It identified complaints relating to financial hardship, deferred establishment fees, default listings and motor vehicle leases as systemic issues.

The single largest source of complaints was financial hardship: 34% of all complaints it received related in some way to financial hardship, specifically the failure of a lender to agree to a payment variation on grounds of financial hardship.

The underlying causes of the financial hardship complaints were identified as unemployment or reduced income (30%), cost of living, including other debt (21%), followed closely by illness of the borrower or their family member (19%), business failure (14%), interest rate increases (8%), relationship breakdown (7%) and natural disasters (1%).

In about 72 per cent of those cases the borrower had been served with a default notice or the lender had commenced legal proceedings, repossessed the security or issued a notice to vacate.

In Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389 (heard together with FirstMac Ltd v Di Benedetto; FirstMac Ltd v O’Donnell) the Supreme Court of New South Wales Court of Appeal held that although a broker (Streetwise Loans) was not the agent of Tonto Home Loans Australia Pty Ltd in one case and Permanent Trustee Company Ltd, in two other cases, the circumstances in each case lead to the conclusion the loan contracts were unjust under the Contracts Review Act 1980 (NSW). Tavares and Di Benedetto were relieved of all liability under their loans and the O’Donnells were given 75% relief.

No finding was made of unconscionability.

ASIC intervened in the trial and was a respondent in each appeal.

The 3 cases related to investments in Streetwise Properties by borrowers introduced by Streetwise Loans who were introducers for Tonto Home Loans. Judge Allsop described the matter as one “where a lender uses contracted so-called “mortgage originators” which in turn use their own networks of so-called “sub-introducers” to find and bring forward potential borrowers and one of those sub-introducers engages in deceptive, indeed dishonest, conduct that leads to the borrowers borrowing funds from the lender and providing mortgage securities in return. In each case, the borrowers, after a body of conduct directed towards them involving a mixture of falsehoods and pressure and their own imprudence, entered the borrowing arrangements and provided the funds obtained to a company associated with the sub-introducer, which funds were ultimately lost.”

Streetwise’s director was subsequently found guilty of fraud.

Structure of the lenders
The loans were funded through two wholesale lending programmes: the “Origin Program” ( funded by ANZ in respect of which Permanent was the lender to the borrowers but Tonto HL had delegated authority to assess each loan application and to make a credit decision on lending) and the “FirstMac Program” (in respect of which Tonto HLA was the lender to the borrowers).

The Tavares loan was placed under the FirstMac Program with Tonto HLA as lender. The O’Donnell loan was initially placed under the FirstMac Program, but transferred to the Origin Program, after funding reached a relevant limit on the FirstMac Program. The Di Benedetto loan was placed under the Origin Program.

Judge Allsop made the following general comments:

“First, for the prudent operation of the programmes, introducers of loan applications, such as S Loans should be reputable. Fraud can be seen as an obvious systemic risk. Depending on the precise function undertaken by such introducers, the lending process was necessarily, to a degree, reliant on the introducer being honest and businesslike in the choice of customer, the extraction of relevant information from the customer and the choice of loan product suitable to the customer.

Secondly, whilst enquiries as to probity and competence could be carried out about introducers, the drawing up and the administration of proper lending guidelines was the essential systemic check to avoid lending to unsuitable borrowers. Such guidelines can be seen as part of the business structure of the programme manager (Origin and FirstMac) and mortgage manager (Tonto HL) in the interests of the funds provider and the programme manager. They can be seen also, indirectly, as some protection of putative borrowers who might apply for loans in amounts or under terms unsuitable to them. Such is not to say, however, that the funders owed any legal duty to act in the interests of prospective borrowers. No such submission was put.

All of the loans were in fact approved by the one person… under the FirstMac lending manual and guidelines. …”

The loans
The primary judge made the following findings:

(a) No check was made as to whether the borrowers qualified for Lo Doc loans “as being owner-occupiers or investors who had limited income verification and had been self-employed for two years” .
(b) No searches or enquiries were made in relation to any ABN numbers.
(c) No enquiries were made to confirm that the borrowers were self-employed trading in the same business for a minimum of two years.

“The primary judge found that the failure to follow the lending guidelines made it easier for the fraud of Streetwise to remain undetected. Indeed, had the guidelines been followed with some rigour, it is difficult to see how the loans would have been made. ”

In fact all of the loans were “asset based loans” where the borrowers had no capacity to pay.

