly greater rates of commission', ASIC's Mr Kell said.

'Further, we found that some of the commission was passed on to some individual brokers as part of their remuneration, so we consider that it was inaccurate to claim the brokers were "salaried and not commission-based"', Mr Kell said.

'We believed that as a result, Fintrack could not claim that they were impartial. While we have not received evidence that Fintrack customers were provided with inappropriate loans, it is well recognised that differential commission payments may create conflicts of interest', he said.

'Finally, we found that instead of the 40-plus lenders Fintrack claimed to compare, during the time the statements were made the company only compared the loans of up to 30 lenders', Mr Kell said.

The enforceable undertaking
As part of the enforceable undertaking, which is provided under the consumer protection provisions of the ASIC Act, Fintrack and its three directors have undertaken to not use the statements or any similar statements in future promotions. ASIC acknowledges Fintrack's cooperation during the investigation of this matter.

In addition to agreeing to cease making the misleading statements in its advertising and promotional material, Fintrack has agreed to: implement a compensation system for consumers who suffered loss or damage as a result of the statements.

Consumers who arranged finance with Fintrack between 11 March 2002 and 2 June 2003 will be given written notice of the compensation system;
implement a trade practices compliance program and an internal complaints system; and
contribute $15,000 towards an ASIC consumer education or similar program in relation to mortgage and finance broking.

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Regulation of mortgage/finance brokers and property investment advisers.
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The Ministerial Council on Consumer Affairs (MCCA), recently met in Sydney
and unanimously agreed Queensland should chair a national working party to develop a single regulatory model for property investment advisors by March 2004.

A working party is already preparing a proposal which addresses
legislation needs for the growing mortgage/finance broker industry.

"A 2003 Australian Prudential Regulation Authority (APRA) report
reveals brokers account for more than $86 billion of current credit
transactions," Fair Trading says.

"Finance brokers arrange about 30 per cent of all mortgage loans and
this is expected to increase to about 50 per cent in the next three to
five years."

The Australian Competition and Consumer Commission is targeting misleading and deceptive conduct by property 'scammers'.

"The ACCC investigation is on four fronts: two-tier marketing; advice given by financial consultants, solicitors and valuers; unconscionable conduct by financial institutions; and real estate investment seminars", according to ACCC Chairman, Mr Graeme Samuel.

"The ACCC is particularly concerned that in a very hot property market, 'Mum and Dad' investors and superannuants are being pressured into joining property investment programs that promise massive wealth through property investment.

"But the 'investors' seem often to end up only with large debts and advice which they have little hope of utilising.

"The ACCC has directed extra resources to this area. Schemes are being currently investigated with a view to possible court action, principally for misleading and deceptive conduct.

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Fringe Credit Providers
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Australian consumer protection agencies are considering proposals for changing the laws for fringe credit providers (such as payday lenders and micro-lenders).

A discussion paper is available for comment.

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Queensland OSR Mortgage Duty and Credit Business Duty Audit Program
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The Queensland Office of State Revenue (OSR) is currently conducting an audit program in relation to the self assessment and payment of mortgage duty and credit business duty. The audit program will review transactions under both the Stamp Act 1894 and the Duties Act 2001.

Audits will be conducted on a range of clients, including registered self assessors, credit unions, building societies, banks, finance companies, first mortgage companies, margin lending institutions and premium finance companies. Notice of all visits will be provided in writing to clients eligible for an audit.

Scoping audits already conducted have indicated problems in the following
areas:
nexus provisions for mortgage duty and credit business duty
particularly in relation to premium funding companies;
liability for mortgage duty and credit business duty on margin
lending products;
calculation of credit business duty on short term loans;
remittance of credit business duty by first mortgage companies;
liability for credit business duty by interstate financial
institutions.

Penalty reductions are available in cases of voluntary disclosure and clients are encouraged to undertake a self-review in relation to their liabilities.

If you have any queries regarding this audit program please contact our office.

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APRA Capital Transition Guidelines
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The Australian Prudential Regulation Authority (APRA) has released its preliminary requirements for local banks, building societies and credit unions under the Basel Committee on Banking Supervision’s new Basel Capital Accord, also known as Basel II, scheduled for implementation in 2007.

The announcement provides guidance on the options available to institutions for calculating regulatory capital under the new Accord.

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Market Research Code
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The Privacy Commissioner has approved the Market and Social Research Privacy Code under section18BB of the Privacy Act 1988.

The Code was submitted by the Market Research Society of Australia (MRSA) and the Association of Market Research Organisations (AMRO). It took effect on 1 September 2003, and is intended to cover the market and social research industry.

The Market and Social Research Privacy Code encourages small market research companies to opt-in to the Privacy Act.

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Privacy Update
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The Federal Privacy Commissioner, Malcolm Crompton, has released five privacy complaint case notes that deal mainly with consumer credit reporting issues.

In G v Credit Provider [2003] PrivCmrA 5, the complainant disputed a default that was listed on their credit file. As a result of investigations by the Commissioner's Office, the credit provider reimbursed the complainant $1,096 and removed the default listing from their consumer credit information file.

