Mortgage duty reduction schedule

In 2007 Tasmania will abolish mortgage duty and South Australia will commence its duty reduction program with other states to follow in 2008.

• Queensland will halve its mortgage duty rate on 1 January 2008 and abolish mortgage duty on 1 January 2009.
• New South Wales will halve mortgage duty from 1 January 2010 and abolish it from 1 January 2011
  
• Western Australia halved its mortgage duty rate on 1 July 2006 and will abolish mortgage duty on 1 July 2008
  
• South Australia will reduce the rate of mortgage duty by a third (from current levels) on 1 July 2007 and on 1 July 2008 and will abolish the duty on 1 July 2009, and
  
• Tasmania halved its rate of mortgage duty on 1 July 2006 and will abolish mortgage duty on 1 July 2007.
  

Currently Victoria, ACT and NT have no mortgage duty.

In states where mortgage duty is payable, concessions may apply. Talk to your local Network Law firm for an estimate of duty payable.

Currently each state has special provisions for calculating the duty payable on mortgages or mortgage packages that secure property in more than one jurisdiction. In each state, mortgage duty is only payable on a proportion of the secured advances.

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New anti-money laundering laws start

The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) and the Anti-Money Laundering and Counter-Terrorism Financing (Transitional
Provisions and Consequential Amendments) Act 2006 commenced on 12 December 2006 when they received Royal Assent.

The AML/CTF Act applies to businesses providing designated financial services and gambling services and bullion dealers ("designated services" is defined in Part 1, section 6).

Austrac will remain the key AML/CTF regulator: it will monitor reporting entities’ obligations and be responsible for undertaking intelligence assessments for Australian government and law enforcement agencies.

The first stage of implementation took effect on 13 December 2006. These provisions include :

• the regulation of cross border movements of physical currency and bearer negotiable instruments (Part 4)
• the regulation of electronic funds transfer instructions (Part 5)
• establishment of a register of providers of designated remittance services (Part 6)
• regulations which may prohibit or regulate the entering into of transactions with residents of prescribed foreign countries (Part 9).
• record keeping requirements (Part 10 Divisions 1, 2, 4 and 7): a reporting entity must make a record of a designated service. The reporting entity must retain the record for 7 years. A reporting entity must also retain a record of an applicable customer identification procedure for 7 years after the end of the reporting entity’s relationship with the relevant customer.
  
• Parts 11 to 18 including offences such as the tipping off offences and other general offences in relation to false or misleading information or documents, and general administrative provisions including audit, information gathering and enforcement powers of Austrac.

Remittance services

The first AML/CTF Rules relate to reportable details of movements of bearer negotiable instruments and movements of physical currency, and the AML/CTF Rules regarding the registrable details in respect of the register of providers of designated remittance services.

Next stages

The next stages of implementation will be:

• 13 June 2007—AML/CTF compliance reports (Part 3, Division 5), correspondent banking (Part 8) and records about correspondent banking (Part 10, Division 6)
  
• 13 December 2007—identification procedures generally including for pre-commencement customers and certain low-risk customers (Part 2 except for Division 6 which will commence on 13 December 2008),AML/CTF programs (Part 7), records of identification procedures (Part 10, Division 3) and records of AML/CTF programs (Part 10, Division 5)
• 13 December 2008— ongoing customer due diligence (Part 2, Division 6), reporting obligations (Part 3, Divisions 1 to 4 and 6).
  

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Western Australia to trial daylight saving

Western Australia will introduce daylight saving on 3 December 2006, for a three-year trial, to be followed by a referendum in 2009.

During daylight saving, Western Australia will be 1.5 hours behind Adelaide, 2 hours behind Sydney, Melbourne and Canberra and 1 hour behind Brisbane.

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Anti-Money Laundering Bills introduced
The Government has introduced the first tranche of the Anti-money laundering/Counter-terrorism financing (AML/CTF) legislation into Commonwealth Parliament:

• The Anti-Money Laundering and Counter-Terrorism Financing Bill 2006
• The Anti-Money Laundering and Counter-Terrorism Financing (Transitional Provisions and Consequential Measures) Bill 2006

The 282-page AML/CTF bill has staggered operative dates. Specific operative dates include:

• Identification procedures: 12 months after the bill receives assent.
• Reporting obligations: 24 months after the bill receives assent.
• AML/CTF reports: 6 months after the bill receives assent.
• Cross-border currency transactions: when the bill receives assent.
• Electronic funds transfer instructions: when the bill receives assent.
• AML/CTF programs: 12 months after the bill receives assent.
• Record-keeping requirements: 6 months after the bill receives assent

The Attorney-General's Department AML website

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Low doc loan declared unjust

In Permanent Mortgages Pty Ltd v Michael Robert Cook and Karen Cook [2006] NSWSC 1104 the NSW Supreme Court declared a loan contract and mortgage unjust notwithstanding the judge's description of the borrowers as "foolish", following the decision in Khoshaba.

The borrowers (defendants) executed a mortgage over their home. They were substantially in arrears and the mortgagee (plaintiff) sought possession.

