Australian Regulatory Compliance Review

APRA releases research on superannuation fund governance

The Australian Prudential Regulation Authority (APRA) has released the results of its recent research on the governance practices of APRA-regulated superannuation funds (pdf).

The research, based on a detailed survey of superannuation trustees, found that there was little difference between the Corporate, Public Sector, Industry and Retail sectors in many areas of trustee policies and practices.  In some areas, however, there were statistically significant differences between the sectors, with Retail trustee practice more often different from that of the other sectors.

Some of the findings of the research include:

 

• Trustee directors of the large funds in the survey were typically well qualified, experienced and reasonably well trained in their trustee duties.
• Most boards (76 per cent) have both independent audit and regular self-assessment to review compliance with the Superannuation Industry (Supervision) Act 1993 and other regulations.
• Service providers are widely used in the superannuation industry, with the average fund using more than 13 service providers. Over 60 per cent of Retail directors have one or more associations with service providers, a figure that is double that for directors of Corporate funds and almost three times that for Public Sector or Industry funds.
• Relative to the other trustees, Retail trustees have fewer directors, shorter (but just as frequent) board meetings, and rely more on fund executives to take the initiative on most key decisions. By contrast, trustees in the other three sectors mostly make the decisions with the main input coming either from themselves or from their consultants.
• More than half of all Retail trustee directors are employed by related parties or by the fund itself, and very few are nominated by fund members. By contrast, many Industry, Corporate and Public Sector trustee directors are member-nominated.
• More than half of Corporate, Public Sector and Industry trustee directors are themselves members of their funds.  About one in five Retail trustee directors are members of their funds.

Productivity Commission Report on Consumer Policy: consumer protection law and product safety

The Minister for Competition Policy and Consumer Affairs, Chris Bowen MP, has released the Productivity Commission's final report of the Review of Australia's Consumer Policy Framework.

The Productivity Commission's key recommendations include:

• a single national generic consumer law, based on the Trade Practices Act 1974 (TPA), which would apply in all States and Territories;
• identifying unnecessary or costly consumer regulation that only applies in a few States and Territories, or to one industry, and either removing them or, if justified, introducing nationally consistent rules;
• transferring regulation of credit providers and finance brokers to the Australian Government, with the Australian Securities and Investments Commission (ASIC) as the regulator;
• national laws to tackle unfair terms in consumer contracts;
• a national approach to product safety laws and enforcement; and
• new redress and enforcement powers for consumer regulators, including the ability to seek redress for non-parties, civil pecuniary penalties, banning orders and substantiation notices.

The Commission also recommended an enhanced role for the Australian Government in consumer policy.

The Government will consider the recommendations and, as agreed by the Council of Australian Governments (CoAG), respond formally at the end of October 2008.

AML and securities

The Anti-Money Laundering and Counter-Terrorism Financing Rules Amendment Instrument 2008 (No. 2) (pdf) sets out exemptions for entities Issuing or selling a security or derivative provided one of the following conditions apply:

• the service is a disposal of a security or derivative through an agent who is doing so in the course of carrying on a business of disposing of securities or derivatives in the capacity of agent;
• the transaction occurs on a prescribed financial market (ie a stock exchange);
• it is an issue of an interest in a managed investment scheme (including an option to acquire an interest in a managed investment scheme) where the managed investment scheme is quoted on a prescribed financial market and it is under a distribution reinvestment plan or an initial public offering.

Queensland consumer credit interest rate capped

The Consumer Credit (Queensland) and Other Acts Amendment Bill was passed by the Queensland Parliament on 1 May 2008.

Background

Competing rights on insolvency: share lending agreement

In Beconwood Securities Pty Ltd v Australia and New Zealand Banking Group Limited [2008] FCA 594 the Federal Court had to decide on the competing rights of a lender (Beconwood) and a borrower (Green Frog, a part of the now insolvent Opes Prime Stockbroking group) under a Securities Lending Agreement. The lender had loaned its shares in return for a loan from the borrower Opes Prime. Opes Prime had obtained its funds from ANZ on the security of the shares it borrowed from Beconwood; ANZ wanted to sell those shares upon default by Opes Prime. ANZ could not sell the shares unless they had been transferred by Beconwood to Opes Prime so that it had the right to mortgage them to ANZ.

The lender Beconwood wanted its shares back upon payment of its debt to Green Frog. Otherwise its shares would be pooled with all the other Green Frog assets and it would become a mere creditor and lose its rights over those specific shares.

After a detailed analysis of the Agreement, including reference to US cases, the Court rejected the Lender's (Beconwood's) claim over the shares. The Court decided that Beconwood had legally transferred the shares to Green Frog (despite use of the lender/borrower terms).

The decision did not deal with claims over representations made to Beconwood about the effect of the agreement.

APRA's Ratings and Supervisory Systems

APRA has released details of its systems for monitoring entities regulated by it: the Probability and Impact Rating System (PAIRS) and the Supervisory Oversight and Response System (SOARS) .

