Australian Credit Licence

Please note that a new licensing regime is proposed, and will be administered by ASIC, with respect to credit providers. ASIC are currently engaged in a consultation process to determine the parameters and requirements of the proposed National Consumer Credit regime, including the proposed enactment of the National Credit Bill in the coming months.

A series of consultation papers and regulatory guides, and a new credit licensing kit will be released during the remainder of this year. Essentially the new legislation will require that anyone who engages in certain credit activities, or provides credit services (ie provides credit assistance or act as an intermediary) in relation to such activities, will need to register with ASIC between 1 November and 31 December 2009.

Such credit activities are set out in section 6 of the new Bill, and are proposed to encompass credit contracts, consumer leases, mortgages, guarantees, and other prescribed activities. If you are the beneficiary of such contract ie the credit provider, mortgagor, lessor, or beneficiary of the guarantee, (whether initiating or later upon assignment), you must be licensed. Section 7 notes that the provision of credit services entails providing assistance (advising/suggesting someone apply for credit) or acting as an intermediary.

Such registered persons will have six months (1 January-31 July 2010) to lodge an application with ASIC for an Australian Credit Licence (ACL). This is the transitioning period for current providers who register in November/December 2009. New entrants will need to apply for, and obtain, an ACL from 1 January 2010 before commencing business. There will be a streamlined (easier) process for ADIs regulated by APRA, and for finance brokers registered in WA (who are therefore considered to have met more stringent requirements already in the provision of their credit services). Key duties for credit licensees will be similar to those currently applicable for AFS Licensees ie operate efficiently, honestly and fairly, properly manage conflicts of interest, comply with the laws and supervise representatives, maintain adequate resources and risk management, have adequate dispute resolution and compensation arrangements (likely to be $2m minimum PI insurance requirement) etc, and also to comply with prescribed 'responsible lending' conduct and duties.

Consultation Paper 111 details the compensation and financial resource arrangements to be imposed on credit licensees, whilst Consultation Paper 110 outlines guidance regarding compliance with general conduct obligations to be imposed. The latter paper is supported by the draft ASIC Regulatory Guide 104.

Consultation Paper 112 sets out the dispute resolution requirements for credit providers and margin lenders. Applicants for an ACL will need to become members of an external dispute resolution scheme (such as FOS or the Credit Ombudsman Service Ltd) and implement internal dispute resolution procedures, akin to those currently imposed on AFS licensees. Unlike the current AFSL regime, it appears to be proposed that representatives of a credit licensee (directly involved in undertaking authorized credit activities) will individually have to be members of an external dispute resolution scheme. This is to enable consumers to have recourse directly to the individual where they have acted outside the scope of their authority, or where the licensee is insolvent.

The draft Regulatory Guide notes that credit providers will be obligated to make reasonable enquiries about a person's needs, objectives and financial circumstances before providing a loan or credit contract, and assess whether it is unsuitable for a person to enter into a loan, have a credit limit increased or even remain in a credit contract.

Credit licensees will also need to implement procedures to properly assist and deal with financial hardship applications and situations.

Consultation Paper 113 sets out the draft training competencies which will be required for credit licensee representatives. Persons involved in providing credit will have to meet 'fit and proper' criteria. Apart from satisfying police, insolvency checks and obtaining references (as per current AFSL responsible manager requirements), this essentially means that relevant officers (who provide the authorised credit activities in the licensee) will have to hold a credit industry qualification at a minimum Certificate IV level or a relevant higher level qualification (eg diploma in financial services or degree in finance) AND have had at least two years "problem-free" experience (ie no regulator-involved action/compliance issues).

For those involved in providing mortgage broking services, key people will need to hold a Certificate IV in Financial Services (Finance/Mortgage Broking). It is proposed that key people should then undertake 20 hours of annual continuing education to maintain skills and competency in this area, covering product and industry developments, and including compliance/regulatory training.

During the transition period of initial licensing, the educational qualifications will not be required (until 2013) for key persons at the time of application, provided they can demonstrate 5 out of the last 7 years relevant experience.

