Jaime Lumsden Kelly

Providers of short-term credit and continuous credit contracts are on ASIC’s radar, with ASIC recently issuing two new product intervention orders modifying what fees can be charged when relying on the different credit exemptions. These orders follow ASIC’s successful appeal before the Full Federal Court, which unanimously found that a ‘financial supply fee’ charged by a service provider is a charge ‘made for providing credit’. Given that many BNPL providers rely on these exemptions, the implications of these orders are significant for the BNPL sector.

ASIC made the product intervention orders by way of legislative instruments imposing conditions on the issuing of short term credit (ASIC Instrument 2022/647)^[1] and continuing credit contracts to retail clients (ASIC Instrument 2022/648)^[2]. The orders came into effect on 15 July 2022.

What are the orders?

The ‘Short-Term Credit Product Intervention Order’ is intended to improve on and extend the current restrictions on what short-term credit providers can charge. Currently, fees or charges for the provision of short-term credit are capped. The intervention orders extend these caps to restrict the types of fees or charges under a collateral or associated contract. This would include, for example, contracts for administration services in connection with a credit contract so that credit providers cannot exceed the cap limits by restructuring their fees across multiple contracts for multiple related services.

Similarly, the ‘Continuous Credit Product Intervention Order‘ is intended to prevent providers of continuous lines of credit from charging certain fees or charges under a collateral contract and limits the amount a credit provider can charge for associated services.

ASIC’s Explanatory Statement states that in their view the costs associated with short-term or continuous credit contracts far outweigh the benefits. As such, the orders seek to protect vulnerable customers who may suffer significant harm from predatory lending practices. They do this by clarifying what fees are caught by the fee caps for short-term credit and continuous credit contracts and make it clear that the fee caps also apply to fees, interest and charges under collateral contracts.

ASIC has defined collateral contracts as one that is separate to but also related to the short-term or continuous credit contract between a credit provider and retail client. This could include contracts for services such as assisting with the application for credit, distribution of loan products, or administration of, or debt collection activities in relation to, a short-term or continuous credit contract. It includes activities associated with arranging for short-term or continuous credit, including fast tracking applications.

If an activity is a by-product of a short-term or continuous credit relationship, and a fee or charge is imposed, the provider will need to ensure they are compliant with the fee caps under the product intervention orders. Non-credit services which necessarily or optionally include a credit component may also be caught under the orders as a collateral contract.

Impact on exempt credit providers

In Consultation Paper 355 (Product Intervention Orders: Short Term Credit and Continuing Credit Contracts), ASIC stated that credit providers are charging fees for the provision of credit in line with the caps under the Code, but these charges only equate to a minor percentage of the overall fees (i.e., 2%). ASIC also states that the fees under a separate contract, such as a contract for service or engagement of a third-party service provider, equates to the remainder of the overall fees (i.e., 98% of the total fees charged) and far exceeds the caps outlined by the Code.

Service providers such as bill smoothers, invoice financiers or buy now, pay later providers who are currently operating under a credit exemption may now be caught by the National Credit Code. Such providers should review their current arrangements to ensure that they comply with the Product Intervention Orders in order to continue to rely on the exemptions, otherwise service providers may face heavy penalties or may be required to get an Australian credit licence.

Exemptions?

There may be an exemption for providers that impose fees or charges under a collateral non-cash payment facility.

Buy now, pay later providers may also be exempt where they are relying on the continuous credit exemption.

By Jaime Lumsden, Michele Levine and Stephanie McClelland

———-

References:
[1] https://www.legislation.gov.au/Details/F2022L00975
[1] https://www.legislation.gov.au/Details/F2022L00976

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Jaime Lumsden

New reporting requirements now apply to AFS licensees for financial years commencing 1 July 2021.

What are the new financial requirements?

AFS licensees previously relying on special purpose financial statements will now be required to prepare general purpose financial statements due to amendments to the Australian Accounting Standards.

How do the changes to the accounting standards apply to AFS Licensees?

AFS Licensees, who are not APRA regulated, must annually prepare and lodge with ASIC financial statements using form FS70. These financial statements must now be prepared as general purpose financial statements.

General purpose financial statements have either Tier 1 or Tier 2 requirements:

• Tier 1 (full disclosure) requirements apply to entities which have public accountability.  Requirements include full application of recognition, measurement, and presentation requirements for all assets, liabilities, income and expenses. Under AASB 1053 Application of tiers of Australian Accounting Standards (AASB 1053) entities which have public accountability must comply with the full disclosure requirements of Tier 1.
• Tier 2 (reduced disclosures) requirements apply to all other entities that have no public accountability. Requirements involve the recognition and measurement requirements of Australian Accounting Standards, but with reduced disclosures. Tier 2 general purpose financial accounts have been recently replaced with the new simplified disclosures as set out in AASB-1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities (AASB-1060).

Public accountability applies to entities where:

• Its debt or equity instruments are traded in a public market, or it is in the process of issuing such instruments for trading in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets); or
• It holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses (this includes AFS licensees that hold client monies or assets).

