Credit Union and Mutual Law Blog

January 27, 2012

Queensland duty on mergers, acquisitions and transfers of assets of financial institutions

The Queensland 2011-12 Mid Year Fiscal and Economic Review delivered on 13 January included an announcement of the “deferral of the abolition of duty on the transfer of core business assets until the Budget can accommodate the abolition”.

Under The Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations (the GST Agreement) business asset duty was previously scheduled to be abolished in Queensland on 1 July 2013. The duty affects non-land assets. Other states have already abolished it.

For financial institutions the duty affects Queensland assets transferred under a merger, including loan securities.

Public Ruling DA000.8.1 provides ex gratia relief for the loan portfolio and any statutory liquidity requirement for ADI’s (including mutuals) in a business transfer transaction made under and in accordance with the Financial Sector (Business Transfer and Group Restructure) Act 1999 (Cwlth).

Langes can advise you on the state duty implications of financial institution mergers throughout Australia.

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Posted 27th January 2012 by David Jacobson in Legal

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January 3, 2012

New APRA Standards commence

New APRA Standards (associated forms) for capital adequacy, market risk, securitisation and prudential disclosure commenced on 1 January 2012.

Download new APS 111, 116, 120, 310 and 330 here.

APRA’s Response to Submissions lists the changes to the previous standards.

Banking (prudential standard) determination No. 5 of 2011 - Prudential Standard APS 111 – Capital Adequacy: Measurement of Capital

Banking (prudential standard) determination No. 6 of 2011 – Prudential Standard APS 116 – Capital Adequacy: Market Risk

Banking (prudential standard) determination No. 7 of 2011 - Prudential Standard APS 120 – Securitisation

Banking (prudential standard) determination No. 8 of 2011 - Prudential Standard APS 310 – Audit and Related Matters

Banking (prudential standard) determination No. 9 of 2011 – Prudential Standard APS 330 – Capital Adequacy: Public Disclosure of Prudential Information

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Posted 3rd January 2012 by David Jacobson in Legal

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December 21, 2011

Payments fraud in Australia

The Australian Payments Clearing Association (APCA) has released statistics for cheque and payment card fraud in Australia for all financial institutions the 12 months to the end of June 2011.

Whilst cheque fraud dropped, scheme credit, debit and charge card fraud (signature-permitted debit, credit and charge cards and card-not-present (CNP) transactions) increased from 58.9 cents to 74.3 cents in every $1,000 transacted. The incidence of fraud on these cards increased from 34.6 to 41.9 in every 100,000 transactions.

CNP fraud is increasing. CNP is where the consumer is not face-to-face with the retailer – shopping online, by mail or by phone.

The figures show that CNP now accounts for 71% of fraud value on Australian-issued scheme credit, debit and charge cards, of which more than half occurs overseas.

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Posted 21st December 2011 by David Jacobson in Risk management

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December 19, 2011

Mutual Banking Code Compliance Committee Annual Report

The Compliance Committee of the Mutual Banking Code of Practice has released its Annual Report for 2010-2011.

It is the view of the Committee that Mutuals have a natural bias towards treating their customers well. It is part of their culture and of their history. However it did identify areas for improvement including:

advice to members in relation to Direct Debits
the frequency of reporting of Code breaches; who is responsible for that reporting and to whom they are reported (e.g. management or board level).

The Committee concluded that the ‘breach’ register may still be being confused with the ‘complaints’ register for IDR and EDR purposes. Some Mutuals have advised that they have only one register in place and that this register only reports on complaints data, without the option to also report on whether there has been a breach of the Code.

Most individual breaches reported related to the categories of:

‘Key Commitments’
‘Privacy and Confidentiality’
‘Dispute Resolution’
‘Training’
‘Terms and Conditions’

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Posted 19th December 2011 by David Jacobson in Credit unions, Mutuals

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November 16, 2011

Case note: assessing a guarantor’s capacity to pay

In Fast Fix Loans Pty Ltd v Samardzic [2011] NSWCA 260, the NSW Court of Appeal rejected an appeal from a Supreme Court decision to refuse a mortgagee’s application for possession of land owned by the third party mortgagors.

The mortgagors were the parents of the sole director of a property development company. They succeeded in their application under the NSW Contracts Review Act to declare the mortgage unjust and unenforceable.

The guarantors were Serbian and whilst they could read English to a simple degree and knew what a mortgage was, their capacity was insufficient to enable them to understand the lender’s commercial deed of loan and mortgage. Whilst a Serbian speaking lawyer gave them independent advice there was no evidence that they had any knowledge about the precarious financial position of their son or the company. They thought their liability would cease at the end of three months. The parents obtained no benefit from the transaction.

The trial judge found that the son pressured his parents to obtain the legal advice and to sign the documents.

In rejecting the appeal Judge Allsop concluded:

There is no reason why considerations such as those here cannot lead to the conclusion that a contract of guarantee is unjust if entered into by a lender who is uncaring of a guarantor’s capacity to repay where there is a real and significant possibility of default by the borrower and the guarantor takes no benefit under the borrowing. This is particularly so in all the other circumstances of this case – most particularly the recognition by the appellant of the only two likely sources of repayment, one (successful refinancing) having a real risk to it. The appellant lent at a significant interest rate, reflecting the underlying commercial risk, appreciating the position the parents had been placed in, without any basis to consider that the parents appreciated the commercial risk or that they could afford to take that risk.