In H v Credit Provider [2003] PrivCmrA 6, the complainant disputed a default that was listed on their credit file. Following an investigation by the Office, the Commissioner was satisfied that the credit provider had not breached the Privacy Act or the Credit Reporting Code of Conduct.

In I v Major wholesaler [2003] PrivCmrA 7, the complainant complained that there had been unauthorised access to their credit report held by a credit reporting agency. As a result of investigations by the Commissioner the wholesaler reviewed their credit reporting procedures, changed their business practices, consolidated their national credit reporting function into one office in one state and paid the complainant $7,500 compensation for the breach.

In J v Two Individuals [2003] PrivCmrA 8, the complainant alleged that there had been an inappropriate disclosure of quashed conviction information. Following an investigation by the Commissioner's Office, the respondent apologised to the complainant for the breach.

In K v Financial Institution [2003] PrivCmrA 9, The complainants, a married couple, held a joint account with the respondent who erroneously linked the account's number to an account held by a different family member who had the same name as one of the complainants. The respondent acknowledged its error in linking the accounts and that this resulted in the disclosure of the complainants' information and agreed to the claim for $1,000 in compensation.

More details

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DEFECTIVE PROSPECTUSES
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On 21 July 2003 ASIC provided an overview of its actions in relation to
public fundraisings for the 2002/03 financial year. Since July 2002, ASIC
has placed a total of 89 stop orders on defective prospectuses seeking to
raise over $383 million from the public by the issue of securities.

ASIC intends that publication of the various defects identified in
fundraising documents will assist issuers and the advisers who prepare
these documents to adequately discharge their duties.

The most common defect was a failure by companies to clarify how the funds
would be applied in the event that the company failed to raise the amount
originally sought in the raising where it was not underwritten, nor
subject to a minimum subscription condition.

Other common defects related to the adequacy of financial information
disclosed in the fundraising document, and a lack of disclosure in
relation to other material information, usually, the risks associated with
the company's current activities or the proposed venture. Defects relating
to the use of financial forecasts in prospectuses were much lower than in
previous years suggesting that most prospectus issuers are now familiar
with ASIC's policy statement on forecasts (Policy Statement 170:
Prospective financial information).

ASIC considers inadequate financial information to include a failure to
meet the specific disclosure requirements in offer information statements
(see Policy Statement 157: Financial reports for offer information
statements), and the adequacy of details about intangible assets.

Since ASIC last provided an update on its prospectus actions in April this
year, ASIC has issued six final stop orders and revoked a further nine
interim orders on fundraising documents that contained insufficient
information for investors. Three other companies lodged replacement or
supplementary documents, which addressed ASIC's concerns, prior to the
issue of an interim stop order.

Most final stop orders were issued with the consent of the relevant
company, after they made the decision not to proceed with the particular
prospectus, rather than to address the disclosure deficiencies.

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ASIC REGULATION OF PROMISSORY NOTES
=============================

On 14 July 2003 ASIC announced the release of an FAQ to assist issuers of
promissory notes in understanding their obligations under the Corporations
Act. The FAQ provides guidance on the circumstances when promissory notes
are likely to be regulated as financial products.

A promissory note is an unconditional promise by an issuer to pay an
agreed sum of money at a fixed or determinable future time to, or at the
order of, a specified person.

Generally, where an offer involves just a promissory note with a face
value of at least $50,000 and no other special features, it will not be
regulated under the Corporations Act. However, ASIC notes that some
issuers are seeking to rely on the promissory note exemptions under the
Act by offering complex investment arrangements involving promissory notes
to retail investors. In some cases, although an offer involves the issue
of a promissory note, the rate of return and the financial risk to retail
investors varies or is dependent on the performance of certain
investments.

ASIC believes that these arrangements are likely to be financial products
and therefore regulated under the Corporations Act, requiring licensing
and disclosure. In particular ASIC is concerned about complex arrangements
involving promissory notes that:

- are accompanied by other promises about how the money loaned may or will
be repaid;
- may reasonably be considered to express or contain a representation or
agreement that the investment returns will be produced by an underlying
specific investment or the performance of some specific commercial
activity;
- are not liquid, cannot be easily traded and are not designed to raise
short term finance to manage day to day liquidity issues; and
- are directed primarily at the retail clients.

For example, an arrangement is likely to involve the offer of financial
products if investors' money (raised through the offer of promissory
notes) is used to partly fund the purchase and development of property and
investors are led to understand that repayment is dependant on the success
of the development.

===============================
TOWER AUSTRALIA TO REPAY INVESTORS
===============================
On 4 July 2003 the Federal Court of Australia gave judgment and made
orders in proceedings brought by ASIC against Tower Australia Limited
(Tower). Tower consented to the orders and will reimburse investors who
have been underpaid for their investments in Tower's Blue Ribbon Products.

The Court declared that Tower had engaged in misleading and deceptive
conduct since early 1993, by sending:

- annual statements of account to some investors that recorded incorrect
redemption or withdrawal benefits; and
- letters (either attaching a cheque or confirming a direct deposit into a
nominated account) to some investors incorrectly stating that the amount
of the cheque or the deposit represented the sum total of the investors'
redemption or withdrawal benefit.