Some examples of AFS licensees that have public accountability and would need to meet the Tier 1 requirements, include:

• ASX listed entities;
• General insurance broker that holds client money;
• Retail over-the-counter derivative issuers;
• Corporate advisers that deal in financial products;
• Over-the-counter derivative traders;
• Wholesale trustees;
• Responsible entities of a registered scheme; and
• Corporate directors of a corporate collective investment vehicle.

For some AFS licensees, it is less clear whether they have public accountability, for example, the impact to underwriting agencies who manage a trust account for insurers is not as clear. There may be times where underwriting agencies pay claims or return premiums on behalf of the insurer through a trust account which they manage for the insurer. Under the Corporations Act, those payments are not required to be held in a statutory trust account under s981B of the Corporation Act (because it is not client money) and such money is held at the risk of the insurer. AFS licensees should seek assistance from their accountant/auditor to determine whether they can rely on the simplified disclosure regime of Tier 2.

AFS licensees should update internal processes and provide training to staff involved in managing financial arrangements and statements.

By Jaime Lumsden and Sónia Cruz.

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Jaime Lumsden Kelly

The Fold Legal is delighted to have made a submission to the Treasury Consultation Paper on Crypto asset secondary service providers: Licensing and custody requirements, which is looking at how the industry will be regulated in the future.

The regulation of the crypto industry is an important step for both the local and global crypto industry. As we have seen with other industries, most notably new energy, uncertainty stifles innovation and a clear pathway to regulation provides the strongest foundation for true innovation, growth, consumer protection and a competitive market.

The scope of regulatory reform outlined in the Consultation Paper is centred on the following key principles:

• ensuring that regulation is fit for purpose, technology neutral and risk-focused
• creating a predictable, light touch, consistent and simple legal framework
• avoiding undue restrictions
• recognising the unique nature of digital assets, and
• harnessing the power of the private sector.

The Consultation Paper presents an opportunity to build a regulatory framework for the future that is technologically agnostic, fit for purpose, has in-built flexibility and strikes an appropriate balance between regulation, consumer protection and innovation. Embarking on legislative change of this nature is no small task and it is critical that we take the opportunity to ensure that the regulatory framework meets the intended objectives and provides the industry with a clear and appropriate transition pathway.

Our submission proposes a regime within the Corporations Act that utilises the existing licensing framework and includes additional obligations for advisory and brokering services undertaken by licensees. In our view, this approach provides:

• the greatest flexibility for current crypto providers to expand their business into traditional markets and for traditional businesses to expand into crypto-assets
• reflects the realities of the provision of services in relation to crypto-assets
• delineates between financial products and crypto-assets
• imposes obligations commensurate with the risks
• mitigates licensing and regulatory duplication
• promotes regulatory certainty, and
• provides appropriate consumer protections.

The Fold Legal is deeply steeped in the fintech space since early 2013 and has been actively involved in the crypto industry since 2015. We are technical specialists that have a broad and deep understanding of blockchain technology, crypto assets, exchanges, DAOs, alternate platforms and crypto product and service offerings. Our crypto knowledge combined with our financial services expertise is market leading. We use our industry knowledge and expertise to deliver practical, compliant and innovative solutions for our clients. We have worked with a range of clients including crypto exchanges, miners, crypto payment businesses, crypto platforms, DAOs and crypto token issuers.

Read the full submission here.

By Jaime Lumsden, Michele Levine or Nicholas Pavouris

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Jaime Lumsden

Purchasing an Australian financial service licence (AFSL) or an Australian credit licence (ACL) is an exciting opportunity to take your financial service business to the next stage of growth. The process is often much quicker than applying for a licence directly, enabling you to get to market fast. One of the critical steps in purchasing a company that holds an AFSL or ACL is ensuring that the licence does what you need it to do and carries no major regulatory risks.

Most buyers understand the general importance of completing due diligence when they acquire a business or asset, and most purchasers also understand that they need to do some level of regulatory due diligence, however, this is often limited to understanding whether there are any regulatory or compliance risks associated with the way the business has been run. What we rarely see are businesses confirming that the licence authorisations actually enable them to provide their desired services.

Not all licenses are the same, in fact, they vary significantly. Whilst on face value it is easy to tell if the licence is appropriate in some respects (e.g. whether it enables both retail and wholesale client business), there are often elements of the licence that require more careful consideration – in particular, having the correct advice and dealing authorisations for the financial products that your business needs.

Whilst the risk is lower for certain licence types, it is still worth confirming. For example, licences for insurance underwriting and insurance broking are relatively straightforward. However, when purchasing one of these types of licences, you should confirm if you are also required to have a claims handling and settling services authorisation, and if so, what type, as these vary from business to business depending on how claims services are being offered and managed. Most financial planning licences typically cover similar financial products, but there are often subtle differences when it comes to rarer or high-risk authorisations, such as whether they cover products like managed discretionary accounts, margin lending and derivatives.