The Probability and Impact Rating System (PAIRS)(pdf) is APRA s risk assessment model. PAIRS was launched in October 2002. An enhanced version of the original PAIRS model was introduced in early 2008.

APRA s Supervisory Oversight and Response System (SOARS) (pdf) was introduced in October 2002. SOARS is used to determine how supervisory concerns based on risk assessments made under APRA s Probability and Impact Rating System (PAIRS) should be acted upon. It is intended to ensure that supervisory interventions are targeted and timely. All APRA-regulated entities that are subject to PAIRS assessment are assigned a SOARS stance.

Legislation to remove same-sex discrimination

The Attorney-General Robert McClelland has announced that the government will introduce legislation to remove same-sex discrimination from a wide range of Commonwealth laws .

This reform follows the 2007 report of HREOC, Same-Sex: Same Entitlements, which focussed on financial and work-related legislation.  On coming to office, the Rudd Government commissioned an audit of Commonwealth laws, which identified other areas of discrimination.

Areas where discrimination will be removed include tax, superannuation, social security, health, aged care, veterans’ entitlements, workers’ compensation, employment entitlements, and other areas of Commonwealth administration.

The Rudd Government will begin introducing legislation in the Winter Sittings of Parliament. Most reforms will commence soon after the legislation is passed. In some areas (such as social security, tax and veterans’ affairs), the reforms will be phased-in to allow time for couples to adjust their finances, and for administrative arrangements to be implemented. All of the changes are expected to be implemented by mid-2009.

The changes will not alter marriage laws.

APRA prohibits "covered bonds" by ADI's.

APRA has confirmed its prohibition of covered bonds.

Covered bonds are secured ADI funding structures whereby an ADI issues debt instruments in conjunction with a cover pool of the ADI’s assets, which are held by the ADI or in a separate vehicle for the benefit of bond investors in the event the ADI is unable to meet its obligations on the debt instruments.

APRA's objection to covered bond structures is that, in substance, they subordinate the interests of depositors of ADIs to the interests of the covered bond holders.

Corporate Governance In Today's Volatile Market Condition

The Minister for Superannuation and Corporate Law's speech on Corporate Governance In Today's Volatile Market Condition summarises the government's caution about further regulation as a response to the sub-prime crisis:

"on the whole, our robust financial system has coped extremely well with the recent global pressures. And our market regulators have been doing a solid job in difficult circumstances.

... But I can assure you that I am well aware of the need for caution before we introduce any new regulation in this area.

We must look beyond immediate events and preoccupations. We must consider the medium-term risks, opportunities, and vulnerabilities that confront corporate law.

I am committed to pursuing reform of the regulatory and corporate governance framework. Reform that is comprehensive, effective, and — above all — sustainable.

The speech discusses:

• disclosure requirements for  equity derivatives
• short selling and securities lending
• directors’ conduct and obligations to their companies
• reforms to corporate offences, sanctions and personal liability for directors
• financial services consumer protection
• reform of regulation of credit-related financial  services
• financial reporting
• self managed superannuation funds

Takeovers Panel rejects claim in respect of bank share securities

In the matter of BioProspect Limited 02 [2008] ATP 6 the Takeovers Panel refused to declare unacceptable circumstances under the takeover provisions of the Corporations Act. The ANZ Bank had failed to lodge any substantial holder notice in relation to its interest in BioProspect arising from its appointment of receivers to Opes Prime.

The Panel did not consider that the Application, on its face, came within section 657A.

However, the Bank subsequently lodged a substantial shareholder notice and gave undertakings to the Panel (among other things) not to:

1. trade BioProspect securities other than in the ordinary course of trading on the ASX and
2. sell BioProspect securities comprising an amount greater than 5% of the issued capital of BioProspect over any three consecutive trading days.

Predatory pricing and other Trade Practices Act small business amendments

As foreshadowed earlier this year, the Rudd Government has announced a package of measures to further amend the Trade Practices Act 1974 including the predatory pricing amendments passed late last year

The Government’s amendments will:

• ensure that victims of predatory pricing will not need to prove that the predator has the ability to recoup losses after participating in an anticompetitive below cost pricing strategy.
• clarify the meaning of the term ‘take advantage’ in section 46 in response to concerns raised by businesses and the ACCC that the present meaning of that term has prevented section 46 from capturing anticompetitive behaviour.
• remove the  uncertainty that has arisen following the ‘two track’ process for predatory pricing that developed under the previous government. The ACCC has said that the dual track process has “caused considerable confusion” because they focus on the “fundamentally different concepts” of market power and market share.

The reforms will also strengthen the role of the ACCC by enabling it to fully investigate suspected breaches of the law by enhancing its information gathering powers under section 155 of the Act  .

The Government will also extend the reach of the ACCC by repealing the $10 million threshold that applies to actions under section 51AC of the Act for unconscionable conduct in business transactions, with duplicate amendments made to the equivalent provisions of the Australian Securities and Investments Commission Act 2001 ('the ASIC Act') which apply to transactions involving financial services.

