Australian Regulatory Compliance Review

Disclosure requirements for non-standard margin lending facilities

ASIC has released Consultation Paper 129 Non-standard margin lending facilities – improving disclosure for retail clients (CP 129) which sets out the key features and risks which ASIC proposes should be disclosed in a Product Disclosure Statement (PDS).

A non-standard margin lending facility differs from a standard margin lending facility in that ownership of securities passes out of the investor’s hands. Ownership is transferred to the lender who then transfers consideration for the securities back to the investor, representing the ‘loan’ component of the facility. Products like this were offered by lenders such as Opes Prime Stockbroking Ltd and Tricom Equities Ltd up until 2008.

Under recent changes to the Corporations Act, margin lending will be regulated as a financial product and supervised by ASIC. ASIC’s proposed requirements for non-standard margin lending facilities supplement the Financial Services Working Group’s proposed requirements for shorter, simpler disclosure for standard margin loans.

Westpac v ASIC: replacement unsolicited debit cards permitted

In Westpac Banking Corporation v Australian Securities & Investments Commission [2009] FCA 1506 the Federal Court decided that by sending a Westpac Debit MasterCard card to 424,000 of its existing Handycard holders, Westpac had sent such cardholders the Debit MasterCard card in renewal or replacement of, or in substitution for, a card of the same kind previously sent to him or her, being the person’s Handycard, as permitted by section 12DL of the Australian Securities and Investments Commission Act 2001 (Cth).

ASIC is considering the judgment and will assess whether or not to appeal the decision.

Interestingly NAB recently agreed with ASIC to deactivate American Express credit cards sent unsolicited as ‘companion’ cards to NAB Qantas Gold account customers.

Westpac decided to substitute its Westpac Debit MasterCard for customers’ Handycards. The new card allows the customer to do what he or she did with their Handycard. However, the new card also has additional functions and can be used to access the customer’s account in different ways to those with a Handycard.

ASIC argued that these differences mean that the new card is not “a card of the same kind” as the Handycard and that Westpac had breached section 12DL. Over 424,000 Handycard holders had received the new card by late May 2009.

Judge Rares decided that:

The expression “of the same kind” does not require that the previous and later cards are absolutely identical...

Here, each of the Handycard and the new card (the debit MasterCard card) is a debit card within the meaning of s 12DL(5). Each card is intended for use by a person to obtain access to an account he or she (or the person who nominated him or her to receive the card) holds for the purpose of withdrawing cash or obtaining goods or services. A person who has received a new card from Westpac will be able to use it at least for all the purposes he or she used the earlier Handycard.

I am of opinion that the extra functionality permitting use by mail, telephone and on the internet and the wider range of places at which the new card may be used, whether considered individually or together, do not change or deny the nature of the new card as a debit card. The new card is, in the natural and ordinary meaning of s 12DL(2)(b), a card of the same kind as the Handycard. And, it offers contractual protection of the customer from misuse of the card by others of the same kind as the Handycard. This is because the terms of the product disclosure statements so provide.

There is no lessening of the protection of consumers intended by the Parliament provided by this construction. The Parliament sought to guard against them being sent a credit card or a debit that they had never sought. But, it was not the intention of the Act to constrain the relationship between an issuer of a card and its customer by preventing the issuer updating the particular kind of card (i.e. a credit or debit card) with the latest version of that kind of card. The more is this likely given the context in which s 12DL has taken its present form of a period of rapid technological growth and the continuing evolution of financial systems.

Achieving product rationalisation for managed investment schemes and life insurance products

Treasury has released a proposals paper for consultation about a proposed product rationalisation framework for managed investment schemes and life insurance products. Product rationalisation is a process of converting or consolidating products of a similar nature into a single product with equivalent features and benefits. Its main purpose in this context is to remove outdated, so-called 'legacy' products by transferring investors into newer, more efficient products.

Submissions close on 26 February 2010.

Personal Property Securities: draft amendments to Corporations Act

The Attorney-General's Department is seeking comments on the exposure draft of the Personal Property Securities Bill (Corporations and other Amendments Bill) 2009.

The exposure draft Bill proposes amendments to the Corporations Act 2001 consequential on passage of the Personal Property Securities Act to:

• close the Register of Charges under Chapter 2K
• amend the terminology of the Corporations Act in line with the PPS functional approach
• where appropriate, to include PPSA retention of title property within the definition of property in the Corporations Act (in line with the PPSA functional approach)
• maintain existing rights (that is, to ensure the amendments do not interfere with certain existing rights under the Corporations Act), and
• provide appropriate transitional and application arrangements.

Submissions are sought by no later than 22 January 2010.

ASIC consults on corporate bonds

ASIC has released Consultation Paper 126 Facilitating Debt Raisings to assist with the development of a sustainable listed corporate bond market in Australia.

The Consultation Paper proposes relief from long form prospectus requirements subject to the following conditions:

• the companies are listed and have a good continuous disclosure history – e.g. they have not been suspended for more than five days over a period of 12 months;
• the bonds offered are simple, vanilla bonds offered to retail and wholesale investors at the same price; and
• the size of the bond offer is at least $100 million to maximise the prospects of a liquid secondary market.

Comments are due by 19 February 2010.

ASIC has also developed a guide on investing in corporate bonds, which covers what corporate bonds are, how they work, what the risks are and provides a checklist of things to look for when investing.

ASIC issues policy guidance on margin lending licensing

ASIC has released policy and regulatory guidance to assist issuers and advisers of margin lending facilities comply with new licensing, conduct and disclosure requirements, following the passage of the Corporations Legislation Amendment (Financial Modernisation) Act 2009 (the Act).

The Act, amongst other things, makes margin lending facilities a financial product and requires that issuers and advisers of margin lending facilities hold an Australian Financial Services Licence (AFSL).