Where we tend to see the biggest risks is with licences for funds and payment products. With these kinds of product offerings, it is important that you take advice on what financial services are being provided and what the licensing implications are. For example, we have seen payments businesses obtain typical payments licences in the past that they believed would cover their product offering, only to find out that they required a licence that not only had authorisations for non-cash payment facilities but also covered basic deposit products and miscellaneous financial investment products which are not as common authorisations in these types of licences. Funds licences tend to vary significantly depending on what the proposed funds will invest in and there is often a need to consider each licence authorisation against the proposed investment offering to ensure that the authorisation suits.

The other common pitfall is in checking that the licence has the right advice and deal authorisations. It is often relatively simple to confirm if the licence supports general or personal advice, but the distinction between the deal authorisations is subtler and less well understood. For example, securing a licence that has an “apply for” authorisation in respect of payments will not support a business of operating a payments system – this business needs the “issue” authorisation. The “arranging” authorisation is even more limited.

What you don’t want to have to deal with is a situation where you need to vary a licence that you have spent considerable money on, in a hope to accelerate your business, because the authorisations are not what is required or because there are other conditions (such as a key person condition) that prevent you from utilising the licence and requiring a lengthy and expensive variation.

What to check for:

• Ask for a full copy of the licence and check the conditions, is there a key person condition, are there any other limits?
• Does the licence allow you to provide advice and deal in the products you need?
• Whether the licence covers retail and wholesale clients and whether you can meet the different requirements that attach to each?

When to engage help:

• if you are unsure what licence authorisations you require
• if you are unsure whether a proposed licence is appropriate
• if you need to vary your licence.

By Jaime Lumsden and Nicholas Pavouris

The post Are you getting the licence you’re paying for appeared first on AdviserVoice.

Jaime Lumsden Kelly

The Australian Finance Industry Association (AFIA) has released a new voluntary Buy Now Pay Later (BNPL) Code (Code) to address criticism that the industry is under-regulated and to enhance consumer protections. The objective of the Code is to encourage a customer centric approach, promote industry standards and drive an uplift in compliance. In doing so, the Code imposes several conditions and protections that go beyond the current legal and regulatory regime for BNPL providers.

Although the Code is not compulsory, 8 major BNPL providers have signed up as members and were Code compliant on the 1 March 2021 launch date.

For many of the current compliant members, it is fair to say that minor (if any) changes were required on becoming Code compliant. Nevertheless, the Code serves multiple purposes that seek to raise the standards of the industry. It does so by setting an industry benchmark that (in some respects) goes beyond the current legal and regulatory framework. It will be interesting to see the impact the Code has on the BNPL industry, providers and customers – particularly whether the Code fuels any competitive or market pressures in the industry or changes to the user experience.

In this blog, we take a look at the Code and highlight where we think the Code raises industry standards, simply maintains the status quo, or may be wanting.

What is the Code?

The Code is a set of 9 standards that BNPL providers that are “Code compliant” pledge to follow.

At a high-level, the standards require BNPL providers to:

1. Focus on customers;
2. Be fair, honest and ethical;
3. Have transparent products;
4. Conduct suitability checks;
5. Review products on an ongoing basis;
6. Fairly deal with complaints;
7. Provide financial hardship assistance;
8. Comply with legal and industry obligations; and
9. Promote the code.

How has the Code gone further than the current regulatory framework?

In answering this question, we have compared the current framework to the standards.

AFCA

One of the more significant changes is that the Code will require members to join AFCA, an external dispute resolution body for the financial services and credit industries.

Although not a current requirement under law, we have definitely seen a recent push by providers in the BNPL sector to join AFCA to provide further recourse to customers and add a level of rigour to the complaints process. It is positive to see a willingness within the Code to be bound by the additional oversight of AFCA, which is also a benefit to customers.

Vulnerability and hardship

The standards do impose a commitment to consider customer vulnerability before providing services. This is a great initiative and particularly important given 21% of BNPL users ASIC surveyed missed a payment in the last 12 months.^[1] It also goes above and beyond the current regulatory regime as currently there is no specific regulatory requirement to consider vulnerability.

We note that the vulnerability requirements are similar to those that apply in the banking and insurance space – they are quite high level and rely on the customer informing or actively demonstrating that they are vulnerable. As outlined in our previous blog on vulnerability^[2], this approach does pose some challenges from an implementation point of view and requires a fair amount of self-advocacy by customers. This may be particularly tricky for the BNPL sector given the demographic is heavily skewed to younger customers who may have never owned a credit card.

Interestingly, there will be a requirement for BNPL providers to consider hardship requests. The hardship requirements are not as robust as those that apply to consumer credit under the National Credit Code. However, the requirements seem to be appropriately pitched given that BNPL products are not regulated as consumer credit. The standards also impose a number of automated and helpful measures to protect customers who may be suffering hardship, including:

• Taking reasonable steps to exclude customers from receiving promotional material where they have a financial hardship arrangement; and
• If a consumer is behind in payments at the time, not providing any additional BNPL products or services or increasing their current limits.

