Applications for an Australian Financial Services Licence (or variation thereto) for existing Issuers and advisers of margin lending facilities wishing to continue business opened on the 1st of February 2010 and will remain open until the 30th of June 2010. Businesses failing to apply before the 30th of June 2010 must cease providing such services, until they obtain a relevant AFSL (or variation).

The main requirements include:
• The need for issuers and advisers of margin lending facilities to be licensed by ASIC under an Australian financial services (AFS) licence;
• That advisers only provide advice that is appropriate to the client's individual circumstances
• That margin lenders meet new responsible lending requirements
• That consumers have access to external dispute resolution services
• Clarity around responsibility for notifying clients in the case of a margin call

Furthermore, the same licensing, conduct and disclosure requirements that currently apply to financial services will apply to providers and financial advisers in relation to margin lending facilities. The changes are part of the Government's plan to regulate credit nationally and have taken effect from 1 January 2010; however there is a 12 month transitional period so that the new requirements will take effect from 1 January 2011. ASIC have also updated Regulatory Guide 146 Licensing: Training for financial product advisers and Regulatory Guide 166 Licensing: Financial requirements in relation to these changes.

 

Responsible Lending Guidance

ASIC released Regulatory Guide 209 Credit licensing: Responsible lending conduct obligations in order to assist in the understanding of ASIC’s expectations in relation to the responsible lending obligations as credit licensees under the National Consumer Credit Protection Act 2009 (National Credit Act).

Credit licensees must comply with the responsible lending conduct obligations in the National Credit Act, and must not enter into a credit contract with a consumer, suggest a credit contract to a consumer or assist a consumer to apply for a credit contract if the credit contract is unsuitable for the consumer.

Meeting these lending obligations will require the following:

(i) Making reasonable inquiries about the consumer’s financial situation, and their requirements and objectives - Reasonable inquiries must be made with consideration of the potential impact on the consumer, the complexity of the contract, the capacity of the consumer and whether the consumer is or isn’t an existing customer. What amounts to a reasonable level of inquiries depends on the nature of the service offered however reasonable enquiries about a consumer’s financial situation and their requirements and objectives must be made.
(ii) Taking reasonable steps to verify the consumer’s financial situation.
(iii) Making a preliminary or final assessment about whether the credit contract is “not unsuitable’ for the consumer - Making a final or preliminary assessment will require active steps to be taken to form a reasonable view as to whether the contract is ‘not unsuitable’ for the consumer that is expected to be based on the reasonable inquiries made to the consumer.
(iv) If requested by the consumer, a written copy of the preliminary assessment or final assessment must be provided.

 

Duty to prevent insolvent Trading

Late in 2009 ASIC released Consultation Paper 124 as a guide for directors regarding their duty to prevent insolvent trading. The paper outlines the key principles which should be applied by directors to ensure compliance with this key duty. These include remaining informed about the financial affairs of the company, regular assessment of the company’s solvency, immediate identification of concerns, obtaining advice from suitably qualified persons and acting in a timely manner, and.
Directors are required to investigate financial difficulties from the moment there are reasonable grounds to suspect that these difficulties may be present. ASIC will take the following potential indicators of insolvency into consideration when assessing solvency of a company:

• A company history of trading losses
• Any difficulties concerning the cash flow
• Difficulties in the selling of stock and collection of owed debt
• Any occurrence of creditors not being paid on the agreed trading terms
ASIC recommends that a director seek professional advice if any of the above indicators become apparent.

 

Australian Consumer Law Reforms

Parliament passed the Trade Practices Amendment (Australian Consumer Law) Bill 2009 (Cth) (ACL Bill) on 17 March 2010. This Bill is the first of two reforms aiming to create a unified national consumer law (ACL) applying to consumer transactions in all Australian Jurisdictions. The ACL Bill:

(i) introduces new civil pecuniary penalties for contravention of certain consumer protection provisions
This penalty scheme is very likely to increase the actions being commenced by the ACCC, especially concerning unconscionable conduct including false or misleading representations, single figure pricing and misleading and deceptive conduct. This is because the penalty scheme allows the ACCC to commence court actions and as the onus of proof shifts from “beyond reasonable doubt” in criminal proceedings to the “balance of probabilities” under the new civil penalty regime.