The Government will amend the Act to require at least one ACCC Deputy Chairperson to have knowledge of, or experience in, small business matters.

The jurisdiction of the Federal Magistrates Court will be extended to include matters arising under section 46 rather than requiring prosecution in the Federal Court, in appropriate circumstances.

The Government wants to have its amendments to the Trade Practices Act passed by parliament by August.

UPDATE: Speech by Chris Bowen. Assistant Treasurer, Minister for Competition Policy and Consumer Affairs

ASIC reports on the implementation of the new debenture regulatory measures

ASIC has released a report (Report 127: Debentures – Improving disclosure for retail investors) presenting the findings of a review into disclosures made by each of the unlisted, unrated debenture issuers against the new disclosure regime.

The disclosures are based on benchmarks on issues ranging from equity capital levels to enhanced transparency of valuations.

Each issuer has, or is in the process of, providing all its investors with a specific report for their investment on how it meets the benchmarks in ASIC’s  Regulatory Guide 69 Debentures – Improving Disclosure for Retail Investors on an ‘if not, why not’ basis.

Disqualification under APRA Administered Legislation

APRA has released notes from a presentation on Disqualification under APRA Administered Legislation  by its  General Counsel.

The presentation focusses on the new procedures under the The Financial Sector Legislation Amendment (Review of Prudential Decisions) Bill 2008 which is expected to come into force in June 2008.

Bank of England Special Liquidity Scheme

Although there are newspaper reports (The Australian) of the Reserve Bank of Australia buying mortgages to provide market liquidity it has not published details apart from Glenn Steven's recent speech.

In England, the Bank of England has announced a scheme to allow banks to swap temporarily their high quality (but illiquid) mortgage-backed and other securities for UK Treasury Bills.

The Special LIquidity Scheme acknowledges that:
"Financial markets are not working normally, which if left unchecked will have an impact on the wider economy. Across the world, there is a lack of confidence in assets created from packages of bank loans, most notably mortgage-backed securities. That lack of confidence was prompted by the downturn in the United States housing market and, in particular, the problems associated with sub-prime mortgages there. The markets that normally trade these assets have, in effect, closed, so it has become very difficult for banks to exchange these assets for cash – the assets are currently ‘illiquid’."

Further details

Reserve Bank’s review of Australia's payments system interchange fees

The Reserve Bank has released the preliminary conclusions of the 2007/08 review (pdf) of the payments system reforms undertaken by the Payments System Board.

In respect of the regulation of interchange fees, the Board’s view is that further changes to improve competition are possible, and that these changes could be implemented by industry, rather than the Reserve Bank. These improvements to the competitive environment include:

• changes to the EFTPOS system to allow it to compete more effectively with the other card schemes over the longer term;
• the card schemes allowing merchants the freedom to make independent acceptance decisions about each type of card for which a separate interchange fee applies; and
• an increase in the transparency of interchange fees and scheme fees.

The Board is proposing that, at its August 2009 meeting, if at that time it were satisfied that sufficient progress had been made by industry, it would proceed to remove the interchange regulations. If, however, the Board judged that insufficient progress had been made, its current thinking is that interchange regulation would continue, with average interchange fees on credit cards being reduced from around 0.50 per cent of the transaction value to around 0.30 per cent. In addition, a common interchange fee of around 5¢, paid to the cardholder’s financial institution, would be established for the EFTPOS system and the debit card system operated by the international card schemes.

Any new arrangements could be expected to be in place in the first quarter of 2010. Until this time, the current arrangements, with some minor modifications, would remain in place. 

The Bank is seeking submissions from interested parties by 30 June 2008.

ASIC Report on "equity stripping"

ASIC has issued a report on the practice of ‘equity stripping’ (pdf), where fringe brokers refinance vulnerable borrowers in financial stress into loans they cannot afford, in order to earn substantial fees.

This report draws on a qualitative examination of a small number of transactions but offers useful recommendations for both brokers and lenders.

The report recommends that brokers can avoid the risk of arranging refinances that are of no benefit to borrowers by:

• providing realistic information to borrowers in financial stress, including advice that, in appropriate circumstances, their best option is to sell their home rather than refinance;
• only recommending a refinance where that transaction has appropriatelong-term benefits for the borrower;
• making sufficient enquiries to ensure that the consumer can repay the loan, including an assessment of their income and expenditure; and
• disclosing the likely repayments, their fees and the total cost of refinancing in advance of the transaction, so that the borrower can make an informed decision.

ASIC argues that "lenders can reduce the risk of approving applications forwarded by brokers for borrowers who cannot afford loans by:

• regularly reviewing their risk management practices;
• identifying ‘high risk’ applications and patterns of conduct, and monitoring them more stringently (‘high risk’ applications can include refinances where the borrower is in arrears, and, for non-bank lenders providing low doc or no doc loans, refinances of home loans from another lender wherethe circumstances suggest the borrower may be in default);
• using their internal complaints handling procedures as part of this monitoring process;
• assessing the extent to which channelling all communication with the borrower through the broker increases the risk of fraudulent applications (and adopting appropriate risk management practices);
• if the broker arranges valuations for the lender, considering whether the broker is valuation-shopping to ensure the estimate of the property value is sufficient to allow the loan to be approved.