A further win for customers is that the Code states “we will never initiate bankruptcy proceedings”. This is certainly a positive outcome for customers. However, this protection may be lost if BNPL providers on sell the debt to a debt collection agency.

Credit/suitability assessment

One of the most significant inclusions in the Code is the implementation of a credit suitability framework. While the proposal falls short of the responsible lending criteria in place for credit providers, it is a step in the right direction and seems to strike a reasonable balance between consumer protection and efficient business practice. This is particularly so in light of the changes proposed by the Government last year to water down the responsible lending laws following the ASIC v Westpac case.

While the Code’s credit suitability checks add a further layer of protection for consumers, in our view, credit businesses (especially those that are maturing) often implement some form of credit risk assessment to manage their book of business and mitigate bad debts. For many BNPL providers, this may be a business imperative to ensure future and sustained growth and investor interest to maintain the record valuations we have seen throughout the COVID-19 pandemic.

How has the Code fallen short of the current regulatory framework?

There are a number of areas where the Code falls short of the current regulatory standards of other industries.

Transparent and reviewed products

The BNPL industry will be subject to the new design and distribution obligations^[3] (DDO) that come into effect in October 2021.

Standards 3 and 5 of the Code set out some guidelines for creating products, and providing disclosure around fees, including notice requirements and ensuring that products are transparent and suitable for customers. The DDO requirements will be more involved than those in the Code and it remains to be seen how the Code will lift standards in this space particularly given that BNPL providers should be taking action now to be DDO compliant from October.

Impacts on credit

One thing that the Code doesn’t address is educating consumers on the impact BNPL products may have on their credit rating. While many BNPL customers may not currently hold other credit products, future applications for credit cards and home loans may be impacted if they have had issues repaying any BNPL products.

Impact on merchants and partners

The Code has included some requirements on merchants and retail partners to meet certain standards. While this is a positive initiative, in our view many of the obligations imposed by the Code would already need to be managed by merchants in order to comply with their obligations relating to unfair contracts and misleading and deceptive conduct.

How to join the code?

Any BNPL industry players that think they are Code compliant may apply for membership of the AFIA. All applications are assessed by an independent Committee (which does not have any representatives from current Code compliant members). This should encourage fair dealing and allay any concerns of anti-competitive behaviour.

What does the Code mean moving forward?

The Financial Conduct Authority (the UK’s financial regulator) has recently made moves to tighten the regulatory leash on BNPL providers and there have been growing voices within Australian circles to force BNPL to be completely regulated as credit in Australia. We think that ASIC will be closely watching the UK’s approach. Australia has followed the UK’s lead on a number of initiatives in the financial services space (e.g. Opening Banking) and this could be another example…watch this space!

In time, we will be able to assess the impact the Code has had on the industry standards. It will be fascinating to see if the Code drives market and competitive tailwinds in response to changes in consumer and merchant behaviours, which encourage (or make it essential for) smaller and/or boutique BNPL players to sign up to the Code.

By Jaime Lumsden, Michele Levine and Nicholas Pavouris

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[1] https://download.asic.gov.au/media/5852803/rep672-published-16-november-2020-2.pdf
[2] https://www.thefoldlegal.com.au/blog/fairness-vulnerability-and-fintechs
[3] https://www.thefoldlegal.com.au/blog/credit-where-credit-is-due-your-design-and-distribution-obligations

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Jaime Lumsden Kelly

The new mortgage broker’s best interests duty obligations are wide reaching. They may apply even if you’re providing credit assistance that doesn’t relate to a mortgage.

Who does it apply to?

The mortgage broker’s best interests duty came into effect on 1 January 2021. It applies to:

• A licensee providing credit assistance where the licensee is a mortgage broker; or
• A credit representative providing credit assistance where either the licensee or the credit representative is a mortgage broker.

This is the case even where the specific credit assistance provided doesn’t relate to a mortgage.This also means non-mortgage broker credit representatives (like asset finance brokers) with mortgage broker licensees will be caught under this new obligation, even though the credit representative never provides mortgage broking services. This is a wide net and there are no current exemptions.

How will you know if you’re captured?

To ascertain if you’ve been swept up in this wide net you will need to determine whether you (or if you’re a credit representative, whether you or your licensee) are a mortgage broker.

A mortgage broker is defined as a licensee who:

(a) carries on a business of providing credit assistance in relation to credit contracts secured by mortgages over residential property; and

(b) does not perform the obligations, or exercise the rights, of a credit provider in relation to the majority of those credit contracts; and

(c) in carrying on the business, provides credit assistance in relation to credit contracts offered by more than one credit provider.

Sub-clause (a) refers to someone who “carries on a business” of credit assistance in relation to mortgages. This is a legitimate legal point, but very subjective. An asset finance broker who only occasionally does a home loan might be able to argue that they’re not carrying on “a business of providing credit assistance in relation to credit contracts secured by mortgages over residential property”. The more home loans one writes, the more difficult the argument becomes.

