FSR: simpler oral general advice warning
The Australian Securities and Investments Commission (ASIC) has announced relief for providers of general financial product advice. The change will allow providers to give a shorter, simpler general advice warning when they provide oral general advice.
Under the Corporations Act a prescribed kind of general advice warning must be given when general advice is provided to a retail client. This relief will allow a shorter, simpler warning than the prescribed kind to be given.
The relief is provided under ASIC Class Order [CO 05/1195] Simplified warning for oral general advice
The following are some examples of warnings that could be given under the relief:
- This advice is general, it may not be right for you;
- This advice is not tailored, so you can't assume it will be suitable for you;
- You will need to decide whether this advice meets your needs because I haven't.
Under the relief the simpler warning needs to be given only once in any telephone conversation or face-to-face meeting where general advice is provided to a retail client.
Senate report on Anti-Terrorism Bill
It has recommended that the Senate pass the Bill subject to 50 amendments listed in its Recommendations.
In particular the Committee recommended the deletion of Schedule 7 dealing with sedition. The recommendations also cover preventative detention and control orders.
Chapter 7 of the report deals with anti-money laundering and and terrorism financing. Whilst it noted concerns it only recommended a review in 5 years.
Recommendations 40-44 deal with the topic of "National Security Notices" discussed by me here.
City Finance Credit Code decision: what is interest?
The Victorian Civil and Administrative Tribunal decided in Director of Consumer Affairs Victoria v City Finance Loans (Credit)  VCAT 1989 that the lender's fees were not interest and were not unconscionable.
The facts as set out by the Tribunal President were:
The credit providers provide loans to consumers, generally in sums of hundreds of dollars, for periods of months. The nominated interest rate is typically 30% per annum. The credit providers also charge various fees: a $20 loan application fee; a loan maintenance fee, generally of $2 per week; and an establishment fee. The size of the establishment fee varies: it is $200 for an amount loaned of $300 to $500; $350 for amounts of $600 to $1,300; and $375 for amounts of $1,400 to $2,000. I am also to assume that the credit provider’s average reasonable costs of establishing a loan is less than the establishment fee. Hence I am to assume that part of the profit earned by the credit provider is from fees.
The Tribunal had to decide two questions:
Whether, all or any part of:
(a) the whole of the $20 loan application fee;
(b) the whole of the loan maintenance fee; or
(c) the amount of the establishment fee in excess of $135.00 was
1. interest under the Consumer Credit Code? or
2. if not interest, were the fees unconscionable?
The President defined interst as follows:in the context of the Code, I would regard the concept of interest as involving two elements: first, a relation to a principal sum; and, second, a charge for the use of the principal sum by the borrower. Moreover, in the context of the Code, interest would normally be expressed by a ratio...
17 I wish to stress that the provisions of the Code reinforce what I would regard as essential components of a sum to be characterised as “interest”. The Code contemplates that interest will be expressed as a ratio, related to both the principal sum and the period during which the borrower has use of that sum. The Code makes separate provision for fees; and contemplates that charges having this characterisation should be regarded as fees, not as interest.
Were the fees unconscionable? No
27 The Director contends that the effect of section 21(1)(b), combined with
section 72(1)(a) and (3) of the Code, is that a credit contract must not impose
fees that are unconscionable; and, in particular, must not impose an
establishment fee which is greater than the credit provider’s reasonable
costs of determining an application for credit and the initial administrative
costs of providing the credit, or the average of these costs in respect of a
class of contract. Further he claims a civil penalty as a result of such a
does it mean that there is an implied obligation to refrain from charging an unconscionable establishment fee? Or does it simply mean that a lender is at risk if it charges an unconscionable establishment fee?
29 In my opinion, the latter proposition is to be preferred; with the consequence that it cannot be said that the establishment fees (or for that matter any of the fees) the subject of this proceeding could be regarded as breaching the requirement of section 21(1)(b) of the Code. Essentially I reach this conclusion for the reasons advanced by the respondents.
30 Section 21(1)(b) of the Code is essentially concerned with the amount of fees. By contrast, section 72 of the Code is concerned about whether a fee is unconscionable. These are two different concepts. It is true that the amount of a fee is one factor which would inform the tribunal in determining whether the fee was unconscionable. But there is likely to be other factors: in particular, the circumstances of each party. Unconscionability focuses on whether one party has taken advantage of the other and has exploited the comparative advantage.
32 It is also to be observed that the role of section 72(3) is not to make a fee unconscionable if it exceeds the credit provider’s reasonable costs (or reasonable average costs) in relation to the establishment of a loan. Rather the role of the provision is to require such a comparison in determining the question. Cases will no doubt arise where other considerations are also relevant, particularly considerations about the comparative circumstances of the parties. Thus the question of whether or not a fee is unconscionable can only be ascertained in the context of a particular transaction.
33 In my opinion, it is unlikely that the obligation to only impose an amount of a fee or charge, that may be charged consistently with the Code, would vary according to the circumstances of the parties. This is especially so having regard to the high penalties that may be attracted by a failure to comply with section 21 of the Code. Rather I prefer the submission of the respondents that section 72 is designed to provide relief to a debtor or guarantor in particular circumstances, even if the establishment fee is consistent with the Code.
34 Even if I am wrong in this analysis, it must be true that the Director’s argument must fail in respect of the loan maintenance fee. This is not a fee that could be regarded as an establishment fee.
35 Further, on the assumptions, even if the $20 loan application fee is part of an establishment fee, it is such a small amount that it is difficult to see how it could be regarded as unconscionable.
Charge cards clarified
The Consumer Credit (Charge Card) Amendment Regulation (No 1) 2005 No 258 (Qld) clarifies the application of the Consumer Credit Code to certain charge card contracts.