Tower estimated that the cost of repaying policyholders is about $600,000,
and has made provision in its accounts for that amount.

The Court has ordered Tower to send notices (if it has not already done
so) to affected investors advising them that, as a result of computer
error, they may have received incorrect surrender values and/or withdrawal
amounts.

The Court also noted ASIC's acceptance of an enforceable undertaking on 19
June 2003 from Tower stating that Tower will:

- repay any shortfall (plus interest) to investors who have fully redeemed
their investments;
- correct the entitlements of investors who have partially redeemed their
investments;
- take all reasonable steps to ensure that all redemption advices, and
redemption and withdrawal amounts are correct;
- use its best endeavours to rectify the computer error; and
- not take any action against investors who may have been overpaid.

Tower has also undertaken to conduct an internal review to ensure that
financial products similar to the Blue Ribbon Products are not similarly
affected by computer error.

The orders follow an ASIC investigation into complaints alleging that
surrender values shown in annual statements for the Blue Ribbon Products
were incorrect. Tower has cooperated with ASIC throughout the
investigation, and took steps to address ASIC's concerns.

===========================================
USING PAST PERFORMANCE FIGURES IN INVESTMENT ADVERTISEMENTS
===========================================
On 3 July 2003 ASIC released final guidelines on the use of past
performance information in investment advertisements.

Key guidelines include that:

- advertisements using past performance information should include a
five-year return figure (or the longest period available for newer funds);
- information about returns should be balanced with information about
risks;
- all past performance figures are up-to-date; and
- important information should not be buried in fine print.

Other key guidelines include that:

- promoters should not give undue prominence to past performance
information;
- promoters are encouraged to show performance compared to a benchmark or
their peers;
- returns should be calculated after all on-going fees have been deducted;
and 'simulated' past performance figures should only be used in very
limited cases.

Research on the use of past performance information shows that:

- it is used in advertising for many products in the financial services
industry, especially when recent returns look good;
- promoters choose varying methods for showing past performance, resulting
in poor comparability;
- advertisements rarely include information about the risk or volatility
of the promoted investment; and
- academic research commissioned by ASIC indicates past performance is a
weak and unreliable predictor of future performance over the medium to
long term.

Copies of the guidelines are available from the ASIC website

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New Banking Code of Practice released
=============================
The Australian Bankers Association has released its revised Code of Banking Practice, replacing the 1993 version of its charter of customer rights.

Download the Code

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APRA releases credit card guidelines
==========================
The Australian Prudential Regulation Authority (APRA) has released final authorisation guidelines for Specialist Credit Card Institutions (SCCI) and a new prudential standard on risk management of credit card activities for Authorised Deposit-taking Institutions (ADI).

The new standard comes into force on 1 August 2003 and applies to all ADI credit card operations.

Read APS 240

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Mandatory Comparison Rates Update
=========================
Two new enforcement policies were released on 11 June.

In summary, the new rulings provide as follows:

* A Comparison Rate Schedule (CRS) may state which repayment frequency has been used to calculate CR (ie weekly, fortnightly, or monthly).

* The law already provided that certain premises of lenders did not need to display and have available CRSs. This exemption has now been extended to provide that a CRS need not be sent with an application form issued from those exempt premises.

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APRA Amendment Bill introduced
============================
The Australian Prudential Regulation Authority Amendment Bill 2003 was introduced in the House of Representatives on 5 June 2003.

The Bill implements the Government's response to certain recommendations made by the HIH Royal Commissioner. It implements an enhanced governance structure for the Australian Prudential Regulation Authority (APRA) and responds to a number of other recommendations aimed at enhancing APRA's ability to share information and co-operate effectively with other financial sector supervisory agencies, law enforcement agencies and overseas regulatory authorities.

In particular the Bill will replace the APRA board (including its CEO and ex officio members) with a full-time executive group comprising at least 3 and no more than 5 members. The executive group will carry the responsibility and be accountable for the operation and performance of APRA. APRA will retain its status as an independent statutory authority.

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APRA Fees for new ADI's
=======================
The Australian Prudential Regulation Authority (APRA) has introduced licence fees for new authorised deposit-taking institutions (ADIs), general insurance companies and life insurance companies, including friendly societies. The statutory instrument imposing the fees was published on 3 June.

Licence fees for superannuation funds will be introduced when the Government’s new licensing regime is launched, currently scheduled for mid 2004.

The fee for each type of licence reflects APRA’s costs of processing and determining a licence application from a prospective new entrant to the prudentially supervised finance sector.

The fixed fees (inclusive of GST) for licence applications are as follows:

1. ADI

bank or special service provider $68,200
building society or credit union $22,000
specialist credit card institution $33,000
2. General insurer $68,200

3. Life company

Non-friendly society $55,000
Friendly society $22,000

APRA’s Chief Executive Officer, Mr Graeme Thompson, said that licensing is a critically important element in prudential regulation.

“It ensures that entities being established under APRA’s supervisory regime have the requisite starting capital and sound risk management processes in place.”

Mr Thompson said that in the past, licence processing costs had been recouped from the annual supervisory levy paid by established institutions.

“It is fairer for those costs to be borne by the applicant, who will obtain the benefit of the licence, rather than being subsidised by the general body of supervised institutions through the annual levy,” he said.