In support of his conclusion that the contracts were unjust Judge Allsop emphasised the following:

“254 The central feature that brought about the loan agreements and mortgages was the dishonest conduct of Streetwise in the filling in, and submission of, the various forms and information to Tonto HL. This brought about the contracts which would not have been entered without false information. This was done for the financial advantage of S Property and the principals of Streetwise, to the distinctly possible (at the time) detriment of the lenders and the borrowers.

255 That S Loans was not in law the agent of Tonto HL does not mean that for the purpose of evaluating the operation of the CRA , the position of Streetwise, how it came to take its place in the overall enterprises of the lending programmes and the objective perceptible risk of fraud arising from its position should not be considered.

256 The perpetrator of the fraud was not a stranger to Tonto HL. It was a retained introducer. It was a sought-after commercial counterparty put in place by Tonto HL for the purpose of hoped for introduction of business. It was part of the “shopfront” of the retail business of the enterprise, albeit sub-contracted, and branded as Streetwise. Its role was to introduce business, obtain information in respect of suitable products and bring forward applications. The characteristics of the group of companies to which it belonged gave it its commercial attractiveness to Tonto HL. As a broking arm of a group engaging in property development it had the attraction to Tonto HL of members of the public as customers engaging in property development or buying property from the group and seeking money so to do. It was obvious commercially that Streetwise was obtaining sources of funding for members of the public going into or doing business with it (all funds at settlement being directed to S Property) and thus providing funding directly or indirectly for its projects. One need not be too specific about this. It is sufficient to recognise that S Loans had a significant incentive (beyond the obtaining of commission) for successful applications, and that this was objectively evident to a commercial party in the position of Tonto HL. In a structure based on independent contract without the control over employees, there was an inherent or systemic risk of exaggeration and fraud which came to pass. This was only heightened by the agreement not to contact prospective borrowers until after settlement, which necessarily weakened Tonto HL’s
ability to apply its own credit guidelines under both programmes with appropriate commercial vigour.

257 One legitimate way of analysing the facts is that through S Property, S Loans was the agent of the borrowers. If S Loans had been worth powder and shot any suggestion that it was not acting for the borrowers would have been shortly dealt with. Nevertheless, this legal position should not be over emphasised in the whole commercial context in which the lending took place, in particular the place and function of S Loans in the commercial enterprise of the lending programmes.

258 Whilst the effect of the “badging” of the approvals with the Streetwise logo and name should also not be overstated, its capacity (correctly recognised by the primary judge) to mislead or confuse should not be ignored. As was apparently common in the industry, Streetwise was assisted through the badging (reinforced by the agreement of Tonto HL not to contact prospective borrowers before settlement) to represent itself as closely connected with the lending and as a company of substance. This permitted some of the borrowers to think, at least up until the final loan and mortgage documentation was sent to them, that Streetwise was the lender. Thus, a sense of completeness of disclosure in the customers was brought about, irrespective of the formalities in the various documents that were shown. Once again, this capacity to mislead was created by the structure and operation of the commercial arrangement put in place by Tonto HL.

259 The only clear organisational checks and precautions were the guidelines. Not only were they not followed, but they were disregarded in a way found by the primary judge to reflect a lack of real concern for aspects that underpinned serviceability and the suitability of the borrowers. Of course, lending guidelines such as these are principally the relevant tool to protect the lender’s interests. However, as recognised by Spigelman CJ in Perpetual Trustee Company v Khoshaba [2006] NSWCA 41 at [80]-[82] and Campbell JA in Kowalczuk at 228 [102], following the guidelines confers a direct benefit on a prospective borrower by identifying risky loans and preventing fraud. The failures can be seen to be material in permitting the fraud to occur.

260 There can be no doubt that, to varying degrees, these borrowers were preyed upon by Streetwise, through the blandishments and lies of apparently sophisticated and skilful people. The written page can never fully reflect, in recalled snippets of conversations, the effects of personality, charm, pressure and deception in a carefully orchestrated body of persuasion of ordinary people. That is not to say that the borrowers were not careless, to a degree, foolish and gullible. They all succumbed to the lure placed before them of monetary gain, the lure being made more respectable by its characterisation as the provision for their future and “wealth-building” for their later years. Greed would be too strong a word, and unfair perhaps. But such caution as was initially revealed by them dissolved under the persuasion of, and trust in, Streetwise. These matters went, in particular, to the collateral joint venture transaction. To complete the exercise of deception, a group of lies directed to obtaining the contracts in question was necessary.