The key people for credit licensing purposes will be named on the ACL pursuant to a 'notification condition' which will operate similar to the current Key Person condition on AFSLs ie if that person leaves the organization, ASIC will have to be notified and a suitable replacement appointed.

There will be a carve-out from the education and ongoing training requirements re mortgage brokers, for those who hold tier 1 RG 146 qualifications and only provide incidental mortgage broking advice eg financial planners who only engage in credit activities in a limited way.

 

Treatment of client monies in relation to OTC derivatives

A new ASIC Consultation paper 114 has been released by ASIC this month, regarding treatment of client money in relation to over-the-counter (OTC) derivatives. The paper sets out a number of proposals including a draft Regulatory Guide on the subject, addressing ASIC's concerns about disclosure to clients regarding money paid to/held by licensees in relation to OTC derivative transactions, namely the counterparty (credit) risk such clients are taking in respect of licensees.

ASIC are concerned that client money obtained and held by licensees as margin payments or free equity, be applied and deposited in accordance with the Corporations Act requirements regarding segregated accounts, and that the risks that a licensee may apply such monies to offset other liabilities and hence be unable to repay clients, be properly disclosed to, and better understood by, their clients.

The draft Regulatory Guide attempts to categorise what is and isn't client money, and what can be included in a client money account. Please note that client monies do not technically include licensee remuneration, reimbursement, payment for products etc. Client monies must be placed into a client money account with an Australian ADI, approved foreign bank or CMT generally. Client money accounts should generally be operated as trust accounts, unless subject to margin calls from clearing facilities etc.

The draft Regulatory Guide outlines circumstances where monies can be deposited into, or withdrawn from, client money accounts. Permitted withdrawals include payments for products, brokerage and other agreed charges, money to which the licensee is properly entitled, and other legally mandated or instructed payments. For dealings in derivatives, licensees may use client monies to meet margins, guarantees, settlements or adjustments etc.

Despite the position that client segregated accounts are essentially subject to a statutory trust, clients remain exposed to a degree of counterparty (credit) risk with respect to the potential failure/insolvency of the licensee of another of the licensee's clients, causing a shortfall and inability to honour payment obligations. Accordingly ASIC consider that clients need to properly assess this risk before placing monies with licensees to trade derivatives. To this end, ASIC will expect that (i) clients be advised of licensee's policy regarding use of client monies (ii) licensees should include clear and prominent disclosures in their PDS regarding the nature of counterparty risk for client monies used for derivatives ie that monies in the client account are co-mingled with other client monies and that such monies may be used to satisfy obligations arising from dealings on behalf of other clients of the licensee, hence exposing a client to the risk that there may be a deficit in the account and that the licensee may become insolvent or otherwise unable to pay the deficiency (iii) licensees should advise clients to minimise the risk by keeping the minimum client money with a licensee to reduce their potential exposure.

ASIC also note that there should be clear and prominent disclosure in the PDS where the licensee is retaining interest earned on monies in client accounts.

ASIC are considering whether further financial information about the licensee should be included in the PDS so that a potential client can adequately assess the licensee's solvency.

ASIC also propose that, going forward, auditor reports will also have to contain a statement regarding the licensee's compliance with the client money provisions (see draft paragraph 56 & 57).

Feedback on the proposals is sought by ASIC by 18 September 2009.

 

Updating of Accounting Certificates for Wholesale Clients

This applies where you provide products or services to a wholesale client under section 761G(7) of the Corporations Act. Reliance on section 761G(7) requires that the product or service is not provided for use in connection with a business and that you have obtained an accountant's certificate in relation to that person's assets or income for the last 2 financial years in accordance with the amounts specified in the regulations (currently assets of $2.5 million or income of $250,000).

It is necessary where ongoing services are provided to clients on this basis to regularly check that you have on file a valid accountant's certificate and that a new accountant's certificate is obtained every 2 years.