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=======================
HIH Royal Commission Report
=======================
Justice Neville Owen has now presented his report on the failure of the HIH insurance group.

View the report in HTML

Read the Treasurer's response

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===================================
Credit Code Mandatory Comparison Rates-
Statements of Enforcement Policy
===================================
SCOCA has issued 7 Statements of Enforcement Policy intended to clarify a number of issues in relation to the Consumer Credit Code comparison rates provisions which come into effect on 1 July 2003. They indicate the enforcement approach that will be adopted by government consumer agencies in relation to these issues.

The policies are as follows:

* If a Government agency to which a fee or charge must be paid deals with the public only through a contracted service provider, any service charges paid to this service provider should be considered to be a government fee or charge for the purposes of the comparison rate formula.

* Where a credit provider offers credit for any of the prescribed amounts which have 25 year terms, but the credit provider only offers that amount for a term of less than 25 years and for purposes other than a home loan, the comparison rate schedule should provide a comparison rate which is based on the term for which that amount of credit is actually offered rather than the 25 year term. The schedule should state the term for which the comparison rate is calculated.

* Comparison rate schedules for consumer credit products which are priced for risk should, for each of relevant prescribed amounts and terms, provide five comparison rates. These should be calculated on the basis of the average annual percentage rate which is charged by the credit provider, rounded to the nearest whole number, and for two whole number rates above and below the average rate. The schedules should clearly indicate the annual percentage rate, amount and term which correspond to each comparison rate.

* Comparison rate schedules are permitted to indicate whether comparison rates are for secured or unsecured loans for loan amounts other than the amounts which are prescribed by section 33E of the Consumer Credit Amendment Regulation (No. 1) 2003.

* Comparison rate schedules are not notices provided under the Consumer Credit Code.

* Where there is no uncertainty over whether a consumer will be charged a valuation fee, but the exact amount of the fee is not known at the time a comparison rate is disclosed, a reasonable estimate of the likely valuation fee is to be included for the purposes of calculating the comparison rate.

* Credit advertisements which are on radio may provide a warning in spoken form, and credit advertisements which are on television, the Internet or other electronic display medium should comply with section 146I of the Consumer Credit (Queensland) Amendment Act 2002 rather than section 33C(1) of the Consumer Credit Amendment Regulation (No. 1) 2003.

Read the full text of the Statements of Enforcement Policy

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ASIC releases results of code monitoring report
================================
The Australian Securities and Investments Commission (ASIC) has released its annual monitoring report on compliance with the Banking, Credit Union and Building Society Codes of Practice and the Electronic Funds Transfer (EFT) Code.

The codes are voluntary but almost all Australian financial institutions have signed up to the codes that are relevant to them, and are bound by their provisions. The report covers the period from April 2001 to March 2002.

'While there's been a steep increase in the number of transactions covered by the codes, the overall incidence of complaints remained low', ASIC's Deputy Executive Director of Consumer Protection, Ms Delia Rickard said.

'Complaints under the Banking Code of Conduct decreased from 3.28 per million transactions in the 2000/2001 reporting period to 2.17 in this one - at the same time, the number of banking transactions rose by roughly 500 million to 4,334 million. The majority of disputes dealt with internally were resolved in favour of the customer (48%) or by mutual agreement (13%)'.

Cmplaints under the Credit Union Code increased while still small in number (2524) when compared to the total number of transactions (438,848,061), they rose from 3.8 per million in the last period to 5.8 per million in the current period. Of these however, 64% were resolved within the credit union in the customer's favour, and 7.5% by mutual agreement.

There was a smaller increase under the Building Society Code from 1.2 to 1.7 per million transactions, with 55.2% resolved internally in favour of the customer, and 13% by mutual consent', Ms Rickard said

'The largest number of disputes under the banking and credit union codes related to EFT (PIN)-based transactions. Other common complaint categories were fees and charges, account debiting and crediting, and service delivery.'

The EFT Code of Conduct, as it applied at the time the monitoring period relates to, sets out the rules for allocating liability for disputed ATM and EFTPOS transactions.

In the period under review, the overall number of complaints under the EFT code increased from 121,434 in 2000/2001 to 132,517 in 2001/02. This corresponded with an increase of 140 million in the number of ATM and EFTPOS transactions performed by Australians, to over 1,640 million transactions.

The rate of complaints per million transactions remained constant at 81 complaints per million transactions. However, there was a marked change in the breakdown of these complaints:

complaints about system malfunction rose by 18.6% to 97,047 (76% of these complaints were resolved in favour of the card holder);
complaints about unauthorised transactions fell by 6.2% to 23,978 or 14 per million transactions. Of these, the customer was found liable in 57 per cent of cases, or in 8 transactions per million; and
there was a 32% decrease in complaints relating to areas such as confusion over the merchant name or processing date or double debit complaints. These fell to 11,493, of which 78% were resolved in favour of the card issuer.

'Pleasingly, this was the second year in a row that we've seen a reduction in complaints about unauthorised transactions. The most common explanation for these transactions continues to be cardholders being careless with their PIN.