Lenders can also assist existing customers by ensuring that their procedures to deal with borrower hardship are workable, practical, and communicated to their customers so that short-term financial difficulties are managed in a way that reduces the need for the borrower to look to refinance elsewhere."

Instalment Contracts and the Uniform Consumer Credit Code

The Justice Legislation Amendment Bill 2008 (pdf) has been introduced into the Queensland Parliament to amend the Consumer Credit Code (the Code) to ensure particular contracts for the sale of land or goods by instalments (known as ‘terms sale of land contracts’, ‘conditional sale agreements’ and ‘tiny terms contracts’) are credit contracts under the Code.

A terms sale of land (a sale on ‘vendor’s terms’ or a ‘wrap loan’) is a sale of land under which the purchase price is payable by instalments. The vendor lets the purchaser into possession but retains title until conveyance following the final payment.

A conditional sale agreement (or ‘Romalpa agreement’) is a sale of goods under which the purchase price is payable by instalments.  The seller delivers the goods to the buyer but retains title until the final payment. 

Tiny terms contracts are contracts where the cost of credit is incorporated into the cash price and the transaction is represented as a sale of goods by instalment (without any credit charges). 

Technical amendments have also been drafted to capture contracts containing instalment payments that exceed the cash price of the goods, which are related to the contract for the actual sale of the goods. 

Once the amendments are passed by the Queensland Parliament, industry will be provided with at least 6 months before they are commenced.

Justice Legislation Amendment Bill 2008 - Explanatory Notes (pdf)

Draft AML/CTF Rules relating to the definition of 'loan'

Austrac has released draft AML/CTF Rules (pdf) which carve out from the definition of 'loan' in paragraph (g) in section 5 of the AML/CTF Act, certain products such as money market instruments, government or corporate bonds, debenture stock, bonds and debt instruments that may also be considered as another type of designated service under that Act.

The purpose of these draft AML/CTF Rules is to remove the potential dual application of two types of designated services applying to a particular transaction. One such instance is where a product or service is a ‘loan’ designated service as well as a ‘security’ or a ‘deposit-taker’ designated service.

One of the consequences of the potential dual application of different types of designated services (in a particular transaction) is that parties to the transaction are treated as reporting entities at different sides of the transaction or at different times.

A public consultation period is open from 17 April 2008 to 8 May 2008.

Consumer credit interest rate cap for Queensland

The Consumer Credit (Queensland) and Other Acts Amendment Bill 2008 (pdf) has been introduced into Queensland Parliament.

The Biil, if passed, will introduce the concept of a maximum annual percentage rate for consumer credit contracts. In calculating the rate, fees and charges will be taken into account.

The Regulations are expected to prescribe a 48 per cent per annum annual percentage rate cap on consumer loans. It is also expected that credit fees or charges arising from the establishment or maintenance of a temporary credit facility by an ADI will not be included in the calculation.

There are currently no caps on interest rates in Queensland and lenders can charge high interest rates, fees and charges on loans. Victoria, New South Wales and the Australian Capital Territory currently have interest rate caps to control the cost of consumer credit.

Credit providers who charge above the legislated maximum will be required to pay back any amount over the cap and will face civil penalties of up to $500,000 for breaching the Consumer Credit Code. They will also face criminal penalties of $10,000 for individuals and $50,000 for corporations.

The cap will apply to new loans made after the Act commences as well as to existing credit contracts which are extended or under which interest rates are increased or new fees or charges imposed after the Act commences.

Explanatory Note (pdf)

The Reserve Bank as a lender of last resort

Reserve Bank Governor Glenn Stevens has spoken about the role of central banks as providers of liquidity and as lenders of last resort in times of crisis in this speech.

He defined "lender of last resort" as follows:

the role of lender of last resort [is] where the central bank lends to one specific entity, when no‑one else will. The first question is: why do we need it? The reason is the possibility – albeit a very remote one – that a panic could put overwhelming pressure on a perfectly sound institution that, though prudently managed, cannot possibly hold enough liquid assets to withstand the pressure unaided. Some entity has to be prepared to lend in such a situation if the market will not, otherwise the panic can imperil the institution concerned, and perhaps the financial system as well.

He summarised the general lessons from the recent events as follows:

One key lesson is the importance of liquidity in markets and to institutions, something that perhaps had not been emphasised as much as it should have been in regulation, where the emphasis has been very much on capital. We have further learned that, under conditions of great uncertainty, liquidity pressures can erupt in markets that had seldom been affected in the past. Central banks have responded quickly and flexibly to such events, but it has proven difficult to contain the pressures fully. Some quite important questions remain for the longer run, which central banks will be considering.