261 The above said, the behaviour of the borrowers to a degree militates against any conclusion of injustice. The signing of incomplete or blank documents was careless, giving the opportunity for the fraud. The carelessness also extended to the degree to which the documents were misleading; though, to a significant, indeed overwhelming, degree the causative deception occurred through the dishonesty of Streetwise. …

264 The position of the lenders should not be judged as detached third parties, distinct and separate from what happened. Nor should they be seen as complicit with, or actually knowing of, Streetwise’s deception, fraud and predatory conduct towards the borrowers. Whilst not having actual knowledge or actual notice of Streetwise’s behaviour, the lenders’ position should be assessed by reference to the reality of the significant responsibility of those structuring the elements of the lending programmes or, in the case of Permanent, those providing the wholesale funds. The mortgage manager (Tonto HL) with delegated lending authority operated the guidelines loosely and in a way which reflected a lack of concern with the suitability of the borrowers and serviceability. The mortgage manager brought into the roles of interviewing and selecting prospective borrowers an intermediary whose commercial attractiveness bespoke the inhering risks to which I have referred, heightened by Tonto HL’s agreement not to contact prospective borrowers before settlement. These considerations materially facilitated the ability of Streetwise to effect these frauds.

265 In all the circumstances, these considerations are relevant to conclude that the unjustness of the contracts can be seen as unjustness affecting Tonto HL and the lenders. This conclusion is relevant to the assessment of unjustness and the extent to which the lenders should be viewed as bearing responsibility for what happened and in applying the broad considerations contained in the CRA , founded as they are in justice and fairness. Looking at these events as brought about primarily by the fraud of Streetwise, a fair assessment is that the business structure put in place by the lenders in how it operated was significantly responsible for the preying upon these people by Streetwise. That is not to ignore the basis upon which the trial and appeal proceeded, that “Lo Doc Lending” per se was not unjust. Nor is it to introduce an enterprise concept of agency; rather it is to recognise that a sub-contracted lending structure of the kind here, in which persons such as Streetwise are “chased” to become the introductory agents, should have guidelines enforced with real vigour to deal with the obvious objective risks of fraud and deception. No one criticised these guidelines. Their operation was loose, and affected by the attitude found by his Honour. It is only fair and just to recognise the significant responsibility of the lenders in these circumstances.

266 Unjustness is a not concept or word with immutable or unvarying content. The degree of unjustness here stems primarily from the fraud and procedural injustice of Streetwise. Though not the agent in law of Tonto HL or Permanent, it was, as I have explained, the link in the business enterprise for which, in the sense I have discussed, the lenders, through Tonto HL, should take significant responsibility.

277 In respect of the Di Benedettos, Mr Tavares and Ms Rowe, the order that is appropriate, in all the circumstances of the unjustness, including the public interest to which I have referred, is to relieve them of liability as the primary judge did (recognising the repayment by Mr Tavares and Ms Rowe and amending the orders about the mortgages).

278 From the evidence as to their resources, a substantive share of responsibility for the loans could well deprive them of their homes. In the circumstances of their being misled and preyed upon by Streetwise and all the other circumstances, such a result would be unjust.

279 The O’Donnells are in a somewhat different position. The evidence reveals that Mrs O’Donnell, in particular, expended considerable effort in understanding what the property venture was. Their decision to enter all the transactions was significantly more the result of the exercise of free will than the decisions of the Di Benedettos and Mr Tavares and Ms Rowe. The assessment is not an easy one to make; but I am left with the positive persuasion that it would involve a degree of injustice to the lender to remove all consequences of responsibility for what happened from the O’Donnells. It is, of course, to be remembered that it is the loan agreement that was unjust because of the fraud of Streetwise. Further, Mrs O’Donnell was to a degree misled about the identity of the lender. Nevertheless, they wanted this borrowing to effectuate their considered decision to enter into the arrangement with Streetwise, they having chosen not to make use of their available advisers (accounting and legal).

280 In my view, an unjust consequence (both to the O’Donnells and the lender) would be avoided by relieving them of three quarters of the financial consequences of the loan agreement. To do more would be unjust to the lender…

286 It is unnecessary to resolve finally the question as to the operation of either s 12CB or s 12CC [of the ASIC Act] because, in my view, the conduct of Tonto HL, and through it the lender, cannot be described as “unconscionable”. Section 12CA also therefore should not apply.”

ASIC was concerned CBA’s home loan ads promoting its Wealth Package loans did not include the Wealth Package $350 annual fee in the advertised comparison rate.

Section 166 of the National Credit Code and Regulation 100 require the comparison rate to include each fee or charge (if any) payable by the debtor at the time each repayment is made, being a credit fee or charge (other than a government fee, charge or duty) that is ascertainable when the comparison rate is disclosed (whether or not the credit fee or charge is payable if the credit is not provided).