The borrower's expert described the loan's features:

"78 The public interest is one of the matters that the court must have regard to under s70. On this issue over the objection of the Plaintiff, I admitted evidence by Dr Steve Keen, Associate Professor of Economics and Finance at the University of Western Sydney.

79 After reviewing the Defendants’ borrowings, for reasons which he gave in a lengthy and detailed report, he categorised the subject mortgage as evidencing a “Ponzi” loan, namely one which “can only be repaid by either taking out a larger subsequent loan, or by selling the asset that was financed using the loan”. He also described it as a “low doc” loan, that is one where borrowers self verify their income in the application process. He said that such loans are:

“designed mainly for the self-employed or those with irregular income who do not have the documentation required to obtain a conventional housing loan.”

80 As to the public interest involved in “low doc” and “Ponzi” loans, Professor Keen said:

“(a) Standard home loans are limited in size by the need for the borrower to establish that he/she can repay the loan out of income.

(b) Legitimate “Low “Doc Loans” are a necessary development of income-based loans


(c) Ponzi Loans are loans that can only be repaid by either taking out a larger subsequent loan, or by selling the asset that was financed using the loan.

(d) Ponzi Lending can occur in Low Doc Loans because the loosening of income-verification standards enables loans to substantially exceed the size that could be met out of borrower’s actual income.

(e) The Subject Loan to the Cooks was a Ponzi Loan.

……………………………………

(g) Were the practice of Ponzi Lending to become widespread, it would substantially increase the tendency of the Australian financial system to asset bubbles and subsequent financial crises, by:

i accelerating the accumulation of excessive debt during the up-swing to an asset bubble;

ii accelerating the rate of decline during the bursting of the bubble; and

iii causing the recovery to take much longer.

(h) Ponzi Loans thus have adverse economic consequences that extend well beyond the immediate parties to the loan agreement.

......

85 Against any public interest in discouraging loans of the type identified by Professor Keen and Mr Carraill, there is, of course, a public interest in the enforcement of contractual obligations freely entered into. In the result, I do not regard the public interest as of much significance in resolving this case. Rather, I think the greater focus should be upon factors personal to the Defendants, or more directly concerned with the particular transaction...

88 Whether I should hold the mortgage unjust in this case involves a balancing exercise. On the one hand are the circumstances that the Defendants speak English as their first language; were experienced borrowers; had the services of a solicitor; were extremely anxious to obtain the loan; and were prepared to sign false statements and procure false certificates. On the other hand, the beneficial nature of the Code indicates that it was intended to protect the unsophisticated and meagrely educated, such as the Defendants, from their own foolishness. Given the means of the Defendants and their credit history, the Plaintiff, in my view, was aware, or would have been aware, had it made the most perfunctory of enquiries, that the Defendants were not capable of servicing the loan even at the lower rate of interest and could only satisfy their obligations by selling the mortgaged property for a sum sufficient to cover the principal and interest. It was likely that they would thus become obligated to pay interest on the amount of the credit, not at 8.8% p.a., but at the much higher rate of 13.8%....

92 Undoubtedly, the Defendants were foolish but, in my opinion, the circumstances of this case constitute the “something more” contemplated by Basten JA [in Khoshaba], in that the Plaintiff or its agents who were, or should have been, aware of the foolishness had, in effect, encouraged it. I am of the opinion that the subject mortgage and the credit contract, pursuant to which it was given, should be held to be unjust within s70 of the Code."

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Daylight saving starts 29 October
Tasmania started daylight saving on 1 October 2006. Australian Capital Territory, New South Wales, Victoria and South Australia start on 29 October. All end on 25 March, 2007.

Queensland, Western Australia and the Northern Territory do not have daylight saving.

Confused? Use ABC's Clock.

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Credit Code E-commerce amendments commence
The e-commerce provisions of the Consumer Credit and Trade Measurement Amendment Act 2006 and the Consumer Credit Amendment Regulation (No.1) 2006 commenced on 9 October 2006.

The objectives of the Act in relation to ecommerce:
• facilitate the application of the electronic transactions legislation in each State and Territory to the Consumer Credit Code;
• ensure that consumer protection is not diminished as a result of a debtor transacting in an electronic environment.

In particular amendments have been made to provide for a debtor to specifically consent to receive electronic communications and notices.

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Causes of Systemic Issues

A systemic issue for an organisation is an issue which has been raised in a dispute or several disputes which will affect a class of people in addition to those who have complained about it.

The September 2006 Bulletin from the Banking and Financial Services Ombudsman contains an extract of a recent presentation given by Diane Carmody, General Manager BFSO on how the BFSO deals with systemic issues in organisations (as opposed to industry-wide issues).