In addition, the regime imposes new responsible lending requirements on issuers of margin lending facilities and clarifies responsibility for providing notification of margin calls.

Under the Act, issuers and advisers will have a 12-month transition period from commencement of the Act until the new requirements take effect (commencement of the relevant sections have not yet been proclaimed). During the first six months of the transition period, existing margin lenders and advisers of margin loans will be required to apply for an AFSL authorisation.

A number of ASIC's existing regulatory guides have been amended to take into account the inclusion of margin lending facilities as a financial product.

The updated policy and regulatory guidance comprise:

• Updates to Regulatory Guide 2 AFS Licensing Kit: Part 2 — Preparing your AFS licence application(RG 2) and Regulatory Guide 3AFS Licensing Kit: Part 3 — Preparing your additional proofs (RG 3)
• Update to Regulatory Guide 146Licensing: Training of financial product advisers(RG 146);
• Update to Regulatory Guide 166Licensing: Financial requirements (RG 166)
• Update to Pro Forma 209 Australian financial services licence conditions(PF 209)
• Regulatory impact statement

Draft bill for ASIC supervision of financial markets

Treasury has released for comment an exposure draft Corporations Amendment (Financial Market Supervision) Bill 2009 containing proposed changes to the Corporations Act 2001 providing for ASIC to supervise domestically licensed financial markets, creating a new rule making power for ASIC and providing additional powers for ASIC to enforce these rules.

Comments close on 24 December 2009.

Citigroup responds to ASIC consumer credit insurance concerns

Citigroup Pty Ltd (‘Citigroup’) has responded to ASIC concerns that some telephone sales of consumer credit insurance products between August 2008 and January 2009 may have been misleading, or likely to mislead consumers.

Citigroup received complaints from customers about the sale and promotion of its consumer credit insurance products known as ‘CreditShield’ and ‘CreditShield Plus’ (together known as ‘Creditshield’). Citigroup was selling Creditshield during calls placed by cardholders to activate new or replacement credit cards (‘activation calls’).

Of the total complaints Citigroup received, 174 cardholders complained about selling practices. In addition, a large number of cardholders cancelled their Creditshield policies during this period.

ASIC reviewed randomly selected recordings of direct marketing calls selected from Citigroup’s complaints register.

ASIC’s review of the activation calls revealed the following issues:

• The sale of Creditshield to cardholders who had not agreed to purchase it
• The use of potentially misleading or ambiguous phrases by Citigroup during the activation calls
• Telephone operators persisting with selling Creditshield to callers, despite the cardholder saying ‘No’ more than once – on some occasions in calls reviewed by ASIC, the cardholder said ‘No’ on three or more occasions.
• The practice of telephone operators to keep cardholders ‘captive’ on the telephone call by waiting to tell cardholders that their credit cards had been activated only after Creditshield sales (or attempted sales) had been completed.

Prior to ASIC raising its concerns with Citigroup, Citigroup had already acted to terminate some telephone sales agents.

In order to address ASIC’s concerns and resolve the issues identified, Citigroup has implemented a number of changes to the calling script for its telephone operators.

Some of the changes include the following:

• The initial purpose of the call (the card activation) is concluded before cardholders are asked if they wish to hear about another product (such as Creditshield);
• Words such as ‘enrol’ and ‘activate’ have been replaced by ‘purchase’ when operators are referring to Creditshield;
• The provision of a general advice warning at the commencement of the call;
• The removal of representations regarding Creditshield being ‘free if you have paid your bills’; and
• The introduction of a clear approach to handling customer objections during Creditshield telephone sales.

Citigroup is also now in the process of writing to all customers (other than those that have already made a claim on their policies) who purchased Creditshield while activating their card between August 2008 and January 2009 to ensure that they are aware that they purchased Creditshield, and that they are aware of Creditshield’s terms and conditions.

Customers who believe they were not made aware of their purchase of Creditshield or its terms and conditions are being asked to contact Citigroup in order for Citigroup to promptly address and resolve customers’ concerns including potentially refunding affected customers in the appropriate circumstances.

APRA final standard on remuneration for ADI's and insurers

The Australian Prudential Regulation Authority (APRA) has released the final version of its prudential requirements on remuneration for authorised deposit‑taking institutions (ADIs) and general and life insurance companies.

The relevant industry governance standards (APS 510, GPS 510 and LPS 510) and an associated prudential practice guide (PPG 511) have now been published, along with a response paper to the second round of consultation that explains further modifications made in response to submissions and other feedback.

Some details in relation to foreign branches and to the coverage of different groups of persons have been modified.

The revised governance standards will come into effect on 1 April 2010. By this date, APRA requires that the Board Remuneration Committee, with appropriate composition and charter, will be established and a suitable Remuneration Policy will be in place.

Unconscionable conduct regulation

Treasury has prepared an issues paper concerning various options for clarifying the scope of the unconscionable conduct provisions of the Trade Practices Act 1974 (TPA).

The issues paper is part of a process which will examine two options for clarifying the application of the TPA’s unconscionable conduct provisions:

1. The first option is the introduction in the TPA of a list of examples of conduct that is universally agreed to be unconscionable.
2. The second is the introduction of a statement of principles of unconscionable conduct.

If the panel is satisfied that either or both of these options would make the provisions more effective, it is then to consider the content of a list of examples or statement of principles.

The panel has also been asked to consider issues associated with conduct in franchising relationships and, in particular, whether specific inappropriate conduct can be identified and — if the panel considers it necessary — whether measures can be introduced into the Franchising Code of Conduct to prevent them. The panel will conduct its work on possible amendments to the Franchising Code of Conduct as a separate process.

Submissions close on 18 December 2009.