Our teleconference for LCAP members on 1 December will cover the following:

• Privacy laws – Changes to credit reporting provisions;
• A recent court case on penalty fees;
• APCA initiatives for card scheme switching;
• Case Study – Can a lender rely on a solicitor’s certificate of advice given to a borrower’s attorney?

We will also be demonstrating our new Langes Compliance website which contains:

• New legislation and case alerts: information on how breaking and on-going issues affect you;
• Template policies and checklists;
• Library of FAQ’s and general advice;
• Material we develop for Langes Compliance meetings on topical issues.

There is a great search tool but if you just want to know what’s new on a particular topic, you don’t have to come to this website: you can elect to receive automatic emails each time an area of interest is created or updated.

In Office of Fair Trading v Abbey National plc & others [2009] UKSC 6, the UK Supreme Court decided that the OFT did not have the power to launch an investigation into whether the banks’ penalty fees were excessive.

Although the long running case was not about whether the banks’ charges for unauthorised overdrafts were fair, many of the comments made will be taken into account in Australian discussion of this issue.

In particular, the court confirmed that the charges were not concealed default charges designed to discourage customers from becoming overdrawn on their accounts without prior arrangement.

The decision does not mean that individual consumers cannot complain about bank fees and the UK Financial Services Authority has announced that these complaints can resume.

Corporations Regulation 7.9.07FA provides an exemption from the requirement by AFS Licensees to give a Product Disclosure Statement (PDS ) for basic deposit products (BDPs), non‑cash payment facilities(NCPFs) attached to basic deposit products and travellers cheques.

However, if a PDS is not given, reg. 7.9.07FA provides that:
(a) the licensee must provide the client with information about the cost of the product;
(b) the licensee must inform the client as to whether or not any amounts will or may be payable after acquiring the product;
(c) the licensee must ask the client if they want any further information about those amounts; and
(d) if the client indicates that he or she would like this further information, the licensee must provide it.

If the PDS is dispensed with, these information requirements would need to be incorporated into the credit union’s documents and procedures. The normal practice is to include the information required by (a) and (b) in the terms and conditions and/or a product rates and fees document. Items (c) and (d) are procedural requirements and would need to be reflected in the credit union’s procedures for issuing products.

The Mutual Banking Code of Practice requires general information about the credit union’s products and facilities to be readily available to anyone who wants it (clause 2.1), and a copy of the terms and conditions must be provided to members if they ask for a copy: clause 2.2.

In addition, the credit union would still have to use a PDS for financial products other than BDPs and NCPFs, such as retirement savings accounts and insurance products.

Members would need to be notified that the PDS is no longer issued and that the relevant product details can be found in the terms and conditions and/or product rates and fees document.

We can assist you with drafting or reviewing changes to documents and procedures. Call Patrick Dwyer or Levina Chim in our Sydney office.

Disputes between joint account holders always raise difficult issues for financial institutions.

In M v Financial Institution [2009] PrivCmrA 16  a joint account holder complained to the Privacy Commissioner that the financial institution had improperly collected their personal information from a third party (a relative of the complainant's former partner) and used it in making a decision about the complainant's joint account, failing to ensure the personal information was accurate, complete and up-to-date.

After the contact, a staff member at the financial institution further modified the joint account to block all withdrawals not signed by both parties. The financial institution contacted the complainant about the modification days after it was made.

The financial institution argued that it did not collect information from the relative because it did not ask for the information. However, the Commissioner took the view that an organisation collects personal information if it gathers, acquires, or obtains information from any source and by any means (irrespective of whether the information was sought by the organisation). In addition, because the financial institution changed its accounts based on that information, the financial institution collected the information for inclusion in a record in accordance with section 16B of the Privacy Act.

Given the information was not provided by the account holders, was subject to change and had an effect on the complainant's finances, the Commissioner took the view that the financial institution had not taken reasonable steps to check the accuracy of the personal information it collected from the third party. Therefore, the financial institution had failed to comply with NPP 3.

The financial institution offered the complainant financial compensation. The complainant accepted the offer.

The Australian Industrial Relations Commission has decided to change the Banking, Finance and Insurance Award 2010 applying to credit union employees by removing the exemption from overtime payments and shiftwork allowances for employees earning more than 15% above the level 5 rate of pay and allowing employers to pay an annualised salary in satisfaction of the minimum wages, allowances, overtime and penalty rates and annual leave loading.

If an annualised salary is paid:

• the employer must advise the employee in writing of the annual salary and which of the provisions of the award will be satisfied by the annual salary;
• the annual salary must be no less than the amount the employee would have received under the award (calculated over the year, or if the employee’s employment ceases earlier, the period that has been worked); and
• the employer must review the annual salary at least annually to ensure that the compensation is appropriate having regard to the award provisions that are included in the salary.

The exemption provisions in pre-modern award instruments will continue to apply until 30 June 2010

In Bofinger v Kingsway Group Limited [2009] HCA 44, the High Court of Australia decided that the guarantors of a mortgage were entitled to be repaid money they paid to the first mortgagee before the surplus proceeds of the first mortgagee’s sale of the properties (about $700,000) were paid by the first mortgagee to the second mortgagee.