A second lesson is the difficulty in resolving a problem with an individual institution under strained overall conditions.  Bagehot’s formula provides only the most general of guidance; making it operational requires considerable judgement. If and when such an event comes, it tends to have its own unique elements and a particular set of circumstances as backdrop. Speed and flexibility in response are essential. So is consistent and early communication, since disclosure of support, if not managed very carefully, could turn out to make the situation worse rather than better.

A third lesson is that a loan of last resort is, in the end, probably simply bridging finance while a takeover or major re‑structure of the recipient institution is organised. The recipient would very likely see a change in its business model, management, board and ownership structure. It could well require a pretty clear statement of temporary government support. All of this would need to be organised very quickly.

Prudential supervision of general insurance groups

The Australian Prudential Regulation Authority (APRA) has released its draft prudential framework for supervision of general insurance groups.

  The package consists of three draft prudential standards and a discussion paper. The package also responds to recommendations 38 and 39 of the HIH Royal Commission. Initial consultation with the general insurance industry on this topic began in May 2005.

The foundation of APRA's approach to the supervision of general insurance groups is that the group as a whole should meet essentially the same minimum capital requirements as apply to individual general insurers. Being part of a wider insurance group can alter the risk profile of an individual insurer through financial and operational inter-relationships with other group members and through decisions and initiatives taken at group level.

It is intended that the final prudential standards implementing general insurance group supervision will be released in the third quarter of 2008 and will become effective on 1 January 2009.

Disclosure of equity derivatives in takeovers

The Takeovers Panel has released a guidance note considering when non-disclosure of long equity derivative positions may give rise to unacceptable circumstances in a takeover.

Where there is a control transaction, the Panel would expect that all long positions which already exist, or which are created, are disclosed unless they are under a notional 5%.

Account Switching Facilitation Package

The  Australian Payments Clearing Association (APCA) has released its First Progress Report (pdf) on the development of an Account Switching Facilitation Package which will include a central registry facility to collect details of customers’ direct debit and credit arrangements to make it easier for customers to switch their accounts between banks.

The account switching facilitation package is to be aimed at personal customer account holders and will initially be the responsibility of individual financial institutions.

A further report will be made in October 2008.

Hedge funds and derivatives

The Minister for Superannuation & Corporate Law's recent speech discussed why Treasury will conduct a review of the current disclosure requirements of equity derivatives:

Australian regulation of hedge funds is directed at disclosure requirements, along with their licensing and registration as managed investment schemes.

Such an approach seeks to ensure that there is sufficient disclosure by these funds to allow all investors — particularly the more unsophisticated investors — to make informed decisions about the risks involved...

One of the recent developments in financial markets relates to the substantial growth in equity derivative products. 

Because the owners of these instruments only have indirect economic ownership over the underlying securities, these equity derivatives have enabled market participants, including speculators and hedge funds, to avoid the disclosure requirements associated with direct stakes.

The use of these instruments have created uncertainty and facilitated speculative trading which puts individual shareholders at risk.  Companies don’t know who the ineffective owners are … investors suffer from volatility as stock prices can be manipulated. 

To address these concerns, Australia intends to take a lead in increasing the transparency of its financial markets.  The Prime Minister recently announced that Australian Treasury would undertake an immediate review of the current disclosure requirements of equity derivatives.

While the Government is examining the disclosure requirements of financial instruments that are used by hedge funds, we do not try to dictate investment strategies or place undue limitations on hedge fund activities and their leveraging.  Doing so may result in unintended and possibly less efficient outcomes, which may be undesirable.

On the other hand, the investment strategies of hedge funds have associated risks, which can influence the performance of prudentially regulated institutions such as banks and superannuation funds.

For this reason, hedge funds need to provide a high level of transparency to their investors, particularly those that are prudentially regulated and of systemic importance, so that exposures to market risks can be accurately assessed and managed by those investors.

Foreign insurers in Australia

  The Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) are jointly reminding direct offshore foreign insurers (DOFIs) and local insurance brokers about the new authorisation requirements for foreign insurers that come into effect on 1 July 2008.

Following the passage of the Financial Sector Legislation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Act 2007, DOFIs wishing to continue operating in the Australian market must be authorised by APRA. The new authorisation requirements are designed to ensure that general insurers are prudentially regulated and consumers are protected from dealing with unauthorised DOFIs that would not meet the standards required of an APRA-authorised insurer. Some business will still be able to be placed with DOFIs that are not authorised as long as this business is placed in accordance with the exemption regime outlined below.

Overseas insurers that provide a substantial application for authorisation by 31 May 2008 will be allowed to continue operating as DOFIs for a limited transition period after 1 July where consideration of their application by APRA is not complete by that time. Foreign insurers will be subject to the sanctions provided for under the Insurance Act 1973 if they have not applied to APRA for authorisation and continue to write business not covered by the exemption provisions after 1 July 2008.