In the paper she said:

Between September 2001 and June 2006 BFSO has investigated and resolved 70 systemic issues. Some of the causes of the systemic issues are:

• Failure to disclose information about the operation of an account or facility
• Ambiguous and misleading disclosure
• Computer programming errors
• Human intervention
• Complex product packages
• Mergers and acquisitions
• Contract and calculation errors – fixed rate loans

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Who can purchase money be paid to?: insist on written disbursement authority from conveyancer

In Clarey v Permanent Trustee Co Limited & Anor [2005] VSCA 128 (19 May 2005), the vendor of a property successfully argued that until she was paid the balance of the purchase price, the purchaser was not entitled to register the transfer and the purchaser's lender was not entitled to register any mortgage from the purchaser.

In this case, the vendor did not receive the balance of the purchase price because her conveyancer misappropriated the funds after forging the transfer. The issue was whether the conveyancer had the vendor’s authority to receive the balance of the purchase price in the form of a cheque drawn payable to the conveyancer.

When the vendor found out that the funds were stolen she stopped registration of the transfer and the mortgage of the purchaser's lender (Permanent Trustee Co) which had provided the funds.

The Victorian Court of Appeal said:

"95...We accept that Permanent was not required (in the sense of being legally bound) to pay anything to the plaintiff. As his Honour said, Permanent’s legal obligations were to its client, the purchaser, and thus to disburse the loan funds as the purchaser directed. We also accept therefore that, if the plaintiff’s claim against Permanent were for breach of legal obligation to pay her the purchase price, the claim would be bound to fail. But the plaintiff’s claim against Permanent was not for compensation for breach of a legal obligation to pay her the purchase price. Her contention was that until she was paid the balance of the purchase price, by whom she did not care, the purchaser was not entitled to register the transfer and Permanent was not entitled to register any mortgage from the purchaser. And in point of principle that contention was correct.

96 A purchaser is not entitled to a transfer or thus to be registered as transferee until the purchase price is paid. So long as a vendor remains unpaid, he or she has every right to prevent a purchaser’s lender from being registered as mortgagee. A purchaser may satisfy the obligation to pay the purchase price by paying it either to the vendor or to a duly authorised agent of the vendor. But the purchaser cannot discharge the obligation to pay the purchase price by paying it to an agent who is not authorised to receive it or to an agent in a manner in which the agent is not authorised to receive it. In the result, payment to an agent who is not authorised to receive it or in a manner in which the agent is not authorised to receive it does not entitle the purchaser or his mortgagee to be registered. So, unless Chalhoub were shown to have had actual or ostensible authority to accept payment in the form of a cheque drawn payable to Middle East, or that the plaintiff was estopped from denying that he had such authority, she was entitled to resist registration. Permanent’s legal obligations to the plaintiff were in that sense beside the point.

97 We also think that his Honour was, with respect, wrong in fact. As the evidence stood, it was not open to conclude that Chalhoub had actual authority to receive the balance of the purchase price in the form of a cheque drawn payable to Middle East Finance. Apart from anything else, the fax of 5 September 2000 expressly limited Chalhoub’s authority to receiving the balance of the purchase price in the form of a bank cheque drawn payable to the plaintiff...

99...At common law a vendor’s solicitor did not have authority to receive payment on behalf of the vendor, and while the position was altered by statute the statute does not apply to "conveyancers" who are not solicitors. ... even if there were some basis in the evidence for concluding that "conveyancers" customarily hold funds on trust for their clients, there was nothing to indicate that it is in the usual and ordinary scope of authority of a "conveyancer" to receive the purchase price on behalf of a client in the form of a cheque drawn payable to the conveyancer."

To avoid the risk of possible arguments later, a purchaser or its lender should not accept a general authority to pay purchase money as directed by a conveyancer who is not a solicitor. There should be an itemised list of cheques for settlement signed by the vendor.

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Unjust loans: the role of the lender

In Perpetual Trustee Company Limited v Albert and Rose Khoshaba [2006] NSWCA 41, the borrowers sought relief from their obligations under their loan contract. They were successful. Departure by the loan manager from the loan guidelines was a relevant consideration in the determination of ‘justness’.

Facts

Mr and Mrs Khoshaba are pensioners and members of the Assyrian community in Sydney. In late 2000 they decided to invest in a trolley-collecting business (which turned out to be a pyramid scheme).

They were referred by the business operator to Combined Home Loans Pty Ltd (“CHL”). CHL submitted a loan application to Australian Mortgage Wholesalers Pty Ltd (“AMW”), whose role it was to assess the application on the Perpetual Trustee’s behalf in accordance with specified Guidelines.

The loan application, initially submitted in Mr Khoshaba’s name alone, was deficient in several respects. It falsely described Mr Khoshaba as being employed and earning a salary of $43,000. The trial judge found that Mr Khoshaba had no knowledge that this information had been submitted to the lender. Furthermore, that part of the application that inquired as to the purpose of the loan was left unanswered. After it had been submitted, the loan application was amended to include Mrs Khoshaba as a joint applicant. The trial judge found that her signature on the form had been forged.

Pursuant to the guidelines, AMW was required to verify the employment and income position of the applicants. The Guidelines also required that full details of the purpose of the loan be given. In neither respect were the Guidelines followed.