'Keeping your PIN a secret is the best way to protect yourself from unauthorised transactions. We all know you should never tell anyone your secret PIN or code – even a friend or family member, You should also never record it on your card or on anything you keep near your card', Ms Rickard said.

The unauthorised transaction cases under the Code are categorised under a number of different causes. An area of concern was the increase in the number of unauthorised transaction cases where cards were forged, faulty, expired or cancelled. The number of such cases where the card issuers was liable, accounted for less than one percent (33) of the total complaints in the 2000/2001 monitoring period, but jumped to 334 instances in the current review (4.2%)'.

It should be noted that consumers now have greater protection for the electronic banking transactions than they did at the time the monitoring report relates to.

A revised EFT Code of Conduct came into force on 1 April 2002, and extended the coverage of the code from the ATM and EFTPOS transactions mentioned in the monitoring report, to include all forms of electronic funds transfers, including internet, mobile phone and telephone banking and stored value products such as prepaid telephone cards.

Download a copy of the report

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ASIC releases report into mortgage brokers
================================
A report on the mortgage broking industry, prepared by the Consumer Credit Legal Centre NSW (Inc) (CCLC) and released by the Australian Securities and Investments Commission (ASIC), has found that while the consumer use of brokers has expanded greatly, there are still few barriers to entry in the industry such as clear minimum competency or training standards.

'Up to one in two home loans are now sourced through brokers, who can provide a valuable service to consumers faced with an ever-increasing choice of credit options. People should be able to approach brokers with confidence, in full knowledge of the costs involved and with appropriate avenues to redress if something goes wrong', Mr Kell said.

'The CCLC report presents evidence that standards need to improve in the mortgage broking sector in order to reduce the risks to consumers. It is pleasing to see that there is wide acceptance in the industry that this is the case', ASIC Executive Director of Consumer Protection, Mr Peter Kell said.

The report analyses the structure of the industry, identifies a range of problems experienced by consumers, and examines the way in which the industry is regulated in Australia and internationally. It also includes a number of case studies, as well as the results of surveys of consumer caseworkers and brokers.

The CCLC report has found that while consumers are increasingly using brokers, consumers who use the mortgage broking industry can face problems that include:

poor advice, with the increased costs of the inappropriate loans that might result;
inadequate disclosure of fees and commissions by some brokers;
inconsistent documentation from brokers;
uncertainty about the nature and price of the service;
in a small number of cases, fraudulent activity such as manipulating loan applications.

''There is also a need for clarity as to whether brokers are acting for consumers or are really agents for lenders', Mr Kell said.

'The CCLC report has identified significant issues about the structure and practices of the industry, and raised possible options for addressing these issues', Mr Kell said.

'While ASIC does not have full responsibility for the mortgage broker market, the report has greatly assisted in identifying the types of problems that ASIC can address with its consumer protection powers, including examples of misleading conduct', Mr Kell said.

'We are currently investigating a number of matters with a view towards possible enforcement action, and some of these were identified in the process of the report's development', Mr Kell said.

'We are also pleased that in response to the gap identified in the CCLC report regarding consumer complaint schemes, the Mortgage Industry Association of Australasia (MIAA) has announced that it will seek formal ASIC approval for its external dispute resolution scheme, the Mortgage Industry Ombudsman Scheme (MIOS). While the MIOS scheme does not cover the whole industry, ASIC is committed to ensuring that the scheme meets proper standards for those it does cover', Mr Kell said.

Note: Detailed consumer protection regulation in the credit marketplace is provided under the state-based Uniform Consumer Credit Code (UCCC). At the Federal level ASIC has powers to take action in relation to misleading and deceptive practices and unconscionable conduct. The provision of credit is not covered by the Financial Services licensing laws that ASIC administers.

Download a copy of the Report (PDF file, 871KB)

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===============================
PRIVACY AND FINANCIAL INFORMATION
===============================
The Privacy Commissioner has released 2 case notes that summarise his investigations into two privacy complaints involving people's financial information.

In the recently released case note 3, where it was alleged that a staff member of the financial institution had accessed personal information about the complainant's investment account and disclosed it to the staff member's family, the Commissioner found no breach of the Act.

The Commissioner arrived at his decision because the alleged privacy breach occurred before the commencement of the Privacy Amendment (Private Sector) Act 2000, which began on 21 December 2001. Had the situation occurred after 21 December 2001 it is likely that the Commissioner would have found that the company had breached the Act.

Even though no breach of the Act was found, the organisation undertook to change its practices by establishing an audit trail on the mainframe where personal information is stored so that staff access to customers' personal information would be recorded.

In case note 4, it was alleged that the credit worthiness information of an individual was improperly disclosed to her former partner by a retail store that both people had credit accounts with. The Commissioner found that credit information about a person had been inappropriately disclosed to another. The matter was resolved to the satisfaction of the two parties with the retailer apologising to their customer and paying them $750 in compensation.

"It's a requirement of the Act to ensure that only the appropriate people in an organisation have access to personal information and that personal information is only disclosed to those who have a right to see it." Mr Crompton said.

Inappropriate disclosure of information is the number one issue the Office of the Federal Privacy Commissioner receives calls and complaints about. Since 21 December 2001 the Office has received more that 4000 calls and 235 complaints about this problem.

