Outsourcing in financial services

ASIC has released two international consultation papers on outsourcing [from The International Organization of Securities Commissions' Standing Committee 3 on Market Intermediaries (IOSCO SC3) and the Basel Committee Joint Forum] and is encouraging interested persons to submit comments on either or both of these consultation reports.

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Internet Banking warning

APRA has reminded authorised deposit-taking institutions of the threats from "phishing" and key-logger and Trojan attacks.

APRA has strongly recommended ADI's which offer internet banking take precautions such as:
• introduce procedures to ensure that under no circumstances would a customer be
asked to reveal their PIN/password;
• implement strong authentication and control mechanisms to provide reliable
safeguards against identity theft;
• actively seek out fake websites or other scams which target their institution;
• ensure appropriate limits are in place for online transactions; and
• ensure fully documented incident response procedures are in place which are
communicated to all relevant staff members.

APRA said ADI's should also encourage their customers to protect themselves.

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Outsourcing shared services

ACCC has announced it will not intervene in the proposed joint venture of the voucher processing facilities of Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corporation.

According to ACCC, "the transaction will create a joint venture company, upon the completion of a competitive tender process, with the function of acting as a service entity. As a result, the parties to the arrangement will collectively outsource their voucher processing requirements, but will not provide these facilities downstream as a single entity. The banks will continue to compete for the provision of voucher processing services to downstream customers."

Such a transaction also must comply with APRA's Prudential Standard APS 231 on outsourcing.

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APRA proposes new capital risk weighting

APRA has released a discussion paper in which it proposes to strengthen the LMI prudential capital and reporting framework and the eligibility requirements for ADIs claiming the 50 per cent concessional risk weight on certain loans that are mortgage-insured.

Currently, under prudential standard APS 112 – Capital Adequacy: Credit Risk and associated guidance notes, ADIs qualify for a 50 per cent concessional risk weight on loans above 80 per cent LVR that are fully secured by registered mortgage over a residential property, and 100 per cent mortgage-insured through an ‘acceptable’ LMI. Without mortgage insurance, high-LVR loans attract a 100 per cent risk weight.

For non-standard loans, proposed amendments will require mortgage insurance on loans with an LVR in excess of 60 per cent for ADIs to claim the capital concession.

The proposal will amend the definition of ‘acceptable’ mortgage insurance to require insurance to be provided by an LMI that:
• is authorised by APRA; or
• is domiciled in a country APRA considers to have comparable prudential regulation.

Where the insurer or any reinsurer has contractual recourse to the ADI, or a member of the ADI’s consolidated group (excluding the captive LMI), the ADI will not be eligible for capital concessions.

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ASIC investigates mortgage broker advertising

ASIC has issued a warning to the mortgage broking industry regarding misleading advertising.

'Don't claim that you are independent or impartial if that's not true', Mr Greg Tanzer, ASIC's Executive Director of Consumer Protection and International said.

'In every case that we have examined to date, we found such claims were misleading. For example, you cannot be totally impartial if you only deal with a limited panel of lenders who are paying you commission', Mr Tanzer said.

Mr Tanzer issued the warning after ASIC accepted an enforceable undertaking from Structured Financial Solutions Pty Ltd not to use the words 'impartial' or 'independent' in any future advertising or promotional material.

ASIC considered the claims misleading and deceptive because Structured Financial Solutions advises consumers only about the lenders appointed to its panel. All of the lenders on the panel pay commission to Structured Financial Solutions.

ASIC has previously taken action against Fintrack and Mortgage Choice.

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FINANCIAL SECTOR ADVISORY COUNCIL REVIEW REPORT RELEASED

The Treasurer has released the Review of the Outcomes of the Financial System Inquiry 1997 by the Financial Sector Advisory Council (FSAC).

FSAC conducted a detailed evaluation of the financial sector reforms flowing from the Financial System Inquiry (which were announced on 2 September 1997) five years after their commencement. FSAC has now completed the review as it is just over five years since those reforms began, including the establishment of the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission.

Overall, FSAC is confident that Australia’s financial system and its regulation are on a firm footing and compare favourably with the rest of the world. As such, the Council notes that the Australian economy, and its financial system, has proven resilient in the face of considerable world economic and political turmoil.

The Review also identifies certain areas where the Council considers that regulatory challenges remain and the Treasurer will take into account its views when considering future options.

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