In February 2001 Perpetual Trustee, as trustee for a securitised mortgage programme, lent the Khoshabas $120,000 and took a first mortgage over their family home (the ‘Loan Agreement’). The Khoshabas forwarded $100,000 of these monies to their daughter, who invested them in the business (the ‘Investment Agreement’).

The trial judge found that Perpetual Trustee had no knowledge of the Investment Agreement, and that it had no involvement in falsifying the loan application. There is no suggestion that Perpetual Trustee or anyone acting on its behalf played any role in inducing the Khoshabas to enter into the Investment Agreement. Nor was there any suggestion that the Perpetual Trusteet or anyone acting on its behalf had any information about the investment proposed or its risks and possible returns.

The business collapsed leaving the Khoshabas without the expected flow of revenue and a debt of $87,572. They sought relief from the Loan Agreement pursuant to the Contracts Review Act 1980 .

The trial judge found the Loan Agreement to be unjust for two principal reasons:

• Perpetual Trustee’s failure, contrary to prudent lending practice, to follow its own lending guidelines in assessing Mr and Mrs Khoshaba’s loan application; and
• Perpetual Trustee’s failure to recommend to Mr and Mrs Khoshaba that they receive independent legal or accounting advice.

The Appeal decision

In rejecting the lender's appeal, the NSW Court of Appeal found that the fact of departure from the guidelines was a relevant consideration in the determination of ‘justness’. But where the departure from the Guidelines is not evidence of departure from prudent lending practice or normal and appropriate lending practice it is not decisive.

In this case departure from the guidelines was however held to be a relevant circumstance: if the Guidelines had been observed the loan would not have been made.

The court took particular note of one departure from Guidelines: the section of the standard form application about the purpose of the loan was left blank. "This indicates that... the Appellant “was content to lend on the value of the security”. In my opinion, that approach is entitled to significant weight in the determination of unjustness....

On the information actually available to the Appellant, a husband and wife – one with a $43,000 per annum income and the other a pensioner – borrowed $120,000 for, as far as the Appellant cared to know, immediate expenditure. Enforcing a security against the personal residence of such borrowers should not be treated as if it were the first resort. That is what, on paper, the Appellant can be described as having done...

The fact that the lender was willing to lend on the value of the security alone, and was indifferent to the purpose of the loan, is entitled to significant weight in the determination of unjustness."

"Had the Appellant or its representatives made any inquiries about the purpose of the loan I would have allowed the appeal. I do not mean to suggest that the Appellant had to determine that the proposed investment was reasonable and capable of servicing the loan. It is the indifference, suggesting that the Appellant was content to proceed on the basis of enforcing the security, which I find determinative."

This was a decision based on the facts but it gives some guidance on the court's view of the obligation of lenders.

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Privacy case notes

The Privacy Commissioner, Karen Curtis, has released case notes relating to personal information handled by a banking institution and a credit provider:

• In U v Banking Institution [2006] PrivCmrA 20, the complainant and their spouse had entered into a loan with a banking institution. After moving addresses, the couple contacted the institution to update their details. However, the banking institution sent the next statement addressed to one of them (the complainant) at their old address. The complainant and their spouse telephoned the banking institution on several occasions, alerting them to their updated contact details. Despite this, some months later the banking institution sent loan default notices to the old address, with the word 'default' visible through the plastic window of the envelope.

  The complainant complained to the banking institution about the incorrect address and the embarrassment they claimed had resulted from the word 'default' being visible to third parties, and received both a verbal and written apology. Dissatisfied with the handling of their complaint, the complainant wrote to the Privacy Commissioner. The Commissioner found that a failure by the banking institution to update the contact details was a breach of NPP 3.

  Regarding the word 'default', the Commissioner accepted the banking institution's assertion that its external mailing house had incorrectly folded the letter and that this would not recur.

• In W v Credit Provider [2006] PrivCmrA 22, a credit provider had listed a 'serious credit infringement' on the complainant's consumer credit information file in relation to a loan. In accordance with its then record retention policy for a serious credit infringement, the credit reporting agency removed the listing after five years. However, the complainant subsequently discovered that the credit provider had re-listed the infringement on the file.

  The complainant was dissatisfied with the response they had received from the credit provider after complaining about the matter and lodged a complaint with the Privacy Commissioner. The credit provider asserted that, at the time of the second listing, the previous listing did not appear on the complainant's file. However, evidence disproved this. The respondent also suggested that the second listing was for a different reason: the first had been for a failure by the complainant to comply with their credit obligations; the second was due to possible fraud.

  The Commissioner took the view that any subsequent refusal to fulfil credit obligations after the first listing formed part of the same infringement and that no evidence had been provided supporting the claim that the second listing was made due to the complainant having committed fraud. For these reasons, the Commissioner found that the credit provider had breached section 18E(1)(b)(x) of the Privacy Act, which allows credit providers to only make one serious credit infringement listing in relation to the same infringement.

  The credit provider advised the Commissioner that it had changed its procedures for listing infringements. The Commissioner was satisfied with these actions and, as the complainant did not substantiate their claim for compensation, the Commissioner closed the complaint.
  