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TAX TREATMENT OF INSTRUMENTS ISSUED BY FINANCIAL INSTITUTIONS
=============================================================
Minister for Revenue and Assistant Treasurer Senator Helen Coonan, has announced that tax regulations would be used to clarify whether certain financial instruments are treated as debt or equity for taxation purposes.

Senator Coonan said the regulations will provide guidance and certainty to both the issuers and holders on the tax treatment of these instruments.

The regulations will ensure that:

certain Upper Tier 2 capital instruments issued by Authorised Deposit-Taking Institutions (ADIs) that are banks are treated as debt for taxation purposes. This means returns on these instruments paid on or after 1 July 2001 will qualify as tax deductions to the bank;

and

certain Lower Tier 2 capital instruments issued by ADIs that are credit unions and building societies are treated as equity for taxation purposes. This means that returns paid after this announcement will qualify as frankable dividends.

Senator Coonan said "These regulations will remove existing uncertainty concerning which side of the debt/equity borderline certain financial instruments fall on for tax purposes.

"Removing this uncertainty will enable banks, credit unions and building societies to now proceed with confidence in raising additional capital on competitive terms."

More

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Mortgage default management
======================
Australia's financial regulator has warned mortgage lenders to improve their insurance claims procedures in preparation for a potential downturn in the housing market.

A recent review by the Australian Prudential Regulation Authority has found that up to one half of all insurance claims lodged by lenders could have been adjusted or refused by providers had they taken a harder line on policy terms and conditions.

"Lenders' mortgage insurance works well to cover the occasional bad loan but may not work well to cover the greatly increased claims volume attached to a property downturn," said APRA executive general manager Charles Littrell, at a recent Securities Institute seminar .

APRA said it would implement a "health check" of home lending practices by Australian banks, building societies and credit unions between May and June this year.

"APRA will be making it clear that insured loans with less than robust foreclosure and claims systems do not qualify for the 50 per cent concessional risk-weighting treatment for capital adequacy purposes but are instead weighted at 100 per cent," Mr Littrell said.

===========================
Consumer Credit Penalties for ANZ
===========================
The Supreme Court of Qld has ordered the ANZ Bank to pay $686,000 as a civil penalty and more than $40,000 in compensation to consumers for breaching laws covering personal loan contracts in the late 1980s through to 1996.

The breaches in more than 47,000 personal loan contracts in Queensland included a failure to disclose insurance commissions, other fees and charges and the correct amount financed.

The order is one of the largest penalties ever imposed on a credit provider in Queensland.

"The ANZ took advantage of thousands of consumers by failing to comply with the laws in place to protect borrowers," Fair Trading Commissioner Matt Miller said.

"However, of greater concern is that when the errors were identified the bank did not treat them seriously and followed a policy of containment,” Mr Miller said.

“When concerns were raised by regulators and the Consumer Credit Legal Service (Vic) the bank admitted its errors and cooperated with the Office of Fair Trading.”

The monies awarded will be directed to education, compliance and counselling activities relating to consumer credit through the Consumer Credit Fund.

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Queensland Stamp Duties
=====================
Calculators for Queensland transfer duty, mortgage duty and lease duty are now available on-line

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==================================
Updated Policy Statement 146
Licensing: Training of financial product advisers
==================================
PS 146 has been updated to take account of requests from industry for further clarification; and comments made by the Parliamentary Joint Committee on Corporations and Financial Services, in its October 2002 report on regulations and ASIC policy made under the Financial Services Reform Act 2001.

In particular, the amendments address two areas of PS 146:

* ASIC's requirements for advisers on basic deposit products and related non-cash payment products (BDPs); and

* ASIC's requirements for advisers who only provide general advice.

More

============================
Increase in broker-originated lending
============================
Australian Prudential Regulation Authority (APRA) has released a report confirming extensive use of broker-originated lending by Authorised Deposit-taking Institutions (ADIs), a trend which is likely to escalate over the coming year.

The result of a survey of ADIs undertaken by APRA late last year, the report provides a comprehensive estimate of the size of the broker-introduced loan market in Australia. The survey does not extend to the practices of non-regulated mortgage providers.

APRA Executive General Manager, Mr Charles Littrell said the report would also be used to gauge common industry practices with a view to assisting ADIs with the implementation of best practice risk management.

"While there are many positive competition aspects to broker originated lending, APRA does have its concerns," he added. "These include, in a few cases, failure to subject broker-introduced loans to the same credit standards as other loans and no limit on exposures to individual brokers".

The size of the broker-introduced loan market (as at June 2002) is $86.6 billion with approximately 802,000 loans outstanding. Brokers are most prominent in the housing loan market, accounting for $76 billion of total housing loans outstanding. Around 23 per cent of ADI home loans are broker-introduced.

APRA will be working with ADIs to develop and implement best practice risk management regarding the use of brokers. This includes, amongst other things, broker-accreditation procedures, independent loan review and appropriate tracking systems.

Mr Littrell said the survey and report are part of an ongoing exercise initiated by the regulator in the latter half of 2002 that addresses the risk practices of ADIs with particular reference to home lending.