You are able to rely on the face of the certificate unless you have actual knowledge that the certificate is incorrect. There is no need for you to inquire behind the certificate if you are satisfied the certificate:

•  is issued by a person who is a qualified accountant. A qualified accountant is a person who belongs to:

•  the specified professional bodies (Institute of Chartered Accountants in Australia (CA, ACA, FCA); CPA Australia (CA ,FCA) or National Institute of Accountants in Australia (PNA, FPNA, MINA, FINA); or

•  an eligible foreign professional body, has at least 3 years practical experience and provides certificate to someone resident in the same country as them (not Australia); and

•  states that the person to whom the offer is made has a gross income of $250,000 or more in each of the preceding two years (before the certificate was issued) or net assets of at least $2.5million.

 

Proposed prohibition on unfair contract terms in standard-form contracts

Unfair contract terms are those that cause a significant imbalance in the parties' rights and obligations arising under a contract and are not reasonably necessary to protect the legitimate business interests of the supplier. The legislative model which has been proposed will apply to standard form, non-negotiated contracts. The Treasury paper provides examples of types of terms that may be problematic as they are likely to cause client detriment including:

 

• clauses that permit the supplier to unilaterally vary the terms of the contract;
• clauses that prevent the consumer from cancelling a contract;
• clauses that exclude liability for harm resulting from the supplier's or its agents' actions;
• clauses that let only the supplier decide whether to renew or not to renew the contract;
• clauses that penalise only the consumer for breaches of the terms of the contract;
• clauses that permit the supplier to change the price of the goods or services contracted for without allowing the consumer to terminate the contract;
• clauses that permit the supplier to unilaterally determine whether a breach of the contract has occurred or to interpret the contract's meaning;
• clauses purporting to limit the consumer's right to take legal action against the supplier;
• clauses limiting the evidence that the consumer is permitted to use in legal proceedings based on the contract;
• clauses imposing the evidential burden on the consumer in legal proceedings;
• clauses that require consumers who breach a contract term or terminate early to pay penalties, in the form of specific additional payments, additional interest or indemnity legal costs, which do not reflect the suppliers' reasonable costs; and
• clauses that deem something as a fact or that something will be a fact, such as an acknowledgment that certain information has been provided to the consumer prior to the agreement being made, regardless of whether or not it was.

 

The onus will be on the provider to prove the contract is not a standard form contract and the remedies (not limited to financial detriment) will be available where the claimant can show detriment or a substantial likelihood of detriment.

 

The Australian Consumer Law will also ban certain contract terms which are considered to be unfair in all circumstances and the use of these terms would expose the provider to enforcement action. Some of the terms suggested by the Treasury paper are:

 

• deny the existence or effect of oral representations
• require the consumer to agree, for instance, that no representations have been made that are not in the written contract

• state that the written document contains the entire agreement of the parties
• the consumer acknowledging that he or she has understood the contract
• conclusive evidence terms
• requiring the consumer to pay more than the provider's reasonable enforcement costs reasonably incurred
• mandating arbitration of disputes or otherwise inhibiting access to courts or tribunals.

 

There will also be new remedies in the proposed new consumer law including substantiation notices (requiring a provider to give to a regulator a basis for representations it makes), public warning ("naming and shaming") and infringement notices.

 

At the National level it is proposed that ASIC will have primary responsibility for the enforcement of consumer laws relating to financial services.

 

Once implemented this new legislation will require review and amendment (where necessary) of all standard form contracts.

ASIC guidance re securities lending/substantial holdings

Last month, ASIC released Consultation Paper 107 regarding disclosure of substantial holdings arising from securities lending or prime broking. The paper is seeking to improve disclosure of substantial holdings in practice and makes it clear that securities lending transactions and prime broking arrangements need to be taken into account in calculating a substantial holding. A substantial holding notice must be lodged when your relevant interests, together with the relevant interests of your associates, increase to 5 per cent or more of a listed entity or that interest changes by 1 per cent or more. A notice must also be lodged when your interest drops below 5 per cent again. The Paper makes it clear that these obligations also apply to parties which lend or borrow securities. ASIC proposes that prime brokers may also need to provide a notice where they are entitled to borrow securities from their clients as part of the prime broking arrangement.