The guarantors claimed that the first mortgagee in paying the surplus to the second mortgagee was obliged to account to them as constructive trustee for the surplus and was liable to pay equitable compensation for paying the surplus to the second mortgagee.

The guarantors were the husband and wife directors of the borrower company which was in liquidation. They gave guarantees to the first, second and third mortgagees.

Normally a guarantee will contain a clause which stops guarantors claiming rights (including rights of subrogation to repayment of money paid under the guarantee) against the debtor in competition with the creditor.

The High Court noted that the wording of the guarantee in favour of the second mortgagee failed to exclude the right of subrogation in respect of payments to the first mortgagee (as against the second mortgagee) with the guarantors having the benefit of any doubt about the construction of the guarantee.

It was also relevant that the second and third mortgagees in agreeing to the sale by the first mortgagee had not protected their position by obtaining an agreement from the guarantors and first mortgagee expressly excluding the guarantors’ rights to repayment by the first mortgagee.

Revenue Ruling DUT 39 deals with Changes to Mortgage Duty. Although issued on 9 November it took effect from 1 July 2009.

In Credit Union Australia Ltd v Lyons [2009] NSWSC 1188 CUA obtained judgment for money advanced to its customer Mrs Lyons under a $300,000 line of credit account, together with interest. The line of credit account was initially secured by registered mortgages, but those mortgages were discharged in 2006 when the loan was re-financed by a third party lender.

By administrative oversight the line of credit account was not closed when the mortgages were discharged. The borrower was able to draw on the account back to its original overdraft limit. It was only when that limit was again exceeded in 2008, and CUA made attempts to obtain repayment, that the relevant officers then dealing with the borrower appreciated that the account was in fact totally unsecured.

In October 2008 CUA served a notice of default on the borrower requiring repayment of what was called the “over limit amount” of then $5,531.55. CUA then threatened to enforce the mortgage if the default were not remedied. However, CUA had no mortgage to enforce.

The defendants are husband and wife. The husband held a power of attorney from his wife who was the borrower. The borrower was seriously injured in a car accident and was suffering from brain damage and was not capable of attending to her own affairs.

The judge said the wife as the borrower was clearly liable for the amounts drawn under the line of credit account, together with interest at the rates provided for in her loan agreement with CUA.

CUA also obtained an order against the husband for money he withdrew and deposited to his account with Westpac totalling $81,700. But it failed to regain its security aganst the properties. The judge ordered a charge on those properties subject to the rights of the new mortgagee which had advanced $805,000.

The judge said:

“22 As I have said, it is clear that the plaintiff allowed drawings on the line of credit account because it was acting under a mistake, and an important mistake, that the account was still secured. There is no direct evidence that either the first defendant or the second defendant was aware of that mistake. As I have said, the defendants have not appeared and so of course they have not put on any evidence. However, it was a term of the agreement on the opening of the line of credit account that it would be secured by mortgages initially over the Hazelbrook property, and subsequently over both the Hazelbrook property and the Ferguson Road, Springwood property.

I infer that the second defendant knew or understood that the further drawings on the account were permitted only by error…

25 I infer that the drawings from the first defendant’s line of credit account which were applied to the second defendant’s account with Westpac, and those which were applied in reduction of the loans secured by mortgages, were drawn by the second defendant acting under power of attorney. His knowledge and understanding of the plaintiff’s mistake, when acting for the first defendant as her agent, would be imputed to her. Hence I infer that both defendants had actual knowledge, or at least imputed knowledge in the case of the first defendant, that the drawings were permitted by the plaintiff by mistake.

26 In those circumstances, and possibly, in the case of the second defendant, even if he had not had such knowledge, the second defendant is liable in an action for restitution, or as it would formerly have been characterised, in an action for money had and received, for the drawings permitted by the plaintiff by mistake, which were applied for his benefit. …

29 The moneys received by the defendants from the accounts, with knowledge that they were permitted to be drawn as a result of mistake, when the moneys were paid without any consideration passing from the defendants to the plaintiff other than the original promise made by the first defendant in her loan agreement, were at that time impressed with either a constructive or resulting trust in favour of the plaintiff. ..

30 Those moneys were not used as contributions to the purchase price of properties acquired by the first defendant. I do not accept that the plaintiff is entitled to declarations that properties of the first defendant are held by her on trust for the plaintiff. However, as certain of the payments can be traced as having been used to reduce the mortgage debts secured over the properties at Great Western Highway, Springwood, and Great Western Highway, Hazelbrook, the court may treat those lands as charged with the payment to the plaintiff of the amounts so applied. ..

31 There is no evidence that the interests of innocent third parties would be adversely affected by an order charging those lands. The charge will not affect the rights of the registered mortgagees to exercise their power of sale, and will not affect the interests of any other person having prior security over the property without notice of the plaintiff’s claim. It would be against good conscience for the defendants to be permitted to receive any surplus proceeds of sale of the property, free of the plaintiff’s claim for repayment, where the plaintiff’s money was applied to reduce the mortgage debts. That charge should also secure interest on the moneys so applied at the contractual rate.”