Langes Compliance Assurance meeting 1 September

LCAP members can download information here (password protected).

What is responsible lending?

Both the National Consumer Credit Protection Bill and the Corporations Act (Financial Services Modernisation) Bill require that licensees (for consumer credit and margin lending respectively) comply with responsible lending conduct obligations.

Responsible lending will apply to brokers and previously unregulated lenders from 1 January 2010. It will apply to ADI’s and registered finance companies from 1 January 2011.

These obligations require licensees to make disclosure to consumers about the application and assessment process and prohibit credit providers from making loans which are unsuitable for borrowers.

And for the first time laws will regulate the credit assessment process by requiring lenders and brokers to make reasonable inquiries about a borrower’s financial situation and to verify information they receive.

The laws fall short of telling lenders how to assess and price risk but do set a minimum standard for credit assessment.

The UK Financial Services Authority conducted a Responsible Lending research project in 2007-8.

Its key conclusions were:

  • lenders could have been more cautious in their approach to lending
  • more stringent checks could have been applied to ensure customers had the ability to pay over the life of the term
  • in determining affordability, more emphasis could have been put on checking customers’ general expenditure as well as expenditure on credit.

Whilst the reasons for the provisions (eg better identification of consumers in financial difficulty, reduction of high-risk lending) are well-known, what does this mean in practice?

For all regulated loans, lenders must be able to show they have taken into account a customer’s ability to repay. For a broker-introduced loan, both lenders and brokers have their own responsibility to consider whether the borrower can afford to repay the loan. Neither can pass on their responsibility to the other. Each must come up with their own judgment as to whether the loan is affordable: the lender cannot use the broker’s judgment as their own and vice versa. However, where it is reasonable to do so, each can rely on information passed to them to help them arrive at their own judgment.

Low-doc loans or loans reliant on borrower self-certification may not be able to be made unless a lender can independently verify the financial information provided. If tax returns are not available for self-employed applicants, can they provide BAS statements?

There will also be an impact on the term of loans if a loan ends post-retirement and there is no evidence of post-retirement capacity to pay.

For interest-only loans, what evidence is there that the borrower can repay the capital?

For low-start loans, what evidence is there that the borrower can afford the repayments after the honeymoon period ends?

Lenders will need to review their loan application forms and product terms to ensure the necessary information is collected.

New AML/CTF Rules

The Anti-Money Laundering and Counter-Terrorism Financing Rules Amendment Instrument 2009 (No.4) has been registered.

The rule covers

  • definition of 'certified copy' and 'certified extract';
  • corporate treasuries;
  • threshold transaction reporting for authorised deposit-taking institutions;
  • sale of shares for charitable purposes; and
  • premium funding loans for general insurance policies.

Product safety information

The ACCC is the responsible Commonwealth agency for product safety under the Trade Practices Act.

How do you find out what has been banned, recalled or is the subject of product safety or information standards?

You can sign up for email updates at these pages:

Draft personal bankruptcy reform bill released

Attorney-General, Robert McClelland, has released the exposure draft Bankruptcy Legislation Amendment Bill 2009 containing the Government’s proposed reforms to Australia’s personal bankruptcy laws for public consultation.

The proposed amendments will:

  • increase the minimum debt for which a creditor can petition for bankruptcy from $2,000 to $10,000;
  • increase the stay period from when a declaration of intent to file a debtor’s petition is filed to when a creditor may commence action to recover debts from seven to 28 days; and
  • increase the debt, income and asset tests thresholds for debt agreements.

In addition, the Bill proposes to strengthen the penalties for some offences, particularly those involving fraud, to appropriately reflect the seriousness of the conduct and ensure the penalties align with similar offences in other Commonwealth, State and Territory legislation. It also strengthens powers for the Inspector-General in Bankruptcy to investigate possible offences.

It appears that the proposal to reduce the bankruptcy period for first time bankrupts is not being implemented.

The draft Bill will be open for public comment until Monday, 14 September 2009

ASIC to take over supervision of financial market trading

The Treasurer, Wayne Swan MP and the Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen MP, have announced changes to the supervision of Australia's financial markets.

The Government has decided to provide for the Australian Securities and Investments Commission (ASIC) to perform supervision of real-time trading on all of Australia's domestic licensed markets. This change will mean that ASIC will now be responsible for both supervision and enforcement of the laws against misconduct on Australia's financial markets.

The changes will mean that ASIC will become responsible for supervising trading activities by broker participants which take place on a licensed financial market, while individual markets – such as the Australian Securities Exchange (ASX) - will retain responsibility for supervising the entities listed on them.

There is no proposal for ASIC to take over supervision of listed entities.

It is intended that legislation will be introduced into Parliament next year to give effect to this change, with ASIC to begin performing these functions in the third quarter of 2010.

Renewable energy targets

The Senate has passed the Renewable Energy (Electricity) Amendment Bill 2009 and the Renewable Energy (Electricity) (Charge) Amendment Bill 2009 in order to implement a national Renewable Energy Target scheme with the goal of increasing to 20 per cent the renewable energy in Australia's electricity supply by 2020.

Draft Corporations Amendment Regulations 2009: margin loans, trustee corporations and debentures

The Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen MP,has released for public comment draft Regulations and explanatory material for the Corporations Amendment Regulations 2009 in relation to margin loans, trustee corporations and debentures.

The draft Regulations give effect to the following matters dealt with in the Corporations Legislation Amendment (Financial Services Modernisation) Bill 2009:

  • the national regulation of margin loans;
  • the national regulation of trustee companies; and
  • enhancements to the regulation of debentures.

The margin loans regulations include the following:

  • the unsuitability assessment provided as part of the responsible lending requirements does not constitute the provision of financial advice;
  • a detailed methodology is provided for calculating the monetary threshold contained in the Act for distinguishing between retail and wholesale clients in relation to margin loans;
  • a number of specific matters are prescribed that lenders must take into account when conducting the unsuitability assessment as part of the responsible lending requirements. These are matters that are considered to contain particular risks to potential borrowers. It is further prescribed that the same matters must be addressed in a Statement of Advice that recommends a margin loan;
  • a number of situations are specified for which a margin loan must be assessed to be unsuitable for the client; and
  • the contents required of periodic statements for margin lending facilities.

The regulations also include new provisions where specific arrangements are prescribed for situations where a credit limit breach occurs due to unilateral action by the borrower that is beyond the control of the provider. The arrangements allow a grace period for conducting the unsuitability assessment within a defined period after the breach occurs.

The trustee company regulations contain a list of trustee companies which will be required to hold an Australian financial services licence (AFSL) covering the provision of traditional trustee company services

The debenture regulations require ASIC to establish and maintain a register of trustees for debenture holders and will require debenture issuers to lodge certain information with ASIC for the purposes of the register.

Submissions are due by 18 September 2009

Draft AML/CTF Rules relating to cashing out of low balance superannuation

Austrac has released draft AML/CTF Rules exempting superannuation funds from carrying out the customer identification requirements of the AML/CTF Act on customers where the superannuation account balance is not greater than $1,000, the whole of the interest of the customer in the superannuation fund has been cashed out and the customer's account is closed as soon as practicable after the cashing out.

A public consultation period is open from 20 August 2009 to 3 September 2009.

Senate reports on Personal Property Securities Bill 2009

The Senate Legal and Constitutional Affairs Legislation Committee's Report on the Personal Property Securities Bill 2009 recommends passage of the Bill be deferred until 30 September 2009 to allow time for consideration of outstanding issues, including privacy issues.