 

RG 126 insurance arrangements

For financial services licencees who provide services to retail clients, the initial implementation period regarding insurance arrangements is drawing to a close. RG 126 details the introduction of the requirement for such licensees to hold professional indemnity (PI) insurance which has been in place since last year, and outlines the higher standard to be complied with from 1 January 2010. Notably, from 1 January 2010 applicable licensees will need to hold PI insurance cover with an 'authorised insurer' ie an insurer authorised by APRA, or operating under an exemption. Carve outs for the requirements are limited to licensees with operating revenue or gross assets of at least $200m, or with at least 500 employees.

Licensees who do not meet this 'large entity' criteria will need to now review and ensure their current policy is held with an authorised insurer (ie not a foreign insurer), and that it will meet the adequacy criteria set out in RG 126. While much of this will be determined by the licensee assessing what is appropriate for the size and nature of their business, minimum requirements include (i) minimum coverage of $2m for a claim, with an aggregate limit above $2m depending on licensee's revenue (ii) coverage for loss or damage suffered by retail clients due to breaches of chapter 7 of the Corporations Act and fraud/dishonesty by directors or representatives, with no exclusions for misrepresentation etc (iii) acts and products outside approved list; and (iv) run-off cover for at least 1 year.

 

Fair Work Act

On 1 July 2009 the Fair Work Act commenced, replacing the Workplace Relations Act, and introducing new unfair dismissal laws which took effect immediately. The National Employment Standards (NES) and Modern Awards come into effect on 1 January 2010, at which point the Australian Industrial Relations Commission will be superseded by Fair Work Australia. The Fair Work Act must be read in conjunction with the Fair Work (Transitional Provisions and Consequential Amendments) Act 2009 by employers transitioning from Work Choices to Fair Work.

From 1 July 2009, employees must lodge a claim for unfair dismissal within 14 days of their dismissal. To be eligible for such a claim, the employee must have been employed for a minimum of 12 months (or 6 months if employed by a small business ie one with less than 15 employees), and be covered by a Modern Award or enterprise agreement or earn less than the high income threshold. There remains exclusions for employees who are employed for a specific task/period or demoted without significant reduction in duties or remuneration.

The small business exemption can be utilised by one that employs less than the equivalent of 15 full time employees, until 1 January 2011, at which point a straight head count of 15 will be used thereafter.

The Act does not distinguish between probation and qualifying periods ie it is simply 12 months of employment for small businesses and 6 months for others. The Act permits dismissals which are genuine redundancies ie the employee's job must be no longer required to be performed by anyone because of changes in the operational requirements of the business. Further, if reasonable in the circumstances, the employer must have tried to redeploy the employee. The primary remedy for an unfair dismissal claim will be reinstatement, or where reinstatement is inappropriate, compensation.

Further provisions in the new Act involve transfers of business, the new bargaining framework, 'good faith bargaining' and enterprise agreement negotiation requirements, as well as modern awards post January 2010.

Significant changes among the NES will be amendments to parental leave entitlements (allowing parents to request leave for up to 24 months); an entitlement for parents of young or disabled children to request flexible working arrangements; and an obligation upon employers with 15 or more employees to pay redundancy benefits in accordance with a statutory scale. 

Employers who increased the rate of pay in return for employees agreeing in a pre-reform workplace agreement to relinquish some entitlements that now are in the NES (e.g. some or all of 10 days' sick leave or 20 days' annual leave) will from 1 January 2010 have to provide both the NES benefit and, where applicable, the modern award higher pay, unless the agreement benefit is considered at least as beneficial as the NES entitlement.

Modern awards will not cover employees who earn more than a certain income, expected to be $100,000 a year (pro rata for part-time employees).

 

Abolition of transfer duty on marketable securities and non-land business assets and mortgage duty

The NSW Treasurer, The Hon. Eric Roozendaal MLC, announced changes to taxes, duties and benefits as part of the 2008 Mini-Budget.

Duty on unquoted marketable securities was to be abolished from 1 January 2009, however due to the Budget, it is now to be scheduled for abolition on 1 July 2012.

Mortgage duty on business loans only (noting mortgage duty on residential loans and loans to acquire residential investment properties has already been abolished) was to be abolished on 1 July 2009 but will now be abolished from 1 July 2012.

Transfer duty on business assets other than land was to be abolished on 1 January 2011 but this has now been deferred to 1 July 2012.