From 1 July 2008, intermediaries (such as agents and brokers) holding an Australian financial services licence (AFSL) will be able to place insurance business only with APRA authorised insurers or in accordance with the exemption regime.

Exemption arrangements

The Assistant Treasurer and Minister for Competition Policy and Consumer Affairs, Chris Bowen has announced the limited exemption arrangements for direct offshore foreign insurers (DOFIs).

An exposure draft of the regulations implementing the exemption arrangements will be released for consultation by late April 2008.

The exemption balances the need for protection for Australian business and consumers with the acknowledged need that some insurance will not be able to be placed in Australia.

The exemption is comprised of three main limbs:

• high-value insured;
• atypical risk; and
• customised

Merger of Financial Services External Dispute Resolution Schemes update

From 1 July 2008 the dispute resolution function currently conducted by the Banking and Financial Services Ombudsman (“BFSO”) will be conducted by a new company, Financial Ombudsman Service Limited (“FOS”), which will merge BFSO’s operations with those of the Insurance Ombudsman Service (“IOS”) and the Financial Industry Complaints Service (“FICS”).

The combined service will deal with complaints involving:
• Banks;
• Other deposit taking institutions (credit unions, building societies);
• Finance & Mortgage brokers;
• Financial Planners;
• Stockbrokers;
• General Insurers;
• Funds Managers; and
• Life Insurers.

More detail in BFSO Bulletin 57.

The rules on credit listings

Banking and Financial Services Ombudsman's Bulletin 57 (pdf) discusses the requirements of the Privacy Act in relation to the listing of overdue payments and the inter-relationship of credit listing with the requirements of the Uniform Consumer Credit Code .

The article considers:

• Listing without prior warning
• Listing amounts less than 60 days overdue
• Providing accurate information to customers

The Bulletin also discusses recovery of enforcement costs by financial services providers.

Borrowing by SMSF's: ATO Alert on instalment warrants

The ATO's Taxpayer Alert TA 2008/05 "Certain borrowings by self managed superannuation funds ", discusses arrangements under which the trustee of a self managed superannuation fund (SMSF) enters into certain limited-recourse borrowings, which may not meet the conditions in subsection 67(4A) and/or breach other provisions of the Superannuation Industry (Supervision) Act 1993 (SIS Act), as well as related superannuation rules.

The ATO has identified 5 features of such arrangements which may give rise to taxation and superannuation regulatory issues.

Trustees are also reminded that existing fund assets cannot be placed into a limited recourse borrowing without breaching the SIS regulatory requirements.

The Australian Taxation Office is examining these arrangements.

In separate questions and answers on instalment warrant type arrangements, the ATO discusses instalment warrants in detail.

ASX Short Selling Consultation Paper

Following the Government's decision to remove the ambiguity in section 1020B of the Corporations Act around the disclosure of ‘covered’ short sales, the ASX has released a public consultation paper (pdf) inviting comments on a range of initiatives the ASX might pursue within its Rules.

If amended, the Corporations Act will require shareholders to report to their broker all selling where borrowing and/or the purchase of securities takes place in order to meet settlement obligations.

Feedback is requested by Thursday, 24 April 2008.

Articles:

Terry McCrann "Short selling should be banned"

Bryan Frith "ASIC, ASX asleep at the wheel"

Stuart Washington, Opes Prime Anatomy of a Collapse

ASIC’s review of mortgage entry and exit fees

The Government has released the Australian Securities and Investments Commission’s review of mortgage entry and exit fees (pdf).

The review examines Australian mortgage fee data for 298 home loan products (standard, basic and introductory rate), from a cross section of large banks, 2 other banks, credit unions and building societies, and non-Authorised Deposit-taking Institutions (non-ADIs, also known as non-banks).

Findings include:

• a majority of home loans include an additional fee for early termination. However, there is significant variation in the method of calculation of these fees and, consequently, their size. On average, non-ADI lenders charge the highest early termination fees, followed by large banks. Within each lender type, there is a loan offered with a nil early termination fee.

• The complexity of the home loan options available, and to some degree the variations in the way they are described, makes the choice for consumers a difficult one. The review provides definitions of various product terms and also considers consumer credit regulation and proposed mortgage broker licensing.

The Treasurer says consideration of a national regulatory framework for mortgage lending, to be overseen by the Commonwealth, will be informed by the ASIC report and will underpin future efforts to ensure full disclosure of fees and boost competition in the banking sector. 