Sub-clause (b) means that if someone is a mortgage manager (or otherwise acts for the lender) in relation to most of their credit assistance activities, they won’t be a mortgage broker. This means businesses that mostly offer their own product (white-labelled from another lender) and only occasionally broker loans, won’t be mortgage brokers and won’t need to comply with the best interests duty. But those who broker more business than they place into their own product will need to comply.

What are your obligations?

If you (or your authorising licensee) meet the definition of “mortgage broker”, you must apply the best interests duty to all your business. If you’re a licensee, it will also apply to all your credit representatives’ business.

How will this apply in practice?

There are several situations where the best interests duty will apply even if the product in question isn’t a mortgage. For example, it will apply where:

• Someone who meets the definition of mortgage broker advising on personal loans and credit cards;
• A broker offers their own product but they broker more than half their business;
• A credit representative of an aggregator provides credit assistance on any product (even if none of it is home loans) where the aggregator meets the definition of a mortgage broker;
• A mortgage broker passes an application to an asset finance broker in such a way that the mortgage broker is providing credit assistance and not just acting as an intermediary. In this instance, the best interests duty will apply to the credit assistance the mortgage broker provides. But it will only apply to the asset finance broker if they (or their licensee) meet the definition of mortgage broker.

In Regulatory Guide 273, ASIC explains what they will look for when they assess compliance with the best interest duty obligations.

By Jaime Lumsden

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Jaime Lumsden Kelly

Providing financial products to retail clients in Australia is almost impossible unless you hold an Australian financial services (AFS) licence. The intermediary authorisation exemption is virtually the only way product issuers can avoid licensing provided it’s used correctly.

What is an intermediary authorisation?

An intermediary authorisation allows an unlicensed product provider to operate by entering into an arrangement with a local AFS licensee. There are no restrictions on the type of clients you may service under this exemption – it’s available for both wholesale and retail clients.

For example, this arrangement can be used by:

• Insurers who enter the Australian market by granting a binding authority to an agent;
• Non-cash payment products as long as customers don’t have direct access to their services.

This is not an authorised representative arrangement, it’s a different type of agreement between an unlicensed product provider and an AFS licensee. A product provider cannot act as the authorised representative of another licensee. This is because an authorised representative always “acts on behalf of” its authorising licensee to provide the financial services. If a product provider did genuinely act on behalf of the licensee to provide its own products, then those products would no longer be its products – they would be the products of the authorising licensee.

The financial service that is provided under the authorisation must be the “issue, variation, or disposal” of a financial product (in accordance with the terms of that intermediary authorisation). It does not exempt any advice activities but product issuers may be able to access a separate exemption for general advice.

To be a valid intermediary authorisation, the arrangement must include a written agreement that:

• Authorises the AFS licensee to make offers to arrange for the product issuer to issue, vary or dispose of the financial products;
• Specifies that the product issuer will actually issue, vary or dispose of the products in accordance with any offers made by the licensee; and
• Only involves offers made by the licensee that are covered by the authorisations on that licensee’s AFS licence.

What you can’t do with an intermediary authorisation

Under an intermediary authorisation a product issuer cannot deal directly with customers under any circumstances.

The AFS licensee cannot deal in a financial product unless they’re issuing, varying or disposing for the product issuer. This means you can’t:

• Make a market for the financial product;
• Operate a registered scheme;
• Provide a custodial or depository service; or
• Provide a crowd-funding service.

This means the exemption can never be used by:

• The trustee of a registered scheme (including peer-to-peer lenders);
• The trustee of an unregistered scheme that has the custodial and depository services authorisation. In this arrangement, the only option available to the trustee is to hold its own AFS licence. But it can be used by the trustee of an unregistered scheme that does not hold any financial products in custody, like a property scheme which only holds real property, provided the trustee only deals with investors through the licensee; and
• Non-cash payment providers that allow direct access to their services.

By Jaime Lumsden

The post An AFS licensing exemption for product issuers – intermediary authorisation appeared first on AdviserVoice.

Jaime Lumsden Kelly

Mortgage brokers must meet the best interests duty from 1 July 2020 or risk a fine of 5,000 penalty units or $1.05 million.This means you must show you have your client’s best interests at heart.

Who is a mortgage broker?

A mortgage broker:

• is either a licensee or credit representative;
• carries on a business of credit assistance in relation to credit contracts secured over real property;
• offers these credit contracts for more than one credit provider; and
• does not perform the obligations or exercise the rights of a credit provider.

Essentially, they offer credit products from more than one provider to individuals purchasing a home, investment or commercial property.

From 1 July, mortgage brokers must act in the best interests of their client. This means they must put their client’s interests above their own.

How do I act in my client’s best interests?