The regulation exempts charge card contracts entered into with the following credit providers from the operation of the Consumer Credit Code:
- American Express Australia Ltd
- American Express International Inc.
- Diners Club Pty Ltd
- Motorcharge Ltd.
A charge card contract is defined in paragraph 6J(2) of the regulation to mean:
‘... a credit contract under which:
credit is ordinarily obtained by the use of a card; and multiple advances of credit are contemplated; and the provision of an advance of credit is limited to a total period of not more than 62 days; and monthly or other periodic statements of account are provided to the debtor; and liquidated damages or charges for late payment are payable by the debtor if the debtor does not repay an advance of credit mentioned in a monthly or other periodic statement of account within a stated period.’
Taskforce to reduce the regulatory burden on business
The taskforce is to:
- identify areas that are unnecessarily complex and redundant
- indicate priority areas for the removal or reduction or regulation
- examine non-regulatory options, and
- provide practical solutions to reduce the burden of complying with Commonwealth regulation.
While the taskforce will focus on Commonwealth regulations, it will identify areas where the regulatory burden arises from an overlap of state and territory legislation.
The Taskforce will report by 31 January 2006.
Australian tax law to be culled
The Treasurer has announced the Government plans to cut tax law by "close to 30 per cent".
The advisory Board of Taxation has been reviewing the tax legislation with a view to initiating ways to promote the ease of use of the income tax law.
The Board has now provided a report to the Government on provisions of the tax law that are inoperative and can be repealed. The Board estimates that up to 28 per cent, or 2,100 pages, of the Attorney-General's Department's ComLaw version of the combined Income Tax Assessment Acts can be repealed.
Privacy and anti-terrorism
The Privacy Commissioner has released a copy of her submission to the Senate Legal and Constitutional Legislation Committee Inquiry into the provisions of the Anti-Terrorism Bill (No. 2) 2005.
The Commissioner is of the view that there should be an appropriate balance between the need for security and the right to privacy.
The submission notes that "a number of new provisions contained in the Bill will expand the power of law enforcement and intelligence agencies to collect personal information about individuals, including through routine surveillance and electronic tracking. Any such expansion is likely to
diminish, to varying degrees, the privacy of individuals by reducing their ability to control personal information about themselves."
As well as analysing the Bill, the submission also contains a prposed framework for assessing and implementing new law enforcement and national security powers.
The Privacy Act may be amended to deal with the exchange of personal information in the case of national emergencies such as a terrorist attack.
Corporate Social Responsibility discussion paper
The Corporations and Markets Advisory Committee has released a discussion paper on corporate decision-making and environmental and social reporting that calls for public submissions on a series of questions by 24 February 2006.
The Advisory Committee has been asked to consider the interests directors may or should take into account in corporate decision-making, whether, or how, corporations should report on the social and environmental impact of their conduct and whether further initiatives are needed to encourage companies to adopt socially and environmentally responsible business practices.
Identifying mortgagors: new rules for mortgagees of Queensland land
The Natural Resources and Other Legislation Amendment Bill 2005 Queensland was introduced into Queensland Parliament on 8 November 2005. When passed, it will amend the Land Title Act 1994 with the aim of improving the operation of this Act in relation to the conduct of inquiries into fraud and errors in the freehold land register by requiring mortgagees to adopt procedures to identify mortgagors.
It will reduce the State’s exposure to claims for payment of compensation for land title related frauds in circumstances where reasonable due diligence measures were not taken by a mortgagee.
Under the Bill there is an obligation on a mortgagee (whether it becomes a mortgagee by the transfer of an existing mortgage or by the registration of a new mortgage) to take reasonable steps to ensure that the person signing as mortgagor is in fact the mortgagor. The Registrar of Titles will specify steps that are deemed to be reasonable. A mortgagee is required to keep written records (in the approved form) of all steps taken to verify the mortgagor's identity, and to keep for 7 years copies of all documents and other evidence used for this verification.
If a mortgagee does not comply with the investigative and record-keeping requirements, and the mortgage or transfer of mortgage is fraudulently executed, the mortgagee loses the 'indefeasible' title it would usually enjoy by having its interest registered. The Registrar would also be able to remove the mortgage from the title. The practical effect of this is that all registered interests (including subsequent mortgages) would prevail over the mortgage.
The mortgagee also commits an offence if it does not keep the records required.
The Bill also restricts a mortgagee's power of sale where the mortgage involved (or was associated with) fraud against a landowner or crown lessee (for example, where the landowner's signature was forged) even if the mortgagee has complied with the procedures. The Bill caps the amount of interest that is recoverable, and limits the recoverability of other costs associated with exercising power of sale.
Reverse mortgages and equity release products
ASIC has released a report into equity release products following increasing interest in 3 types: reverse mortgages, home reversion schemes, and shared appreciation mortgages (SAMs).
The Equity Release Products Report includes tips for consumers who may be considering equity release products.
ASIC warned that all equity release products are complex and, if used inappropriately or with poor advice, there are significant risks for consumers.
From the regulatory viewpoint, ASIC commented:
The existing regulatory system was not designed to address the issues raised by equity release products, which take the form of a credit arrangement but nevertheless have some of the attributes of an investment product.
At the product level, the principal vehicle for regulation of credit, the Uniform Consumer Credit Code (UCCC), does not provide for disclosure of risk, nor provide a mechanism for disclosing elements of the cost of the product, such as the forgoing of equity, that are not translatable into an interest rate. Finally it will not apply at all where the funds obtained are to be used for investment purposes.
The principal vehicle for the regulation of investment products, the Corporations Act 2001 (Corporations Act), has limited application to some home reversion and shared appreciation products, depending on their terms, but generally does not apply to reverse mortgage products.