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.

Complaints and dispute resolution procedures are now mandatory for financial services providers but When Unhappy Customers Strike Back on the Internet in a recent Sloan Management Review reminded me that it’s what you do with the complaints you receive that is important.

You have to tell your customers how their complaint will be dealt with (and when) as well as the ultimate resolution and keep them informed along the way. And complaints should be analysed internally to assess whether they are an indicator of a widespread problem, poor customer service or a potential breach of a law or Code.

Or you’ll have an unhappy customer like Dave Carroll who has told nearly 11 million viewers on YouTube since 2009 to not fly United Airlines because they did not respond to his $3500 broken guitar claim.

Dave Carroll has transformed his bad experience into a career as a keynote speaker on customer service!

It will be interesting to see how much ASIC’s review of consumer credit insurance draws on the UK Financial Service Authority’s dealings with its UK equivalent, payment protection insurance. Background:BBC News

According to the BBC, UK banks have set aside billions of pounds to resolve PPI complaints.

But there has also been a backlash against firms offering to handle complaints for a percentage of the amount recovered. See video.

The law relating to financial institution liability for honouring a withdrawal request made under a forged customer signature without the customer’s involvement is well-settled: the financial institution is liable to its customer as the debit was not authorised.

In Campbell v Bank of Queensland Ltd [2011] QSC 122 the Supreme Court of Queensland allowed a claim by the bank’s customers for recovery of money paid out by the bank based on forged signatories to a line of credit.

The major issue at trial was whether the Bank was protected by the provisions of the “all purpose authority and indemnity” given by the customer as a condition for being able to send instructions by facsimile. The trial judge decided that the indemnity did not protect the Bank as it only applied to instructions given by the customer and not to forged instructions.

APRA has written to ADI auditors setting out its expectations in relation to APS 310 reports for assurance engagements undertaken in relation to reporting periods commencing on or after 1 July 2011.

The letter follows APRA’s review of the first year of reporting by external auditors under the revised standard APS 310.

This letter seeks to clarify for auditors APRA’s expectations on the following matters:
• a General and Specific Observations appendix to the auditor’s report should be used to highlight any material internal control weaknesses or other reporting issues that are not qualifications;
• auditors should start from the premise that all data reported to APRA are sourced from accounting records and so require a reasonable assurance opinion;
• the ADI reporting form ARF 230.0 Commercial Property should be subject to a reasonable assurance sign-off by auditors;
• a qualified ‘except for’ opinion or a disclaimer of opinion should be issued in certain circumstances; and
• detail should be provided on the level of reliance by the external auditor on the work of internal audit in APS 310 reporting.

In a long-running case last year (Banksia Mortgages Limited v Croker), a mortgagee seeking to exercise power of sale was met with fierce resistance by the property owner.

Interim court applications concerned whether internal emails between the in-house lawyer and the Risk Manager were confidential and subject to legal professional privilege ([2010]NSWC 535) and the terms on which the owner could get an injunction preventing an auction sale ([2010]NSWC 1177).

The substantive trial ranged over whether the loan was unjust or unconscionable and whether unfair influence, pressure and tactics were exerted.

In the course of hearings, the in-house lawyer’s employment agreement was examined together with emails sent in-house.

Part of the evidence concerned the lender’s loan manual and whether it had complied with its own procedures in approving the loans and whether it was guilty of asset lending, where there was no obvious ability of the borrower to repay other than through the sale of the security.

Ultimately the owner’s actions failed. The final judgment ([2010]NSWC 1447) is worth reading as a summary of the current case law in this area and the importance of ensuring that a lender’s internal documents reflect actual procedures.