Mortgage brokers haven’t been given the benefit of a “safe harbour” test – that means there are no steps you can follow to make sure you definitely meet your best interests duty. Instead, you’ll need to decide what actions to take for each individual client.

However, ASIC’s draft guidance identifies some things you can do:

1. Gather information

To determine what your client’s best interests are you must ask them questions about their needs and personal situation. As you find out more about your client, you may find that the credit assistance they need changes.

If you don’t get all the information you need, you may not be able to act in their best interests and therefore shouldn’t act for them.

2. Make an individual assessment

When making an individual assessment of your client’s needs and best interests, you should consider:

• their objectives;
• their priorities and preferences for different products and providers;
• their personal circumstances and financial situation and if these may change in the reasonably foreseeable future;
• whether the loan has features that meet their needs and requirements;
• if any features of the loan are inconsistent with or are unnecessary to meet their needs and requirements;
• if they have multiple needs, the relative importance of these;
• if some of their needs or objectives are inconsistent, how you will resolve this conflict;
• the term and structure of the loan compared to their needs;
• the lender’s credit policy and risk appetite;
• the interest rate, fees and charges;
• their understanding of the product; and
• if switching products, is it in their best interests.

You should also consider whether you have access to the products, ability or expertise to make recommendations that meet your client’s requirements.

3. Consider cost

You must consider the cost of the product you’re recommending to a client but it is not the sole, or even in some cases, the most important factor. However, failure to consider it at all will be a breach. For example:

• If you recommend a loan that costs more than another that would meet their needs, you must support your recommendation with strong evidence as to why they needed that loan.
• Don’t just consider the interest rate or comparison rate. Consider other features, like an offset account, that may give the client substantial savings and make the loan cheaper or otherwise meet their needs.
• When refinancing, consider if the costs of refinancing exceed the cost savings of the new loan.

4. Consider other factors and product features

In your overall assessment, consider non-cost features as well. This includes features that may:

• realistically offer the client a net benefit; and
• be irrelevant to the consumer. For example, a fixed rate loan may not be suitable if it has a substantial break fee and the client wants flexibility. Similarly, offset accounts may offer limited benefits to a client who doesn’t have large account balances.

In some situations, non-cost factors will be highly relevant. For example, if the loan is approved quickly for a time-sensitive transaction. In cases like this, ASIC will expect you to substantiate your reasons.

5. Present your recommendations

Once you’ve assessed which options are in your client’s best interests, you must explain it to them. It is helpful to do this by presenting them with a shortlist and one recommended option. ASIC’s view is that you should always present more than one option, but sometimes this isn’t possible, such as where the client is credit-impaired and has limited choices.

When presenting your recommendations:

• clearly articulate how your recommendation will achieve their objectives and is in their best interests; and
• make sure you have explained and they understand why:

(i) you selected these options;

(ii) other options have not been presented;

(iii) a particular option is recommended; and

(iv) if all options are with the same credit provider, why this is so.

After you’ve presented your recommendation, your client may decide some product features are more or less important. This may mean that you need to re-consider your recommendations.

It’s important to challenge your client’s needs and requirements

Sometimes a client may not want a particular product even though you believe it’s the most appropriate for them. For example they:

• want to use or exclude a particular lender regardless of competitiveness; or
• want a feature that isn’t suitable for them, like an interest-only loan or an expensive offset account.

In these situations, explain to your client why the product is detrimental or poor value and offer them an alternative. This helps them make an informed decision. If they still want a product that’s not in their best interests, they can choose it and you can help them with their loan application, but make sure you document the discussion.

Providing credit assistance

After you’ve given the client your recommendations., you must continue to act in their best interests when helping them apply for their loan. Misrepresenting your client, even if this improves the chance of their loan being approved, will always be a breach of your best interests duty.

ASIC is consulting on their guidance for mortgage brokers’ best interests duty until 20 March 2020.

By Jaime Lumsden

The post 5,000 reasons why you should trust your Mortgage Broker appeared first on AdviserVoice.

Jaime Lumsden Kelly

Finity and The Fold Legal released an update on the Royal Commission’s recommendations into add-on insurance in July 2019.

After two separate consultation papers, Treasury has recently released:

• An Exposure Draft Bill;
• Exposure Draft Regulations;
• An Explanatory Memorandum; and
• An Explanatory Statement.

The consultation period for these draft documents ends on 28 February 2020. Assuming that there are no substantive changes to the Exposure documents, then this is what we know about the deferred sales model (DSM) for add-on insurance.

What aspects of the changes are now known?

• The deferral period begins at the later of:
  • The date the customer makes a financial commitment; or
  • The date that the seller provides the ‘prescribed information’ to the customer.

The exposure draft regulations identify when a consumer enters into a ‘commitment to acquire a product or service of a class’ for some transactions. However, this list is not exhaustive, and where a product is not on the list, the product issuer will need to determine what amounts to a commitment. The list may provide guidance in this respect, e.g. Insurance for removalists’ liability is not listed, but it may be considered analogous to the hire of a motor vehicle. Therefore, the commitment would be when the customer makes a reservation for the move or (less likely) the time at which the move actually takes place.