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APRA identifies supervisory issues

In a recent speech by APRA Chairman John Laker he identified issues relating to financial institutions that APRA was monitoring against a background of:

• the "inexorable" process of consolidation...in the last five years, the number of banks, building societies and credit unions — known as authorised deposit-taking institutions (ADIs) — has fallen from 281 to 223; general insurers from 162 to 133; life insurers and friendly societies from 84 to 62; and superannuation funds, where licensing has spurred the process, from 4,233 to 1,147.
  


• the intensification of competition across a range of financial products...in mortgage and small business lending, in on-line deposit accounts and in classes of life and general insurance business.
  

He said APRA's supervisory monitoring had identified the issues of credit standards, pricing for risk, product innovation, ‘offshoring’, and pandemic planning.

In respect of credit standards Laker observed that:

industry is shifting from traditional rules of thumb under which debt servicing is constrained by gross income, to what are called ‘income surplus’ models under which debt servicing is constrained, ultimately, by the need of the borrower to maintain ‘subsistence’ spending. Put another way, many lenders now assume that borrowers will accept near or actual subsistence levels of family consumption in order to maintain mortgage payments. These models allow ADIs to materially increase the maximum amount they areprepared to lend to a given borrower. The old ‘30 per cent of income rule’ is giving way to the ‘50 per cent of income rule’, and beyond!

Our analysis also shows a wide dispersion in maximum loan amounts across institutions. The most aggressive ADIs appear to be willing to lend almost twice as much as the most conservative ADIs to a hypothetical household with the same basic characteristics. For example, the maximum owner-occupied loan ADIs are prepared to offer a couple with a gross annual income of $150,000 and one child ranges from $300,000 to almost $600,000.

In the area of pricing for risk he observed in respect of lenders:

The concern is whether the higher risk of default of low-doc loans is being factored into their pricing. Low-doc loans are now being advertised at rates comparable to the ‘headline’ rate for fully verified mortgages, and the spread between actual rates paid on low-doc and conventional loans has halved over the past few years. Time and an adverse turn in Australia’s economic circumstances will tell whether this margin for risk is adequate.

On the topic of product innovation he expressed caution in respect of reverse mortgages:

Put in simple terms, a reverse mortgage is a race between interest rates and housing price growth, with the finish line set at the borrower’s death or moving. High interest rates and low housing price growth, combined with greater longevity, would make this a risky race for the lender.

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Consumer Credit Code e-commerce update

The Consumer Credit Amendment Regulation (No.1) 2006 was gazetted on 4 August 2006 and will commence on the proclamation of the e-commerce Code amendments.

The amendments will not take effect until after the Queensland election on 9 September.

The objective of this regulation, as set out in the Explanatory Notes accompanying it, is to amend the Consumer Credit Regulation 1995 to facilitate the application of electronic transactions legislation.

The regulation:
• amends a number of sections to clarify how they apply if there is an electronic communication;
• inserts print or type requirements for electronic communications; and,
• lists the transactions, documents or information that must not be made, given or provided by electronic communication.

These amendments to the Consumer Credit Regulation 1995 complement the electronic transactions amendments to the Consumer Credit Code made by the Consumer Credit and Trade Measurement Amendment Act 2006.Section 2 provides that the commencement date for this amending regulation will be the day that s8 of the Consumer Credit and Trade Measurement Amendment Act 2006 commences.

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Is your customers' personal information secure?

Privacy Case Note 16 discusses the complaint of a customer against their financial institution which terminated the additional cardholder’s access to the credit account as requested but allowed the additional cardholder's internet access to the account to remain active, thereby allowing the additional cardholder to view the current transaction history of the credit account.

The financial institution resolved the matter directly with the complainant by providing an explanation of the incident, amending its practices and agreed to a payment of compensation.

The financial institution advised that the credit account was linked to internet banking whilst the additional cardholder status was still valid. As the financial institution did not require the principal cardholder to give approval for internet access to be granted to the additional cardholder, the request was manually approved and sent to the operations centre of the financial institution for processing. The request to remove the additional cardholder took twenty four hours to process and as such, the existence of the internet linkage to the credit account was not apparent until the day after it was requested. The financial institution explained that although the complainant requested cancellation of the additional cardholder’s access, the manual verification process and the twenty four hour processing period meant that the internet linkage was not detected and actioned by the financial institution.

The financial institution advised that the process for verifying and allowing access to credit accounts via internet banking had subsequently been completely automated so that when access is removed or the account is closed, the corresponding internet linkage is also amended or removed.

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Revised exposure draft AML/CTF Bill and draft AML/CTF Rules

The Minister for Justice and Customs, Senator the Hon Chris Ellison, has released a revised exposure draft AML/CTF Bill 2006 and draft AML/CTF Rules for a period of three weeks of public consultation from 13 July 2006.

The revised exposure draft AML/CTF Bill 2006 and draft AML/CTF Rules follow consideration of comments on the Exposure Bill and sample Rules released on 16 December 2005 and the findings of the Senate Legal and Constitutional Legislation Committee inquiry into the exposure Bill.