A fee or charge is not ascertainable and need not be included in the calculation if their imposition or amount is dependent on events that may or may not happen.

The Home Loan Key Facts Sheets personalised comparison rate is based on the normal comparison rate calculation except for the loan amount and term nominated by the consumer and any other information required by a lender.

The National Consumer Credit Protection Act 2009 incorporates the home loan key facts sheet provisions of the National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Act 2011 but not the credit card provisions.

The National Consumer Credit Protection Regulations 2010 includes the National Consumer Credit Protection Amendment Regulations 2011 (No. 5) (the home loan key facts sheet regulations) but not the National Consumer Credit Protection Amendment Regulations 2011 (No. 6) (for credit cards).

Topics have been selected for their relevance for Responsible Managers. It is a practical guide to the most recent changes and topical issues affecting financial services and credit licensees, including latest cases, legislation, regulatory developments and other tips on how to prove compliance to ASIC.

Attendance will count towards CPD points.

More information and to register

From 6 June 2012 ADI’s which do not comply with the new price signalling laws in the Competition and Consumer Act in relation to their credit activities will not only risk a fine of up to $10 million but also breach their credit licence.

The new laws prohibit anti-competitive price signalling and other information disclosures in activities undertaken by an Authorised Deposit-taking Institution when taking deposits, (otherwise than as part-payment for identified goods or services) and lending money.

The Competition and Consumer Amendment Act (No. 1) 2011 prohibits both the private disclosure of pricing information between competitors and disclosures which take place in the public domain and/or are related to information other than pricing information if they were made with the purpose of substantially lessening competition.

Exemptions include:

•Disclosures in the ordinary course of business (eg advertising)
•Discussions between credit providers and credit service providers and for insolvency purposes

But pricing discussions between competitors in relation to interest rates and fees and charges will be regulated. More

What other laws are relevant to compliance with your credit licence conditions?
• ASIC Act;
• Banking Act;
• AML/CTF Act;
• Privacy Act (credit reporting provisions).

In respect of the Privacy Act, it is worth noting the recent case of Q and Financial Institition [2011] AICmrCN 11 relating to the improper disclosure of a borrower’s personal information.

The main change to RG 206 is to replace the term ‘mortgage broking services’ with the term ‘home loan credit assistance’, (which ASIC defines as credit assistance in relation to a credit product where the credit is secured by real property) and to permit a representative only providing credit assistance in relation to home loans offered by their own licensee (as opposed to representatives of intermediary mortgage brokers) to complete training in the form determined appropriate by the licensee, subject to certain qualifications.

The revised RG 206 make changes to the requirements for the qualifications of representatives, ongoing training for representatives, the type of training for representatives and the qualifications of responsible managers of credit licensees.

ASIC has not changed its policy regarding qualifications for responsible managers of independent mortgage brokers or representative training for the intermediary mortgage broking sector.

We will discuss the changes at our Responsible Managers seminars in February 2012.

Qualifications
ASIC remains concerned to ensure that credit provider representatives providing credit assistance in relation to home loans are fully trained to perform this role (as well as any other roles they have). ASIC has therefore required that their training should allow the representative to achieve the outcomes specified in Table 2 of RG 206, as well as covering other areas appropriate to their role.

ASIC will no longer require credit provider representatives only providing credit assistance in relation to home loans offered by their licensee to complete a specific training course.

Responsible managers of credit providers providing home loans will no longer need to complete a Certificate IV in Finance and Mortgage Broking, but will instead be able to hold any relevant credit industry qualification to at least the Certificate IV level, or another general relevant higher level qualification (e.g. a diploma or university degree).

Ongoing training
In relation to ongoing training requirements for representatives who provide home loan credit assistance, while ASIC has retained its guidance that 20 hours is an appropriate suitable minimum number of hours of CPD each year, ASIC will also give these representatives the option of a regular ‘knowledge update review’—a test administered by a registered training organisation via a secure facility, assessing the representative’s knowledge of key regulatory and market developments, as relevant to their role and industry sector—as part of meeting their continuing professional development obligations: see RG 206.93.

If affected representatives choose to undertake a regular knowledge update review, ASIC will not require them to complete the minimum 20 hours of CPD each year. Nevertheless, these representatives are likely to need to undertake a reasonable amount of CPD each year in order to maintain their knowledge of key regulatory and market developments, for the purposes of completing their regular knowledge update review.