The Rudd Government's Plans for Financial Services and Super

The Minister for Superannuation and Corporate Law's speech to IFSA highlighted the following:

• The Government plans to ensure that mortgages and investment loans will be regulated under uniform national legislation and that mortgage brokers, non-ADI and ADI lenders will be subject to nationally consistent licensing, conduct and advice provisions.
• the Government is still considering submissions on the introduction of a product rationalisation mechanism. This would help move customers out of outdated managed investment products and into modern ones.
• The Financial Services  Working Group  is charged with cutting lengthy and unreadable documents in the financial  services sector. It will examine disclosure documentation in a staged process. As a first step, it is exploring the development of a concise Product Disclosure Statement for our newly announced First Home Saver Accounts. The Working Group is also examining the issue of 'within product' or 'intra-product' advice in regard to superannuation products. The group will identify current obstacles to this advice.
• the Government will pursue a legislative change to the Corporations Act to address an ambiguity around covered short selling and disclosure to ensure that the current disclosure requirements apply  to such covered short sales.
• the exploration of the possibility of a mutual recognition of securities regulation  arrangement between USA and Australia
• the growing number of people on the superannuation lost members register
• some SMSF trustees are not  as aware of their legal obligations as they should be
• superannuation lump sum payments are tax free when paid to persons suffering from a terminal medical condition from 1 July 2007.
• the development of the new First Home Saver Account

Online financial services disclosures

ASIC has released a Consultation Paper (pdf) proposing to facilitate disclosure of financial services information through email and the internet as part of the Retail Investor Taskforce work to improve access to such information.

ASIC is proposing relief to enable providers to give their financial services disclosures by:

• notifying clients via email that the relevant information is available from a website and with instructions on where the information can be found; or
• sending clients an email with a hyperlink to the relevant information.

ASIC is also proposing relief to enable trustees of superannuation entities to use a website as the default method of delivering annual superannuation information (other than personal disclosures, such as periodic statements of a member's holding). The proposed relief will mean that annual superannuation information is treated in much the same way as company annual reports.

Comments are invited by 28 May 2008 

APRA finalises key general insurance refinements proposals

The Australian Prudential Regulation Authority (APRA) has released the final draft version of the proposed general insurance refinements package following industry consultation. 

There will be a short period of consultation on the related amendments to draft prudential standards when they are released later in April.

Australia-USA securities and financial services mutual recognition

U.S. Securities and Exchange Commission Chairman Christopher Cox and Australian Prime Minister Kevin Rudd have announced that the SEC, the Australian Securities and Investment Commission (ASIC) and the Australian Treasury Department have begun formal discussions to consider a mutual recognition arrangement for the two nations' securities markets. The discussions are intended to enhance cross-border law enforcement cooperation, facilitate regulatory coordination, and increase investor access to well-regulated capital markets.

The SEC and ASIC have agreed to undertake a formal assessment of each other’s regulatory systems to determine the extent to which each jurisdiction produces a comparable level of investor protection. The results of the comparability assessment would be published for public comment before being made final. Once the comparability assessment is completed, this would provide the basis for further discussions between the SEC and ASIC regarding a formal mutual recognition arrangement, which would include specific discussion of the extent to which, and under what circumstances, U.S. and Australian securities exchanges and market participants could operate in each other’s markets and would articulate the additional cooperation arrangements that would be necessary and appropriate to ensure the integrity of financial markets and the protection of investors.

Reserve Bank Financial Stability Review: Crisis Management Arrangements

The Reserve Bank's March 2008 Financial Stability Review gives an overview of the global financial environment and Australia's financial system concluding with a discussion of crisis management arrangements, ADIs’ liquidity management policies and proposed regulation of mortgage brokers.

The Review discloses that the Council of Financial Regulators has been reviewing aspects of Australia’s arrangements for the management of a financial crisis in the light of UK's Northern Rock experience. It discusses 2 particular areas:

arrangements in Australia would be enhanced by the establishment of a scheme to repay depositors in a failed authorised deposit-taking institution (ADI) in a timely fashion. Under the existing legislation, depositors rank ahead of other creditors in a failed ADI, although they are likely to have to wait some time before they could be repaid. Given this, the Council is working on an Early Access Facility, which would provide early repayment of up to $20 000 per depositor in a failed institution; it is estimated that this cap is sufficient to cover the entire deposits of around 80 per cent of depositors...

reviewing APRA’s powers for dealing with a distressed financial institution. While these powers are more extensive than those available to the Financial Services Authority in the United Kingdom, the Council has recommended legislative changes that would give a statutory manager appointed by APRA additional powers, and provide APRA with greater flexibility in arranging a takeover by, or a transfer of assets and liabilities to, another ADI in a timely fashion.

APRA's view on securitisation of assets for contingent liquidity purposes

APRA has written to ADI's giving its view on ADIs seeking to securitise a portion of their loan portfolio specifically to create mortgage-backed securities that are eligible for repurchase agreement (repo) transactions with the Reserve Bank of Australia (RBA).

APRA’s understanding is that ADIs intend to hold all of the securities issued by the securitisation vehicle until needed in obtaining liquidity from the RBA.

APRA has agreed that the proposed structures can be designed to meet APRA’s prudential requirements, subject to the provisions outlined in its letter and the conditions under which the RBA will accept these securities.

The ADI is expected to treat the entire pool of securitised loans as on-balance sheet assets for capital adequacy purposes under APRA’s Prudential Standard APS 120 Securitisation, Attachment B paragraph 23.