The Minister also released a summary of changes to the exposure Bill and a summary of the draft AML/CTF Rules.

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Titles Office fees change from 1 July

Queensland, New South Wales, Victoria, South Australia, ACT and Western Australia have introduced a new schedule of fees for land title services from 1 July 2006 (WA from July 10, 2006). Northern Territory and Tasmania have not announced any changes.

For more information contact your local Network Law representative.

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Unsolicited increases in credit card limits

The Banking and Financial Services Ombudsman's latest Bulletin (pdf) discusses procedures lenders should follow in resolving disputes over making unsolicited offers to increase credit card limits.

Giving an example of a person on an annual income of $38,000 who was experiencing difficulty meeting the minimum monthly payments on credit cards with two lenders with limits totalling $41,000, the Ombudsman has suggested that lenders should apply their criteria for new credit to the financial position of the disputant at the time the unsolicited offer was made to establish the amount that should have been offered.

The Ombusdman also discusses a number of cases where inaccurate or incomplete information was provided to the lender in the application for a new credit card. In some cases it is said that, if the lender had undertaken verification of that information, the inaccuracies or missing information could have been discovered.The Ombudsman considers that in most cases of credit card lending the lender is entitled to rely on the information provided by the applicant. However, he will consider whether the information provided was clearly incorrect or nonsensical on its face.

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Reform of personal property securities

There is a different system in each State of Australia for taking and registering security interests (including leases, hire purchase and retention of title arrangements) over most types of tangible and intangible personal property (including livestock, crops, intellectual property and receivables) ranging from motor vehicles and boats to liquor licences, water rights, taxis and gaming machines.

But it now appears that a consensus exists for a unified national law and registry where "one form fits all".

The Standing Committee of Attorneys-General has released an Options Paper (Pdf) for consultation.

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Corporate and Financial Services Regulation Review.

The time for submissions in respect of the Consultation Paper entitled Corporate and Financial Services Regulation Review, released by the Parliamentary Secretary to the Treasurer has closed.

The paper covers the areas of financial services regulation, company reporting obligations, auditor independence, corporate governance, fundraising, takeovers, collective investments and dealing with regulators.

It is expected that, following consultation new legislation will be introduced by the end of the year.

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"Do Not Call" Register Bill introduced

The Minister for Communications, Senator Coonan, has introduced the Do Not Call legislation into Commonwealth Parliament.

The Do Not Call Register Bill 2006 and the Do Not Call Register (Consequential Amendments) Bill 2006 provide a framework to establish a Register that would allow individuals to opt-out from receiving unsolicited telemarketing calls.

The Bill requires the Australian Communications and Media Authority (ACMA) to establish and oversee a Do Not Call Register and prohibits telemarketers from calling a number which has been included on the Register.

The Register will be limited to individuals: the Government has decided not to include small businesses on the Register.

Individuals will not be charged to put their number on the Register. The Australian Government will contribute more than $17 million towards the cost of establishing the Register, with the telemarketing industry contributing $15.9 million over four years.

Exemptions will be provided for certain types of telemarketing calls such as calls from charities, registered political parties, independent Members of Parliament and candidates, religious organisations, educational institutions (where the call is made to a student or alumni) and government bodies.

ACMA will be responsible for the enforcement of the legislation and a range of penalties will be available depending on the nature of the breach. ACMA will be able to issue formal warnings or infringement notices or commence court proceedings. The Courts will be able to impose fines ranging from $1,100 to $1.1 million.

It is intended that ACMA commence with implementation of the Register as early as possible in 2007.

You can download the Bills and Explanatory Memoranda from the Parliament website.

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Mandatory Comparison Rates Review Research

Mandatory Comparison Rates Review Research

Even though the sunset date for publishing mandatory comparison rates has been extended to 1 July 2007, the research into whether MCR should be retained, continues.

Swinburne University, on behalf of the Director of Consumer Affairs Victoria, has finished a research project into the effectiveness of mandatory comparison rates in guiding consumer choices (The Final Report is "The Effectiveness of Mandatory Comparison Rates: Information, capacity and choice"). The results of the research will feed into the national review of comparison rates that is being undertaken by Hawkless Consulting (see their Preliminary Report (pdf)).

The results of Swinburne's preliminary research consisted of a literature review (First Issues Paper) and the results of the consumer survey (Consumer Research Issues Paper).

Swinburne's final report says their research suggests that there are three broad approaches available to regulators for improving information provision to consumers of credit:

• Setting out broad parameters for suppliers in terms of what information is to supplied and relying largely on industry self-regulation;
• More prescriptive approach with more detail requiring information to be provided as an attempt to make comparison easier (this is where the MCR regime would fit);
• Direct collection and provision of information in a comparable form. This is the approach adopted, for example, by the Financial Services Authority in the UK in developing an online mortgage comparator.