The content of the prescribed information and how the information must be given to ASIC has been left to ASIC to determine. Product issuers may prefer to give this information to the customer early in the process, so that the customer can consider the various products and the deferral period will trigger as soon as the customer makes a financial commitment.

• The deferred sales period is 4-5 days. The deferred sales period runs for a period of 4 days commencing on the day after the day the prescribed information is given or the financial commitment is made (whichever is later). This means if the deferred sales period is triggered at 9am on a Monday, it will end at midnight on Friday, which is practically a period of 5 business days. If it is triggered at 11pm on Monday night, it still ends at midnight Friday, which is closer to 4 business days.
• Customers cannot opt to end this period early. This means that no consumer (even a small business or savvy investor) can end the deferral period, regardless of the urgency of the need for the insurance.
• How and when customers can be contacted. Before the deferred sales period starts providers may provide information about the insurance to consumers verbally and in writing, but cannot conclude a sale. Once the period starts, information can only be provided in writing, and no sales may be concluded. If a consumer asks a question inside the deferred sales period, providers may provide answers verbally, but must contain their answers to the question asked. Once the period ends, until the date 6 weeks after the period commenced, providers may only provide information in writing, but if consumers ask for more information, providers may answer verbally and need to confine their responses to the specific question. Sales may now be concluded.

Anti-hawking

• The product seller can contact the customer for 6-weeks after the start of the 4-day period, but cannot contact the customer after the 6-week period has ended. This is because so long as the deferred sales rules apply, there is an exemption from the new hawking rules.

Exemptions

There are various powers to make exemptions, but currently the only proposed exemption is for comprehensive motor vehicle insurance.

A class of products may be exempted by Regulations (but none are presently proposed except comprehensive motor). ASIC also has the power to make exemptions, which it may choose to do itself by providing class order relief, or which it may exercise individually upon receipt of an application for relief. Relief applications will need to be made in accordance with ASIC’s Regulatory Guide 51 Applications for relief. In exercising its powers, it must have regard to:

• Any evidence as to whether the product has historically been good value for money;
• Whether there is a high risk of underinsurance or non-insurance without the exemption;
• Any evidence as to whether the product is well understood by consumers;
• Any differences between the product and financial products of a similar kind that are not sold as an add-on; and
• Any other matters that ASIC considers relevant.

ASIC has a separate relief power to exempt classes of products where ASIC considers consumers are likely to need to be covered by the products immediately.

There are a number of situations where this exemption may be needed, such as:

• Strata managers have a fiduciary duty to lot owners and this includes an obligation to protect the building by obtaining insurance. However, if strata managers are required to wait for the expiry of the deferred sales period providing strata insurance, there is a risk that they will be in breach of their fiduciary duties.
• Postal insurance, where the parcel has already been delivered by the time the deferred sales period has ended, and travel insurance, where the travel commences inside the deferred sales period, and rental car insurance where the hire has commenced (and possibly ended) inside the deferred sales period.

There is also an exemption for persons who give personal advice. The exemption for personal advice exists to avoid a double up with the best interests duty where it applies instead.

Where do the Design and Distribution Obligations fit in?

The design and distributions obligations will apply to all insurance products, including add-on products.

The Fold’s view:

Unless the DSM can be built into the sales process, product manufacturers should consider the merits of seeking an exemption from ASIC.Applicants for an exemption will need to be able to demonstrate (among others):

• Value for money;
• Significant consumer convenience and benefits; and
• Appropriate loss ratio.

Clearly stating their proposition and building a compelling case will be critical to success.

Finity’s view:

At least to some extent DDO and DSM are intended to address and mitigate similar types of consumer detriment, including poor product value. Treasury should consider the potential for overlap with DDO and which would be more likely to effectively reduce consumer detriment.We feel that the Exposure Draft documents leave some gaps and unanswered questions.  Our concerns include:

• the blanket approach with no ability to opt out
• there is still some room for uncertainty as to what amounts to a ‘commitment’, particularly for digital platforms
• for various product categories, it remains unclear as to what the best way forward will be; do the entities that provide, say, strata or landlords insurance need to change their sales model entirely or should they apply for an exemption?

Ultimately, it becomes an inconvenience if certain products cannot be purchased immediately – those of real value, such as removals insurance and travel insurance are likely to be the subject of an exemption – if they do not, there is a significant risk of underinsurance and financial loss to the consumer.

By Jaime Lumsden, Lydia Carstensen and Raj Kanhai

The post Deferred sales model for add-on insurance appeared first on AdviserVoice.

Charmian Holmes

Currently insurers are not permitted to offer financial products for issue or sale to retail clients in the course of or because of an unsolicited meeting at all, or in the course of a telephone call unless they have met certain requirements.

The result is that there is virtually no cold-calling in general insurance because of the onerous compliance requirements under the current anti-hawking laws.