At this point however, APRA does not consider the securities issued under such structures to constitute part of the ADI’s liquid assets.

AFS licensees: compensation requirements

ASIC has issued a reminder to Australian financial services licensees that the compensation requirements in s912B of the Corporations Act 2001 commence, for most licensees, on 1 July 2008. 

Many licensees will comply with these requirements by obtaining professional indemnity (PI) insurance. Those licensees who are seeking ASIC’s approval of alternative arrangements are reminded that they will need to apply to ASIC for approval soon.

Regulatory Guide 126 Compensation and insurance arrangements for AFS licensees  

Liquidity in the Australian mortgage-backed securities market: is it time for AussieMac?

Joshua Gans and Christopher Joye from the Melbourne Business School argue that the markets for primary residential mortgage-backed securities in Australia are not operating efficiently.

"Under our proposal, the Commonwealth would guarantee the credit worthiness of an Australian government agency, which we loosely call ‘AussieMac,’ thereby lending it Australia’s AAA credit rating. This would allow AussieMac to issue substantial volumes of very low cost bonds into the domestic and international capital markets. The funds raised through issuing these bonds could be used to acquire high-quality AAA-rated Australian home loans off the balance-sheets and warehouse facilities of lenders (including the majors). AussieMac would, therefore, serve to guarantee liquidity in the Australia home loan market in the event that other private sources of capital were to supply insufficient funding, such as is currently the case."

Australian Financial Review article

Full paper: Aussie Mac: A Policy Proposal for Australia

Legal and Economic Issues in Subprime Litigation

Harvard Law School has published an article on Legal and Economic Issues in Subprime Litigation by Jennifer E. Bethel, Allen Ferrell and Gang Hu which explores the economic and legal causes and consequences of recent difficulties in the US subprime mortgage market.

The paper discusses:

• the process by which loans to homeowners are securitized and discusses the role of various participants in the mortgage securitization market,
• the causes and consequences of the current subprime lending difficulties,
• reasons why market participants may have underestimated risks related to subprime lending,
• the legal issues facing market  participants (in USA). 

The paper is based on data rather than anecdotes and concludes that litigation will either:

• identify that there were weak links in the chain of participants that originate, appraise, and service collateral, and underwrite, manage, insure, rate, and sell securities; or
• highlight where the market may have underestimated certain risks or failed to anticipate particular circumstances, rather than the actions of any particular market participant.

ASIC grants relief for share and interest sale facilities

ASIC has announced class order relief from provisions of the Corporations Act to facilitate the operation of certain share and interest sale facilities. This relief is provided in ASIC Class Order CO 08/10 Share and interest sale facilities and explained here .

ASIC has also released Regulatory Guide 161 Share and interest sale facilities (RG 161), which explains the relief given in CO 08/10, and ASIC’s approach for sale facilities not covered by the class order.

Share and interest sale facilities are facilities that some companies and issuers of interests in managed investment schemes offer to their members from time to time. These sale facilities can provide an easy and cheap way for their members, especially those with small holdings, to dispose of their holdings at or near their current market value.

CO 08/10 provides relief from a range of provisions of the Act. This will allow companies and product issuers to offer certain sale facilities and related facilities for the purchase of shares or interests, and reduce costs for those companies and product issuers by removing the need for them to apply to ASIC for individual relief before offering such facilities to their members.

The relief only applies to facilities where the shares or interests are sold in the ordinary course of trading on a licensed market or approved foreign market. The relief is also subject to other limitations and conditions. The details are set out in RG 161 and the class order.

If an issuer proposes to operate a sale facility that is not covered by the class order relief, it can apply for individual relief.

First Home Saver Accounts update

The time for submissions in response to the First Home Saver Accounts Consultation Paper has closed.

The final administrative and legislative features of First Home Saver Accounts have not yet been decided.

Liquidity, Licensing and Super Funds

Ramani Venkatramani, General Manager Diversified Institutions, Australian Prudential Regulation Authority, jn a speech  Liquidity, Licensing and Super Funds - What's on APRA's agenda'. has warned that Superannuation Fund Trustees need to ensure that they have built sufficient flexibility into their respective funds to ensure they can meet their fiduciary obligations as well as member expectations.

He said that super trustees should not presume that APRA will routinely exercise its power to freeze redemptions unless warranted in the best interests of members.

Risk management systems and controls

The UK Financial Services Authority (FSA) has published Market Watch 25 (pdf), which focuses on firms' reviews of their systems and controls in light of the Société Générale (SG) 'rogue trader' incident.

Market Watch highlights the measures firms should consider when reviewing the systems and controls which protect them against 'rogue trader' risk.

Amongst other areas, Market Watch looks at:

• Front office culture and governance, in particular are traders encouraged to take two-week continuous holidays, and appropriate segregation of front office staff from middle and back office functions;
• The use of suspense accounts;
• The quality of management information, both routine and outside normal parameters; and
• Elementary IT precautions, such as whether access to systems is password dependent.