ASIC will monitor how the credit industry complies with RG 206 over the next three years, and the broader standards of training and competence within the industry and will review its policy in light of any findings arising from that monitoring process. If, at that stage, ASIC is not confident that the more flexible arrangements it has announced are effectively ensuring a high standard of organisational competence and representative training in the industry, it may investigate whether a more prescriptive approach would be appropriate.

Type of training
ASIC has explained that CPD activities undertaken to meet RG 206 should be relevant to the purpose of ensuring that representatives are adequately trained to provide credit services; however, they need not simply be directed at understanding compliance requirements. CPD may encompass a variety of relevant credit-related educational activities, including both product and industry developments related to credit. ASIC thinks internal training on systems, procedures and policies relevant to a representative’s role may also make up a proportion of ongoing training.

ASIC’s guidance is not intended to constitute an exclusive list of activities that may be counted towards CPD: see RG 206.92. ASIC has also clarified that it generally does not regard private study as adequate for the purpose of meeting the CPD requirements, unless it involves audio or visual material specifically designed for the purpose.

Qualification requirements for responsible managers of mortgage brokers, as they apply to credit provider licensees.

ASIC has recognised that responsible managers of credit providers are often responsible for diverse businesses, and has modified its policy in relation to qualifications for credit licensees’ responsible managers. RG 206 now states that responsible managers of licensees that only provide credit assistance in relation to their own home loans may hold credit industry qualifications to at least the Certificate IV level, or another general relevant higher level qualification (e.g. a diploma or university degree): see RG 206.53.

However ASIC requires Responsible Managers of credit providers who oversee representatives providing credit assistance in relation to home loans should take account of the training outcomes it proposes to apply to such representatives (see Table 2 of revised RG 206), and review their own qualifications in this light.

Updating licence conditions
Following on from its change of policy, ASIC will be updating PF 224 Australian credit licence conditions and making any other necessary changes to regulatory guides. These changes will take effect in early 2012. If you are a credit licensee that currently has a licence condition relating to mortgage broking services and you believe that you no longer require it as a result of ASIC’s change of policy, you may apply to ASIC to vary the conditions on your licence.

Money management service providers who give financial advice about basic deposit products in the course of providing a money management service have also been granted limited relief [CO 11/927] from licensing requirements under the Corporations Act 2001 .

Rural financial counselling services are available to primary producers and rural small businesses in financial difficulty and are funded in whole, or in part, by the Commonwealth Government through the Department of Agriculture, Fisheries and Forestry (DAFF) or, in Queensland, through the Department of Employment, Economic Development and Innovation (DEEDI).

Money management services are provided predominantly to improve the financial knowledge and skills of consumers, principally Indigenous consumers in regional and remote Australia. These service providers are funded in whole, or in part, by the Commonwealth through the Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA).

ASIC’s exemptions are subject to important conditions, namely that:

• the regulated service is provided to the consumer as part of a rural financial counselling or money management service;
• no fees or charges are payable by the consumer for any aspect of the rural financial counselling service or money management service;
• the service providers do not engage in any credit activity or financial services business beyond the scope of these exemptions, and take all reasonable steps to ensure that none of their employees do so; and
• the service provider ensures its representatives have undertaken appropriate training to ensure that they have adequate skills, knowledge and experience to satisfactorily provide the services.

The claims are on behalf of 45,000 customers of Commonwealth Bank, 30,000 customers of Westpac, 30,000 customers of NAB, and 10,000 customers of Citibank. Including 38,000 customers in the ANZ case, proceedings have now been issued for over 150,000 bank customers.

The value of the claims against the five banks totals $197 million including $50 million against the ANZ, $56 million against Commonwealth Bank, $38 million each for National Australia Bank and Westpac and $15 million for Citibank.

These seminars for AFS and ACL licencees cover current hot topics and a general update on things you must get right. The seminars delve in depth into all the ‘must-know’ rules and traps for each topic.

Topics are selected for their relevance for Responsible Managers. All
topics contain practical case studies and examples.

It is a practical guide to the most recent changes and topical issues affecting financial services and credit licensees, including latest cases, legislation, regulatory developments and other tips on how to prove compliance.

Key Information

* Cost: $330 (incl GST) per person
* CPD points: 3 points
* Time: 9am – 12:30 noon (registration 8:30am)
* Location: Brisbane, Sydney, Melbourne Adelaide
* Designed for: Responsible Managers who wish to stay up to date with all the relevant finance industry regulatory news

When and where
Brisbane: Tuesday 7 February 2012
Sydney: Wednesday 8 February 2012
Melbourne: Tuesday 14 February 2012
Adelaide: Wednesday 15 February 2012

Register your interest
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