Australian Regulatory Compliance Review

Compliance Update

Two recent cases give insights into the courts' view of compliance programs: BMW v ACCC and ACCC v George Weston.

In BMW Australia Limited v Australian Competition & Consumer Commission [2004] FCAFC 167 the Full Court of the Federal Court of Australia found that BMW had breached the Trade Practices Act (TPA) by using safety warnings which did not comply with the Australian Safety Standards on the jacks in its 318i models.

On appeal BMW argued against an order of the trial judge that an external auditor of BMW's TPA compliance program be appointed. The Full Court said there was no legislative authority for such an order and even if there was, it found that the relevant matters (eg wilful refusal to include certain issues into its compliance program or a history of non-compliance) had not been established.

In Australian Competition & Consumer Commission v George Weston Foods Limited [2004] FCA 1093, George Weston Foods Limited was fined $1.5M in relation to a price fixing attempt by a senior executive relating to the price of flour.

The trial judge rejected the ACCC's request for orders relating to a compliance program as he was satisfied that the company had a serious and well designed compliance program. The executive knew his telephone call from a public telephone to a competitor was illegal. "No compliance program can effectively deal with deliberate breaches by those at Board level."

The size of the penalty reflected the fact that while the executive was dismissed and no actual damage was suffered:

no official disclosure was made to other employees of that fact or the reason

he was paid a generous severance amount

he was immediately re-employed as a 2 day a week consultant at the same pay

an early decision was made not to approach ACCC

.

The judge thought the penalty of $1.5M suggested by ACCC was very much at the low end the range but accepted it.

APRA reviews loans risk weighting

The Australian Prudential Regulation Authority (APRA) has released revised criteria for authorised deposit‑taking institutions (ADIs) to qualify for the concessional risk‑weighting of residential mortgage lending for capital adequacy purposes.

The revised criteria ensure that the 50 per cent risk-weight applies only to residential mortgage lending by ADIs which have adequate procedures to gauge the ability of the borrower to meet repayment obligations and to assess independently critical information in respect of the borrower. This new element is targeted at low-doc loans.

To be eligible for the concessional risk‑weighting, ADIs must also implement:

policies for determining the marketability of residential properties offered as security;

documented procedures regarding the valuation of properties; and

processes for outsourcing any part of the credit assessment process to third parties.

The revised prudential standard covering changes to the risk-weighting of residential mortgage lending comes into effect from 1 October 2004, and will need to be reflected in reporting to APRA for the quarter ending on 31 December 2004.

September 20, 2004 in Financial Services | Permalink | Comments (0) | TrackBack

Infochoice Loan Calculators Misleading

ASIC has acted to close down loan calculators on more than 100 websites of Australian financial institutions, including banks, credit unions, other lenders and finance brokers. The calculators suggested that using a line of credit will result in the consumer paying off their home loan more quickly.

'Most lines of credit charge higher interest rates than standard home loans, so when you stop to think about it, it was extraordinary to suggest that paying higher interest could pay off a loan sooner', said Mr Greg Tanzer, ASIC's Executive Director of Consumer Protection and International Relations.The loan calculators produced a graph, comparing the time taken to pay off a standard loan with the time taken using a line of credit.

However, the way the calculator was designed meant that:

extra repayments were credited to the line of credit but not to the standard loan:

the line of credit was at the same interest rate as the home loan;

and

these assumptions were not made clear to the consumer, so that the calculator showed that the line of credit was paid off more quickly than the home loan but it was not clearly stated that this was due to higher repayments by the borrower.

'The calculator software was produced by infochoice.com.au in line with industry specifications, and was used by over 100 lenders and broker groups.''infochoice.com.au acted quickly to take down the calculators from over 100 websites once ASIC raised these concerns with it,' Mr Tanzer said. 'ASIC acknowledges the company took a co-operative and responsible approach that will benefit consumers.'

More

When is "free" misleading?

The Australian Competition and Consumer Commission has accepted court enforceable undertakings from American Express regarding the advertising of its International Airline Program (IAP) for Platinum Cardmembers.

American Express's IAP was advertised by American Express as entitling Platinum Cardmembers to purchase a specially negotiated ticket for first or business class air travel on a participating airline and receive a free, complimentary or bonus companion ticket entitling a second person to accompany the cardmember on that trip.

The ACCC received complaints from cardmembers who found that they were able to purchase comparable air travel tickets in the open market at a price that suggested that the companion ticket offer was not free.

ACCC said the offer could not in all cases be said to be truly free, bonus or complimentary.

In response to the ACCC's concerns and complaints by some Platinum Cardmembers, American Express will write to those who may have been misled and offer:

a refund of up to one year's Platinum Card membership fee

; or

an amount of 10 per cent of the cost of the first fare purchased under the IAP, depending upon individual circumstances

.

Parliament dissolved

Federal Parliament was "prorogued" (dissolved ) on 31 August following the calling of a general election to be held on 9 October.

As a result, any Bills currently in Parliament but not passed, will lapse and will need to be reintroduced when Parliament is reconvened after the election.

Until the election, the Government is in caretaker mode and no decisions will be made.

ASIC AFS Verification Report

ASIC has issued a report containing its findings on a program of randomly conducted verification visits on Australian financial services (AFS) licensees.

The 353 visits, which were conducted between December 2002 and July 2004, were undertaken to check that certain declarations made in a licensee's AFS licence application were true and to ensure that the licensee's required procedures are operational.

'Most of the AFS licensees visited by ASIC demonstrated that appropriate procedures are in place and working well in practice. Where ASIC identified deficiencies, these issues were generally straightforward and easily addressed by the licensee', Ms Pamela McAlister, Deputy Executive Director of Financial Services Regulation, said.

In a small number of cases ASIC will be undertaking a further compliance review.

The visits examined a number of key areas, including:

risk management and compliance arrangements

;

supervision of representatives and authorised representatives

;

adequacy of financial resources

;

compensation arrangements

; and

internal dispute resolution procedures

;.

ASIC intends to continue conducting random compliance visits on AFS licensees.