ASIC, ACCC and Consumer Protection Information Session Australian Consumer Law and the National Credit Law Greg Kirk ASIC, ACCC and Consumer Protection Information Session 18 November 2010

Agenda ACL in Financial Services UCT – legal and policy issues ASIC’s regulatory approach New National Credit Laws key elements Responsible Lending Applying the two new laws, a case study on mortgage exit fees

What does ACL mean for ASIC? Introduced in 3 tranches Trade Practices Amendment (Australian Consumer Law) Act (No. 1) 2010 Trade Practices Amendment (Australian Consumer Law) Act (No. 2) 2010 Competition and Consumer Legislation Amendment Bill 2010 A single Australian Consumer Law with multiple regulators ASIC retains primary responsibility for financial products and services

Table of old and new sections ACL Sections Issue or power New 12BF to BL Unfair Contract Terms Existing 12CB Unconscionable conduct - supply financial source 12CC Unconscionable conduct - in business 12DB False & Misleading Representation 12DC False & Misleading Representation - offensive conduct 12DF Misleading conduct in relation to financial services 12GBA-GBB Civil Penalties 12GLD Director Disqualification 12GY-GYC Substantiation Notice 12GLC Public Warning Notice 12GNB Non-party Consumer Redress 12GX-GXG Infringement Notice ASIC ALREADY HAD SOME CONSUMER LAW PROVISIONS IN PART 2 DIV 2 ASIC ACT SEE BLUE SECTIONS THE RED SECTION HAVE NOW BEEN ADDED IN.

Unfair contract terms New provisions in ASIC Act ss12BF-12BM Main provision - s12BF. A term of a consumer contract is void if: the term is unfair; the contract is in standard form; and it relates to a financial product or supply of financial services.

Which financial products and financial services? Any financial products and financial services (ASIC Act definition): Credit Banking transaction accounts Investment products? Except… General and life insurance Constitutions of companies, MIS, other bodies.

Meaning of unfair? A term is unfair if it: causes significant imbalance in the parties’ rights and obligations; is not reasonably necessary to protect the legitimate interests of the advantaged party; and would cause financial or other detriment. A court must consider transparency and the contract as a whole.

Exclusions A term is not subject to the UCT provisions if it: defines the main subject matter of the contract; or sets the upfront price; or is required or expressly permitted by law.

Examples of unfair terms Some potential examples in the legislation: penalising one party but not the other for breach or termination; allowing one party unilaterally to determine if there has been a breach or to interpret its meaning; allowing one party, but not the other, to renew or not renew the contract.

Terms of concern A term stating: “No officer, servant or agent of the company has any authority to vary, add to or omit any of the terms and conditions of the contract or lease”. Possible conflict with National Credit Code entitlement to seek hardship variations.

Powers of attorney Terms relating to powers of attorney “In the event of default, the Grantor [Buyer] irrevocably appoints the Lender and each officer of the Lender severally its attorney with the power to exercise its powers even if the attorney has a conflict of duty in exercising its powers or has a direct interest in the means or result of the exercise of its powers”. Extent of lenders ability to negatively influence the financial position of the consumer, above and beyond the level of debt under the loan/lease agreement.

ASIC’s regulatory approach to UCTs A new tool for use where appropriate in all of our work A measure for addressing particular identified problems Possibly different approaches where the questionable term is one off or industry wide Current work with industry – projects to cut out boilerplate

National Consumer Credit Protection Act Commenced 1 July 2010 Key elements UCCC becomes the NCC Licensing for all players Regulation of mortgage brokers Introduction of Responsible Lending Mandatory EDR

Responsible Lending Conduct reasonable inquiries about requirements and objectives Verify the customer’s financial situation Assess the customer’s capacity to repay without substantial hardship Do not offer or suggest credit products that are unsuitable

Responsible Lending: Credit Cards ASIC review of existing practice in relation to credit card issuance and limit increases Survey of 15 card issuers Industry practice – high volume, streamlined, little manual intervention Responsible lending requirements focus on individual assessments Guidance in RG 209

Resources to Assist www.asic.gov.au/credit Regulatory Guides and Information Sheets on all key elements Downloadable Podcasts Subscribe to credit newsletter ASIC Infoline – 1300 300 630

Some priorities going forward Verification audits in relation to license applications Policing the boundary Complaints Emphases in our BAU activities Debt collection, hardship Gatekeepers Entities new to regulation

Issue based work Mortgage Early Exit Fees Responsible Lending credit cards, short term lending, home loans especially fringe Consumer Credit Insurance Book Up Debt consolidation

Applying the NCC and the ACL Mortgage Early Exit Fees Twin Jurisdiction Section 78 of the NCC: unconscionable establishment fees (s78(3)) and unconscionable “fees payable on early termination” (s78(4)) Unfair Contract Terms: section 12BF of the ASIC Act 2001

Mortgage Early Exit Fees 2008 review of mortgage entry and exit fees ASIC published a report which found that: early termination fees on mortgages in Australia were high in comparison with the UK and US; some early termination fees could probably not be justified by the underlying cost to the lender; but, home loan entry fees in Australia were lower in comparison to those overseas.

Mortgage Early Exit Fees Regulatory guidance on early exit fees 27 June 2010: ASIC released Consultation Paper CP 135 seeking stakeholder feedback on how ASIC proposes to administer the NCC and UCT provisions as they apply to mortgage early exit fees. Consultation period closed on 9 August 2010 10 November 2010: Regulatory Guide 220 published setting out ASIC guidance on NCC and UCT provisions.

Mortgage Exit Fees – legal issues Deferred Establishment Fees - for the NCC are they establishment fees or fees payable on early termination - for the ACL, are they a part of the upfront price Two routes to the same outcome – fees that reflect losses caused by the early termination

Mortgage Exit Fees Provides guidance about: what is a fee “payable on early termination”? Types of costs and losses that may be included in an exit fee Types of costs and losses which may not be included in an exit fee The circumstances in which a lender may vary an exit fee How lenders can explain their early exit fees transparently Break fees on fixed rate mortgages.

Questions and more information Complain to ASIC’s infoline 1300 300 630 emailinfoline@asic.gov.au Joint regulatory guidance on UCT and other guidance forthcoming Coordinated relationships with fellow regulators

consumerlaw.gov.au