"APRA is largely comfortable that ADI risk practices associated with lending are sound. It is prudent, however, that we examine all aspects of practice and industry is working with us to achieve the right outcome in keeping Australia’s ADI deposits safe."

A copy of APRA’s report is available on APRA’s website

======================
Mandatory Comparison rates
======================
On 27 December 2002 it was announced that the Ministerial Council on Consumer Affairs had agreed that the mandatory comparison rates provisions will commence on 1 July 2003 and had approved the making of the necessary amendments to the Consumer Credit Regulation 1995 (‘the regulations’).

The amendments that have now been approved differ from the earlier draft amendments in the following respects:

1. The definition of the credit fees and charges payable by the debtor that are to be taken into account in calculating the comparison rate will now be “a credit fee or charge (other than a government fee, charge or duty) that is ascertainable when the comparison rate is disclosed (whether or not the credit fee or charge is payable if the credit is not provided)”. The draft version referred only to retained credit fees and charges.

2. The form of the warning that must be given when a debtor is informed of the comparison rate, in any advertisement which refers to a comparison rate and in a comparison rate schedule will now be as follows:
“WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.”

3.There is to be a new provision allowing a warning to also contain “a statement that the credit provider does not provide credit for an amount, or a term, or both, specified in an advertisement or comparison rate schedule”. This is intended to address a concern that some credit providers have that the information they are required to provide may infer that they provide loans for particular amounts and terms that in fact they do not.

4. A typographical error that appeared in the comparison rate formula in the draft amendments has been corrected.

5. The definition of the premises in relation to which a credit provider is exempt from the requirement to display and make available comparison rate schedules has been changed. The exemption will now apply “if the use of the premises relating to the provision of credit is limited to one or more of the following:
(a) The display or provision of credit advertisements that do not, or information that does not, contain an annual percentage rate;
(b) The distribution, or collection, or both, of credit applications.”

6. Finance brokers will not have to display or make available a comparison rate schedule for a particular product of a credit provider with which it deals if the finance broker does not deal with that particular product.

7. Suppliers of goods and services will not have to display or make available a comparison rate schedule for a particular product of a credit provider with which it is linked if that particular product is not available for the purposes of providing credit relating to the supplier’s goods and services.

Credit providers now have a relatively short time available to gear up for compliance with the new requirements.

Contributed by Shannon Adams

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Reserve Bank Standard on Merchant Pricing
===================================
On 1 January 2003 , the RBA’s standard on merchant pricing came into force. The standard removes the restriction imposed by the international credit card schemes which prevents merchants from recovering from cardholders the costs of accepting credit cards. In response, Visa has suggested that there is “just one problem” with the reforms –“they will not work in the manner the RBA claims”. Visa claims that consumers will face losses and increased costs, that many small businesses and small financial institutions will face higher costs and the potential losses of business, and that competition in credit cards will be lessened.

Contributed by Shannon Adams

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Mandatory Comparison Rates
==================================
The Ministerial Council on Consumer Affairs has agreed that the mandatory comparison rates provisions for consumer credit contracts will commence from 1 July 2003, and has approved the making of the Consumer Credit Amendment Regulation 2002.
Download the draft Regulation

==================================
FSR Updates
==================================
1. Draft FSR Regulations

Commonwealth Treasury has released draft Corporations Amendment Regulations for consultation. If passed, the regulations will:

A) amend the definition of credit facility to ensure that credit cards with a deposit facility attached and lines of credit attached to an overdraft account into which deposits may be made will be included in the credit facility exemption;
B) exempt a funeral expenses policy provided by Friendly Societies from the definition of financial product under the Act;
C) extend the number of documents considered to be an exempt document and therefore not considered to be financial product advice under section 766B(9) of the Act. General advertising and promotional material would not be treated as exempt documents - only those documents specifically contemplated and regulated by legislation
D) clarify the intent behind the display of `flyers and other promotional material displayed in a public place', as part of the exemption from providing a Financial Services Guide when the advice is provided in a public forum under section 941C of the Act
E) exempt the provision of a Financial Service Guide when providing entities are providing general advice to existing clients
F) allow parties to describe their remuneration in FSG's and SOA's by stating a range of amounts rather than a specific amount, where the remuneration is paid by way of salary or wages that are otherwise unrelated to the person's sales performance
G) extend the current exclusions from allowable hawking times from Christmas Day, Good Friday and any Sunday to include the following dates:
New Year's Day;
Australia Day;
Easter Monday;
Anzac Day; and
26 December (Boxing Day).
H) provide specific exemptions from the confirmation of transactions requirement for transactions involving a non-cash payment facility linked to either a basic deposit product or credit facility.
I) extend streamlined licence applications to persons who hold a licence or authorisation issued by APRA in respect of activities which require licensing after FSR Act commencement - this includes ADIs, registered general insurers and life insurers, and approved trustees of superannuation funds.
J) expand the current exemption from placing an Australian Financial Services Licence (AFSL) number on documents issued before the licence has been granted. This exemption would apply to an expanded range of documents, such as Product Disclosure Statements, Prospectuses, Key Features Statements and Advisory Services Guides.
Download the draft Regulations

2. ASIC Conduct and Disclosure Policy Proposal Paper
ASIC has released a policy proposal paper, Licensing: Financial product advisers – Conduct and disclosure.