But they have not made a recommendation:

"Ensuring that consumers negotiating complex markets have access to comprehensible and comprehensive information is an endemic issue for public policy. Whether the MCR is retained or not, the issue will remain. In this review we have found that the MCR is a useful tool for consumers and have made some pragmatic suggestions for improving its usefulness, as well as pointing to the need for more research on how consumers go about information search and, in particular, testing different approaches to information provision with consumers."

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Consumer Credit Code amendment passed

The Consumer Credit and Trade Measurement Amendment Act 2006 was passed by Queensland Parliament on 21 April 2006. The Act includes amendments to the Uniform Consumer Credit Code to provide for e-commerce and for the extension of the sunset date of mandatory comparison rates to 1 July 2007.

The e-commerce amendments will commence on proclamation, which is likely to occur in early July 2006. The extension to the comparison rates sunset clause took effect on 2 May (when the Bill was assented to).

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Bill Facilities Regulation by Consumer Credit Code

Bill Facilities Regulation by Consumer Credit Code

The UCCCMC has invited comments on the Consumer Credit (Bill Facilities) Amendment Regulation 2006 which will apply the Code to credit arising out of a bill facility unless the credit is provided by an authorised deposit-taking institution. The Explanatory Notes provide background to the Regulation.

Section 7(5) of the Code provides that:
This Code does not apply to the provision of credit arising out of a bill facility, that is, a facility under which the credit provider provides credit by accepting, drawing, discounting or endorsing a bill of exchange or promissory note. However the regulations may provide for the application of the Code to the provision of all or any credit arising out of such a facility.

The closing date for submissions has been expedited to 12 May 2006 because of concerns that the use of the bill facilities exemption for consumer credit is being exploited.

The Department of Consumer and Employment Protection in WA has noted the emergence of fringe providers operating in the WA marketplace using promissory notes. Similar examples have been noted in New South Wales using bills of exchange. In both cases these credit providers target highly vulnerable consumers including Indigenous consumers and Centrelink recipients.

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Consumer credit ecommerce amendments

The Consumer Credit and Trade Measurement Amendment Bill 2006 (pdf) was introduced into Queensland Parliament on 28 March 2006.

The objectives of the Bill in relation to credit matters are to:
• facilitate the application of the electronic transactions legislation in each State and Territory to the Consumer Credit Code;
• ensure that consumer protection is not diminished as a result of a debtor transacting in an electronic environment; and
• extend the sunset clause in relation to the mandatory comparison rate regime in the Consumer Credit Code by one year to 30 June 2007 to enable a review of that regime to be completed.

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Western Australia mortgage stamp duty changes

The Western Australia Premier has announced that stamp duty on mortgages would be halved on July 1, 2006 and completely abolished by July 2008.

Also, from January 1, 2007 stamp duty on hiring transactions will be completely abolished.

The Government has also committed to abolish stamp duty on the sale of 'non-real' business property such as goodwill, intellectual property and statutory licences, from July 1 2010.

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Privacy case note: is marital status necessary?

In D v Banking Institution [2006] PrivCmrA 4 the complainant alleged that the banking institution was gathering unnecessary marital status information for the purpose of opening a deposit account.

The banking institution advised the complainant that it was unable to open the account without entering information into the 'marital status' field on its computer system. It offered a 'workaround' as system changes could not occur quickly. (The workaround was that it would use the response of “single” in the mandatory data field, and it would include a note stating that the entry may not reflect actual marital status.)

The Commissioner's view was that the collection of marital status information for the purposes of opening a deposit account was unnecessary. The banking institution agreed that the collection of marital status information would not be considered necessary for its functions or activities; in this case because the complainant’s marital status had no bearing on the complainant’s eligibility to open the account.

In consultation with the Commissioner, the banking institution agreed that it would change its computer system so that when individuals applied for a deposit account, they would no longer be required to disclose their marital status if they did not wish to. Further the banking institution agreed to report to the Commissioner on the progress of the implementation program and would also raise the matter with its industry body as it appeared to be an industry-wide practice.

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APRA fit and proper person standards

The Australian Prudential Regulation Authority (APRA) has released three new fit and proper standards for acceptable practice in the appointment of Board directors, senior management, and certain auditors and actuaries: APS 520 Fit and Proper (for authorised deposit-taking institutions), LPS 520 Fit and Proper (for life companies) and GPS 520 Fit and Proper (for general insurers).

The standards come into effect from 1 October, 2006.

The framework consists of principles-based prudential standards and separate prudential practice guides, which provide non-binding guidance on meeting these new standards and on prudent practices in fit and proper matters.

Prudential Practice Guide APG 520 Fit And Proper (ADI's)
General Insurance Prudential Practice Guides
Life Insurance Prudential Practice Guides

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Mandatory comparison rates extended for 1 year

The Uniform Consumer Credit Code Management Committee reports that the Ministerial Council of Consumer Affairs has agreed to extend the sunset date for comparison rates for a year until 30 June 2007. An extension of a year was agreed to accommodate the possibility that the Queensland Government may call an election in the interim.

A draft of the amendment to the Code has been formulated and will be introduced in the early part of 2006.

