Australian Regulatory Compliance Review

APRA releases more Basel II discussion papers

APRA has released two new discussion papers and accompanying draft prudential standards on the implementation of the Basel II capital adequacy regime. The first paper introduces the draft prudential standard for the standardised approach to operational risk. The second paper outlines APRA’s approach to the implementation of the internal ratings‑based (IRB) approach to credit risk.

NAB admits fees overcharging

National Australia Bank has released details of the cost for reimbursing customers for over-charging of fees on a range of financial packages, as well as updating initial estimates in relation to over-charging of Bank Account Debits tax. 

These issues date back several years.  Incorrect collection of Debits tax date back as far as 1982 when the tax was first introduced, while overcharging on package fees may date back to 1994, when the first package was launched.  The estimated total overcharging for both the package fees and Bank Account Debits tax amounts to approximately A$62 million before tax.  This consists of an estimated A$10 million for Debits tax, and A$52 million for package fees that will be reimbursed.

In addition, NAB will reimburse customers approximately A$18 million in interest. This consists of approximately A$4 million for Debits tax, and A$14 million for package fees.

NAB will also set aside A$30 million to cover remedial activities and contingencies.

FSR relief

The Australian Securities and Investments Commission (ASIC) has released an update report outlining its decisions on recent relief applications made by financial service providers.

Retail lending: dealing with customers in financial difficulty

The Banking and Financial Services Ombudsman has set out the guidelines he follows when customers write to his office to complain that a credit provider has refused to agree to a proposed repayment plan for a debt that the customer is unable to repay because of general financial difficulties.

The guidelines apply where there is no maladministration or other breach in relation to the original lending but there has been a subsequent change in the customer’s circumstances. And if there is a breach of statutory provisions to do with misleading, deceptive or unconscionable conduct or unjust or unfair contracts, his approach will be different.

The new Code of Banking Practice introduced an obligation to try to help individual and small business customers overcome their financial difficulties and to provide information about the UCCC hardship variation processes if they could apply to the customer’s circumstances. Even if the Code does not apply to you, the Ombudsman comments that non-subscribing banks and other credit providers should consider implementing the guidelines.

Acting fairly and reasonably, in the Ombudsman's view, requires that credit providers:
• give genuine consideration to a repayment proposal or hardship variation application and any reasonable alternatives that will help the customer overcome their financial difficulties;
• give reasons for any rejection of the proposal, preferably in writing;
• ensure that those reasons reflect legitimate considerations and are referable to the particular customer’s circumstances;
• not start or conclude enforcement action before a decision is made and communicated; and
• respect the customer’s appointment of an advisor and, if one is appointed, not deal directly with the customer.

Acting consistently and ethically, in the Ombudsman's view, requires that credit providers:
• have clear and reasonable internal processes for assessing hardship variation or enforcement postponement requests and other repayment proposals;
• be able to demonstrate that their staff have followed those processes;
• record and keep any promises made, for example, about suspending enforcement action, and record and keep to any agreement reached. If that includes that the arrangement be reviewed at a certain date, credit providers should not seek to review the arrangement earlier if the customer is keeping to it. Any review should be based on a genuine consideration of the customer’s position at that time;
• ensure that any collection related correspondence is consistent with what has been promised or agreed; and
• confirm in writing any agreement reached and ensure that collection agents and/or later assignees have a copy.

Finally the Ombudsman's view is that "informing a customer of the UCCC provisions includes telling the customer, at the time of any rejection of a hardship variation application, that they can apply to the relevant court or tribunal under s 68 of the UCCC for an order changing the contract. This information should be given whether or not the credit provider thinks that the application would succeed – the obligation is to do so if those provisions could apply to the customer’s circumstances."

General Insurance Code of Practice

The Insurance Council of Australia has issued a revised General Insurance Code of Practice.

General principles covered by the new Code of Practice include:

• All customer services (including product information, sales procedures, claims handling and the management of complaints or disputes) will be conducted in a fair, transparent and timely manner.
• If an error is made in assessing applications, deciding on claims or investigating complaints, the insurer will take immediate action to correct it.
• Customers will have access to any information that has been used to assess applications, claims or complaints and will have the opportunity to correct any mistakes or inaccuracies within this information.
• Insurers will make sure that not only its employees, but also its Authorised Representatives and Service Providers meet the standards in the Code.

Compliance with the code will be monitored by the independent Insurance Ombudsman Service to which consumers will be encouraged to contact if they feel their insurer has breached the code.

ASIC reports on ASX

It's unusual for one regulator to report on another regulator.

But in the case of the ASX, ASIC must do so annually because ASX holds an ASIC financial markets licence.

ASIC's June 2005 ASX assessment report concludes that :

"the ASX has adequate arrangements for supervising the market, including arrangements for:

• handling conflicts between its commercial interests and the obligation to operate the market in a fair, orderly and transparent way
• monitoring the conduct of participants, and
• enforcing compliance with its rules.

The ASX has taken a number of positive steps since the release of ASIC's last report in September 2004, including:

• the establishment of arrangements for supervisory and compliance personnel to elevate issues of concern to the Audit and Risk Committee of the ASX Board; and
• the establishment of an internal compliance function."