The paper sets out ASIC's views on how certain conduct and disclosure obligations under the Corporations Act apply to the provision of financial product advice to retail clients. It discusses preparing and providing an FSG and an SOA.

Download it

==================================
Farm Management Deposits
==================================
The Taxation Laws Amendment (Earlier Access to Farm Management Deposits) Bill 2002 has been passed by Commonwealth Parliament and is awaiting Royal Assent . The Bill amends the farm management deposits (FMD) conditions to provide an exception to the 12-month waiting rule for persons in "exceptional circumstances" areas. These persons will be able to withdraw funds early and still retain the tax benefit.

In summary, the amendments:
• provide an exception to the 12-month waiting period for access to FMDs for persons in "exceptional circumstances" declared areas. Where a person uses this new provision to access their FMD within 12 months, they will not be permitted to make any further FMD deposit within the same tax year;
• allow part of an FMD to be withdrawn within 12 months provided the remaining amount of the deposit is $1000 or more and is retained in the account for at least 12 months from the date of deposit. That remaining amount still qualifies as an FMD. If the residual amount falls below $1000 within 12 months of the deposit being made, the entire amount of the deposit originally made is taken to have never been an FMD; and
• allow FMDs to be held in accounts of any term, provided the amount is not withdrawn within 12 months from the date of deposit. This means that deposits placed in "at call" accounts still qualify as an FMD, provided the amount is not withdrawn within 12 months (unless in "exceptional circumstances").
Date of effect
From 1 July 2002, persons in "exceptional circumstances" areas at the time the withdrawal is made are eligible to maintain the tax concession if they access FMD funds early. The restriction on partial withdrawals will also be removed with effect from this date. Removal of term deposit requirements will apply from 2 January 1999 (commencement of the FMD provisions).
Download an ATO fact sheet

==================================
Advertising Breaches
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Both the ACCC and ASIC are actively monitoring financial services advertising.
1. Westpac's Rocket Home Loan

Westpac Banking Corporation (Westpac) has altered its promotional campaign for the Rocket Home Loan, launched in early October 2002, following concerns raised by ASIC.

ASIC was concerned that certain representations in the advertising used in the Rocket Home Loan campaign, relating to the ability of Westpac's offset loan to reduce the loan repayment period on a 25 year loan by 10 years, could have been misleading.

Additionally, Westpac will write to over 1000 consumers who took out loans or applied for loans as a result of the advertisements , and explain the representations made in the advertisements.

2. Wizard's Rate Breaker
Wizard Mortgage Corporation Limited has been found by the Federal Court to have engaged in misleading or deceptive conduct in respect of a television advertisement for its home loan products. Justice Merkel also has made an order to restrain Wizard for 18 months from publishing or broadcasting advertisements for housing loans at specific interest rates with features the loans do not have.

The ACCC alleged that a television advertisement, broadcast in Melbourne, Brisbane and the Gold Coast during June and July 2001 for Wizard, misled consumers as to the features that were available with Wizard's 'Rate Breaker' 5.64 per cent interest rate housing loan. The features were: the capacity to have loan repayments directly credited from salary; the option of changing from monthly repayments to fortnightly or weekly repayments; and the absence of ongoing monthly fees. The features were only available to consumers who took out one of Wizard's other housing loans at a higher interest rate, not the Rate Breaker loan.

In ordering the injunction sought by the ACCC, Justice Merkel stated: "I am not satisfied that the procedures that Wizard has set in place since the advertisement are adequate to prevent a repetition of contravening conduct of the kind that has occurred".

He declined to order that Wizard implement a corporate compliance program or corrective advertising as sought by the ACCC, stating he was satisfied the injunction ordered was, in the circumstances, a sufficient inducement for Wizard. He did not regard it as appropriate or necessary for the court to exercise its injunctive power to impose such a program on Wizard.

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ADI Fit and Proper Persons
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The Senate Economics Legislation Committee has recommended that the Financial Sector Legislation Amendment Bill (No 2) 2002 be passed without amendment, although the minority Senators' report recommends amendments to the Bill to ensure the minimum criteria for the fit and proper person test are defined by regulation and be subject to disallowance.
The Bill was passed by the House of Representatives on 14 November 2002 with 33 Government amendments. The Bill amends a number of Financial Sector Acts. The most significant amendments are to the Banking Act 1959 which:
• provide for the application of a "fit and proper" test to directors and senior managers of ADIs (authorised deposit-taking institutions) and authorised NOHCs (Non-operating holding companies);
• provide APRA with the means to remove auditors who fail to perform adequately and properly;
• require ADIs, authorised NOHCs of an ADI and their subsidiaries, to notify APRA immediately of any breaches of prudential requirements and any material adverse developments;
• allow APRA to apply prudential standards on a consolidated group basis;
• provide additional grounds for APRA to revoke the authority granted to an ADI or NOHC where the application for the authority contained false or misleading information; and
• correct a discrepancy between the indemnity provisions of the Banking Act and the APRA Act which relates to the extent of protection available to APRA officers under these Acts.

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