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Posted 16th November 2011 by David Jacobson in Legal

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October 26, 2011

Mutuals: the quiet achievers

In APRA Chair John Laker’s speech at the Abacus Convention he described the ‘quiet achievement’ on the part of mutual ADIs as an important source of their strength, notwithstanding “unsettled times”.

He confirmed that APRA will maintain its focus on three main supervisory issues: credit standards, liquidity and funding, and governance.

In respect of funding he made the following comment on securitisation:

self-securitisation … is an arrangement under which an ADI ‘packages’ mortgage loans on its books into an instrument that can be used in repurchase transactions with the Reserve Bank of Australia. Self-securitised instruments are not intended for day-to-day funding purposes but they have proven their worth at times of acute market pressures earlier in the crisis. I mentioned at the 2009 Conference that APRA expected all large credit unions and building societies to establish self-securitisation facilities with the Reserve Bank of Australia as part of their contingency planning. Many have now done so but, to be frank, we have also had some pushback. Some have argued that existing securitisation warehouse arrangements and/or other committed facilities are an acceptable alternative. We disagree. Experience in 2008 was that such arrangements can be unreliable at the very time they are needed. Prudence dictates another instrument in the crisis management armoury.

John Laker also commented on the impact of Basel III on mutual ADIs:

Your one challenging area in Basel III, where we would like your thinking caps on, is the design of capital instruments that might be issued by mutual ADIs. Basel III requires that, to be eligible as regulatory capital, all classes of capital instruments must be capable of absorbing losses at the point of non-viability. At that point, without going into the details, capital instruments must either be converted into equity or written-off. Only the latter appears an option for mutual ADIs.

Langes can advise mutual ADIs on funding and capital arrangements as well as issues relating to becoming a mutual bank and other regulatory requirements.

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Posted 26th October 2011 by David Jacobson in Legal, Mutuals, Risk management

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September 11, 2011

Regulatory capital for mutuals under Basel III

APRA has set out its proposals for regulatory capital for ADI’s under Basel III in a discussion paper.

APRA proposes to adopt the Basel III definition of regulatory capital, under which common equity (ordinary shares) is the predominant form of Tier 1 capital.

APRA proposes that, from 1 January 2013, all ADIs will be required to meet the following minimum requirements:
• a 4.5 per cent Common Equity Tier 1 ratio (increased from 2%);
• a 6.0 per cent Tier 1 capital ratio (increased from 4%); and
• an 8.0 per cent Total Capital ratio (no change) .

A capital buffer of an additional 2.5% of Common Equity Tier 1 will also be required resulting in a minimum of 7% Common Equity Tier 1.

In respect of mutual ADIs APRA says:

The criteria for classification as common shares in Common Equity Tier 1 is intended to apply to all ADIs, including mutually owned ADIs, taking into account their specific constitutional and legal structure. Basel III provides some scope for instruments other than ‘common shares’ to be recognised as part of Common Equity Tier 1. The Basel III rules text states that ‘the application of the criteria should preserve the quality of the instruments by requiring that they are deemed fully equivalent to common shares in terms of their capital quality as regards loss absorption and do not possess features which could cause the condition of the bank to be weakened as a going concern during periods of market stress.’

There are a number of mutually owned ADIs that have issued instruments currently qualifying as Tier 1 capital. APRA invites submissions from these ADIs as to whether the features of the instruments will comply with the criteria for Common Equity Tier 1 (or Additional Tier 1 criteria, set out in section 2.1.2 …). APRA also invites submissions more generally on how new capital instruments issued by mutually owned ADIs could be deemed to be the equivalent of common shares (or Additional Tier 1 capital) in terms of their capital quality and loss absorption.

Langes+ can advise mutuals on constitutional and legal issues affecting capital raising.

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Posted 11th September 2011 by David Jacobson in Legal, Risk management

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September 1, 2011

Mutual Banking Code training

In its latest Bulletin, the Code Compliance Committee which monitors the Mutual Banking Code of Practice has emphasised the need for mutuals to train staff on the requirements of the Code to ensure that staff are aware of the Code and the benefits, rights and responsibilities of Mutuals towards their members.

Whilst there is an overlap with the training obligation in ASIC Regulatory Guide 146 (RG 146), the Mutual Banking Code of Practice deals with good practice as well as legal obligations. There are also provisions in the Code that are not dealt with in the National Credit Code or the Corporations Act, such as direct debits, chargebacks, joint accounts and subsidiary cards.

The Code also extends to Small Business members or customers.

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Posted 1st September 2011 by David Jacobson in Mutuals

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August 26, 2011

How to improve by making good mistakes

The objective, Tim Harford says, is not to assume you can solve every complex problem objectively but to solve them by trial and error, by making good mistakes and learning from them.

In this fascinating 18 minute talk Harford looks at economics, medicine and science to ask whether the world is just too complex to think we can understand it all.

How does this apply to your business?

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Posted 26th August 2011 by David Jacobson in Risk management

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August 22, 2011

Can you redesign your statements?

Have a look what happens when designers try redesigning their home loan statement.

Too hard, you say?

Interestingly some of the things they are proposing will be required as part of the new Home Loan Key Fact Sheet to be required from 1 January 2012.

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Posted 22nd August 2011 by David Jacobson in Legal

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