Low doc loans and the ATO

The Commissioner of Taxation has announced the results of the ATO's initial investigation into borrowers of "low doc loans":

In June last year I announced we had begun to investigate whether people using low documentation loans were likely to have tax compliance issues. This early work suggested many people using these products had either understated their income or failed to lodge income tax returns. Our work since has confirmed our concerns.

In the first of our compliance initiatives, around 350 taxpayers were selected randomly from eight lenders to get a picture of the broader population using these products. This information was obtained using the access powers in the tax law. It identified failure to lodge tax returns as a primary concern.

Around 50 per cent of these people had not lodged returns – the average was three years outstanding...

In a second initiative we undertook a risk based approach that showed that, for certain low documentation loan users, concealment of income is a significant concern...

Although our findings indicate concerning levels of non-compliance amongst the users of low documentation loans, many users of these products are fully meeting their tax responsibilities. Many are funding repayments from legitimate sources like inheritances and capital gains, often derived from investments in property.

Code of governance for the voluntary and community sector

The UK Institute of Chartered Secretaries and Administrators (ICSA) has launched a code of governance for the voluntary and community sector, which sets out the main principles of governance, clarifies roles and responsibilities and provides guidance in ensuring effective decision-making and accountability.

Australian immigration detention: the Palmer Report

The Palmer Report into the immigration detention of Australian citizen Cornelia Rau has been released.

The report exposes serious cultural and organisational problems in the Immigration Department.

The Main Findings conclude that compliance officers had "little or no formal training and a poor understanding of the legislation they are enforcing". "Officers lack basic investigative and management skills". "There was a failure of executive leadership".

It's a tragedy.

Health Fund: is a loyalty scheme age discriminatory?

HBF Health Fund Inc has lost an application to the Administrative Appeals Tribunal to review a decision by the Minister for Health and Ageing directing HBF to modify its rules by adding a rule that HBF "will not further publicise and not further implement" a loyalty bonus scheme proposed by HBF as it was discriminatory (as defined in the National Health Act).

HBF is a Western Australian based fund. It is a mutual "not for profit" membership organisation with approximately 950,000 members.

In summary, the scheme proposed that:
• To quality for a loyalty benefit members must have either hospital or ancillary cover and have at 3 years continuous membership.
• Loyalty benefits increase as the length of membership increases.
• The HBF loyalty benefit includes an ancillary component rewarding members for either reducing or deferring claims for services viewed as discretionary.  This is to reward the member’s loyalty to the membership as a whole.
• For members with the same ancillary claims to contribution ratio, benefits under the initiative will be higher the longer the membership.
• Benefits accrue until the member reaches the age of 65, at which time they are available to be used, unless there are unforseen circumstances.

The Minister argued it was discriminatory on the grounds of age as well as claims history. The Tribunal agreed having regard to the special provisions of the National Health Act:

25. In the sense of the ordinary meaning of "discrimination"  the proposed scheme, if implemented, would discriminate in favour of contributors who are over the age of 65 years. One only receives the financial benefits of the scheme when one reaches that age. A single person, for example, could be a contributor with HBF for forty years, dies before reach 65 and never receive a bonus under the scheme. But the question is whether it is "improper discrimination" within the meaning of s66(1)(ba).

26. It can be argued, and indeed it was on behalf of the applicant, that the scheme only discriminates in a positive way to assist those who have attained the age of 65 years. This may be said to be a proper objective as people over 65 generally tend to have lower incomes, but increased needs.

27. Looking beyond health insurance it is fair to say that there exists in Australia many different schemes which provides benefits to people of a certain age. In a number of the states, if not all, senior cards provide a range of benefits and discounts only for those over 60 years of age. It is interesting to note that in s33 of the Age Discrimination Act 2004 (C’th) an exemption is provided if "... (a) the act provides a bona fide benefit to persons of a particular age."

28. It was put on behalf of the respondent that the general provisions of anti-discrimination legislation such as the Commonwealth Act referred to above render positive age discrimination unlawful and that is why it is necessary to expressly provide specific exemptions, such as  exists in s33.   It is further pointed out that the National Health Act has no such exemptions except the limited exemptions referred to in s66(1)(ba).  Such exemptions could have been easily included by the legislature had that really been its intention.

29. The definition of improper discrimination in s66(1) of the Act and the nature of many of the grounds specified in (a) to (e) of that subsection make it clear that the grounds were specifically chosen in order to protect the integrity of the health insurance system. Some of the grounds are very different from those one would expect to find in broad based anti-discrimination. In other words "discrimination" here has a particular relevance and application to health insurance.   The desire to protect, for example, those who need frequent medical services and the full range of age groups is self evident in the Act...

31. It is not so much the provision of benefits to people over the age of 65 which is the concern, but rather the fact that contributors of any other age, whether it be at age 20, 30, 40 or whatever age, have no right, at that age, to receive any financial benefit under the scheme. This is despite the fact that their contributions may indirectly assist to finance the benefits which flow only to that limited age group.

The Fund is reportedly (AFR) intending to appeal.