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Updated Policy Statement 146
Licensing: Training of financial product advisers
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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.

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Increase in broker-originated lending
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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

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Mandatory Comparison rates
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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
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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
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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

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FSR Updates
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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

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Farm Management Deposits
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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

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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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