Consultation on the Preliminary Impact Statement has now closed however a copy of the paper is still available. Hawkless Consulting will consider the submissions which will inform the drafting of the Final Decision Making Preliminary Impact Statement to be provided to MCCA for consideration and decision.

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ASIC launches reverse mortgage calculator for seniors

ASIC has issued a reverse mortgage calculator for seniors.

A reverse mortgage allows an older person with assets but little income to borrow money secured against their home, without having to pay back either the amount they borrowed or the interest due until they leave their home or die. Instead, the debt and interest builds up
(or compounds) over time.

The calculator shows the effect on the equity in a borrower's home based on decisions they may make about:

* how much they borrow;
* whether they take an initial lump sum, or arrange regular payments or a combination of both;
* how long they borrow for;
* interest rates and various fees; and/or
* changes in home values.

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Verifying the mortgagor's identity: new Queensland requirements

From 6 February 2006 the Queensland Land Title Act 1994 (for freehold land) and the Queensland Land Act 1994 (for state leasehold land) will provide that a mortgagee intending to take a mortgage over land as security for a debt or liability, must, prior to lodging a mortgage instrument or a transferof mortgage instrument for registration in the land registry, take “reasonable steps” to ensure that the person who executed the instrument as mortgagor is identical with the person who is, or who is about to become, the registered proprietor of the lot or the interest in the lot.

Under the Act, a mortgagee takes “reasonable steps” if they comply with the practices included in the Land Title Practice Manual. In essence, these practices reflect the ‘100 points of identification’ provisions under Commonwealth legislation governing certain financial transactions, namely, the Financial Transaction Reports Act 1988 and the Financial Transaction Reports Regulations 1990 and to ensure that the mortgagor (whether the borrower or a third party) was in fact the registered owner (or entitled to be reghistered as owner) of the mortgaged property and therefore entitled to deal with the property.

However there may be circumstances where a lender should make further enquiries.

If a mortgagee fails to take "reasonable steps" and its mortgage was fraudulently executed, the mortgagee may lose its indefeasible title and its entitlement to compensation from the State.

The Registrar of Titles has issued an Alert containing Guidelines but he will not provide an exhaustive list of reasonable steps a lender must take.

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Mandatory Comparison Rates review

The Preliminary Regulatory Impact Statement (pdf) into the effectiveness of mandatory comparison rates (MCR) has been released.

The Regulatory Impact Statement will be a key factor in deciding whether the comparison rate provisions will continue to apply in their current form, be changed, or deleted entirely from the Consumer Credit Code.

The preliminary findings are inconclusive:

"The comparison rate does assist consumers to identify the true cost of credit although it is recognised that the “true” cost of credit can only be fully ascertained once the loan has been repaid and all actual costs incurred are realised.

Based on the cost and benefit data provided to date, there remains some uncertainty as to whether the ... outcomes have been achieved at a net benefit to the community.

The situation in the future whereby the mandatory disclosure requirements sunset on 30 June 2006... creates a risk of information asymmetry resulting in some detriment to consumers who may engage in a fixed term credit contract without an understanding of the true cost of that credit contract. This risk is not able to be calculated with certainty due to the absence of statistically reliable empirical data.

The effect of ceasing the MCR regime would appear to have minimal negative impacts on credit providers and a slightly increased risk of confusion for consumers that is partly offset, in the mortgage industry particularly, by the existence and growing use of secondary market players: independent information providers and brokers.

If it is not possible to demonstrate a net benefit to the community from the continuation of the MCR regime, there will be a strong case for MCR to end on 30 June 2006.

The degree to which industry is meeting its obligations to comply with the comparison rate provisions of the Code would appear to be mixed, with the home loan sector providing the highest level of compliance and the motor vehicle sector reported by jurisdictions as the lowest level of compliance.

Data is not yet available to indicate that the benefits of the comparison rate provisions outweigh the cost to industry. Enhancements to the MCR regime assessed to date do not appear to greatly enhance the benefit/cost balance.

Most of the benefits obtained by consumers since the introduction as a result of the publication and disclosure of comparison rate information remain theoretical."

The Ministerial Council on Consumer Affairs (MCCA) introduced mandatory comparison rates with a three year sunset clause, meaning that at present, the provisions will cease to have effect after 30 June 2006. Their operation must be reviewed prior to 30 June 2006 and in time to permit MCCA to make a decision and implement that decision.

The preliminary RIS seeks further information from stakeholders, other interested parties and
members of the public on the effectiveness, impacts (including costs and benefits) and changes to the MCR regime to enable an informed decision on whether to continue with the requirements or allow them to sunset.

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Consumer Credit pre-contractual disclosure

An explanatory package (pdf) containing proposals to streamline the essential pre-contractual information provided to consumers has been released for consultation.

The package contains draft Consumer Credit Code amendments, which feature a new-look financial summary table containing essential information for consumers about the credit contract together with a summary of other information.

The new formats are intended to make it easier than it is now for consumers to understand such product features as a 'honeymoon' interest rate on a home loan or a credit card concessional interest balance transfer.

Submissions close 31 March 2006

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