What does unsolicited mean?

The term ‘unsolicited’ is not defined in legislation, however in ASIC’s Hawking Guide (Regulatory Guide 38) they have adopted the view that a meeting or telephone call is unsolicited unless it takes place in response to a positive, clear and informed request from a consumer. Hayne has recommended that this definition be legislated.

The Hawking Guide also provides detailed guidance on when a positive, clear and informed request has been made.

There is no reason to believe that this guidance would be abandoned, and in fact, Hayne agreed that the law should work as described by ASIC. The guidance explains when discussing a financial product will be within the scope of a consumer’s request by reference to the consumer’s actual words, previous dealings with the offeror, and what a reasonable person would expect to discuss.

Impact for the general insurance industry

Professional insurance advisers such as brokers are unlikely to be significantly affected by changes to anti-hawking laws. Most offers of insurance that they make are solicited or would be solicited because of their previous dealings with clients, the nature of their engagement, and the fact that a reasonable person would expect to discuss a wide range of insurances with their broker.

Where a consumer deals with an insurance agent, it may be more difficult to offer an alternative product unless it was within the scope of the consumer’s initial request or reasonable to expect that that product would be discussed. This might occur where it is clear the insured is enquiring about the wrong kind of product for the risk, for example, the insured is enquiring about personal accident cover in circumstances where it is apparent life insurance or total and permanent disability insurance would provide better outcomes. That said, agents and insurers are already challenged in cross-selling in this way because they cannot tell the client what is best or appropriate for them.

On the other hand, an enquiry to an insurer or underwriting agency about building insurance which moves into a discussion about contents insurance is unlikely to breach anti-hawking laws because these two products are closely related—and arguably, one and the same in the consumer’s mind.

Examples of hawking

It seems more likely that the restrictions will draw additional scrutiny to sales situations where a consumer is offered one type of financial product in the course of a meeting or call to discuss something else. Practices which already exist in the industry may now be re-examined to determine if the meeting truly is solicited. Some sales models may need to be adjusted to more clearly demonstrate that the consumer has made a positive, clear and informed request:

• Cross-selling insurance on referral – An insurer offers consumer credit insurance to homebuyers. The insurer contacts those consumers through referrals from a third party mortgage broker. The consumer is made aware by their mortgage broker that they will be contacted, however the contact is initiated by the insurer. This will be hawking without positive, clear and informed consent from the consumer.
• Selling insurance as an add-on to other services – A vet offers pet insurance to pet owners who come in for a consultation regarding their pet. When the appointment is made, the vet does not make the pet owner aware that they will be offered pet insurance or that they will discuss pet insurance to cover future fees. This will be hawking without positive, clear and informed consent from the pet owner.
• Up-selling insurance – A tradie applies online for motor vehicle insurance for a ute and is contacted by the insurer’s call centre to complete their transaction. In the course of the call, the insurer offers the additional option of extending the policy for a privately owned vehicle. This is likely to be hawking without positive, clear and informed consent from the tradie. If the insurer asks if it can assist with private motor insurances and the tradie consents, this is not hawking.

Digital and email offers

Current anti-hawking laws do not apply to unsolicited emails and digital offers. Hayne’s recommendation refers to “meetings, telephone calls and other contact” and it is unclear what “other contact” might include. Arguably, it could extend to other forms of contact such as emails and digital messages. However, it appears unlikely this is the intent because such digital forms of contact do not cause the consumer detriment (for example, digital/online sales with opt-ins, chat bots, SMS messages, and emails). Any suggestion that anti-hawking laws should be extended to these more passive forms of contact should be vigorously challenged.

What will the changes be post-Royal Commission?

Realistically, the practical application of the anti-hawking laws are unlikely to substantively change, because the main recommendation is for ASIC’s guidance to now be enshrined as law. The approach is not therefore changing, it will merely carry the full weight of the law.

The biggest changes are:

• Telephone sales will now be dealt with identically to unsolicited meetings; and
• There may be renewed scrutiny of general insurance in add-on contexts. The question of whether the meeting is “solicited” for the purposes of offering the financial product has historically been given cursory consideration, and licensees will discover they need much more rigour in their sales process to obtain “positive, clear and informed” consent.

Strong industry consultation will be necessary to strike the right balance between protecting consumers and allowing a convenient and helpful offer of insurance products to consumers. The sales method and the capacity in which someone acts (whether as adviser or seller) are important considerations which should not be overlooked during the consultation process for the new laws, and more passive forms of contact which cannot, by their nature, involve pressure selling, should be excluded, such as online sales.

Leading consulting firm, Finity, have assisted with the preparation of this blog by discussing the issues with us and challenging our views. Whilst we appreciate Finity’s input, The Fold is responsible for this communication and the views expressed are our own.

By Charmian Holmes, Solicitor Director, Brisbane, and Jaime Lumsden Kelly, Solicitor Director, Sydney

The post Royal commission response: Anti-hawking appeared first on AdviserVoice.