(ii) prohibits unfair contract terms in standard form consumer contracts
A term in a consumer contract will be void if the term is "unfair" and the contract is a standard form contract. There will be a rebuttable presumption that the term is not reasonably necessary to protect the business’ legitimate interests. This means that a business will need to demonstrate on the balance of probabilities that its legitimate interest is sufficiently compelling to overcome any detriment that may be caused to the consumer.
Equivalent changes have been passed for financial services and are mirrored in amendments to the Australian Securities and Investments Commission Act 2001 (ASIC Act). Under the ASIC Act amendments, such a term will be void where the standard form consumer contract is for a financial product or financial service.
All contracts will be presumed to be standard form contracts unless demonstrated otherwise. Courts will consider the bargaining power of the parties, pre-preparation of contracts, negotiating potential etc in deciding whether a contract is standard form or not. A term will be unfair if it causes significant imbalance in the parties’ rights or obligations, is not reasonably necessary to protect the legitimate interests of the advantaged party and causes detriment (financial or otherwise). Examples of unfair terms include those which enable avoidance/limitation of performance, variations, renewals or terminations by only one party etc.

(iii) introduces new enforcement powers for the Australian Competition and Consumer Commission (ACCC) and the Australian Securities and Investments Commission (ASIC)
Under the new penalty scheme ACCC and ASIC will be empowered to
- Apply for a court order disqualifying a person from managing corporations following a contravention of certain consumer protection provisions of the TPA.
- Seek a court order to redress loss or damage to consumers arising out of contravention of certain consumer protection provisions.
- Issue "substantiation notices" requiring the recipient to provide information and/or documents which would be capable of substantiating representations made by the recipient.
- Issue "infringement notices" containing a financial penalty for suspected contraventions of certain civil penalty provisions of the TPA's consumer protection law. Although payment is voluntary, if paid, it will avoid the regulator bringing court proceedings in relation to that conduct.
- Issue "public warning notices" relating to consumer protection in certain circumstances.

These wide-ranging reforms will have a significant impact on all businesses and will require companies to conduct reviews of their business-consumer agreements, standard form terms and conditions, document retention policies and procedures that are currently in place dealing with potential investigation by a regulator.

The second proposed reform the Trade Practices Amendment (Australian Consumer Law) Bill (No 2) 2010 was introduced into the House of Representatives on 17 March 2010. This Bill aims to provide for a national law that deals with statutory consumer guarantees, unsolicited sales practices, lay-by agreements, product safety and manufacturer liability.

It is anticipated that the consumer law reforms will take full effect on 1 January 2011.

 

Simplified product disclosure

Draft regulations have recently been released by Treasury regarding simplified disclosure in relation to managed funds and superannuation fund investments. The objective is to make Product Disclosure Statements (PDSs) standardised and easy to understand, at a maximum length of 6 A4 pages (minimum 9 point font). Issuers will therefore need to consider what additional information investors should receive and in what format this can be provided to them, once these regulations are passed. The Government has published sample PDSs for superannuation and managed fund investments to demonstrate the proposed content requirements and format. The new PDS regime will only apply to MISs which invest mainly in financial assets, initially. The new PDSs will be required to contain prescribed sections/headings (set out in the prescribed order) and containing certain prescribed information. Briefly, the format for MISs will require the following:

1. About the RE – summary of RE, investment manager, key benefits of investing in MIS and what it is.
2. How to Invest – overview of minimum investment amount, fund assets/valuations, how to invest more or redeem investment etc.
3. Benefits of Investing with RE – summary of significant features and benefits of the MIS (and any socially responsible/ethical considerations).
4. Risks – inclusion of a number of prescriptive statements, and a summary of the key risks including past performance/no guarantee disclaimer etc.
5. How we invest your money – summary of investment options, asset classes and strategic asset allocation, investment return objective, minimum suggested timeframe for holding the investment, risk level of the investment, and warnings.
6. Fees & Costs – various prescribed warnings, and inclusion of a prescribed fee table showing key fees, maximums under trust deed, performance fees (but not how they are calculated), worked example (including buy-sell spread) based on a $100,000 investment for 9 years with an additional $5,000 invested per quarter. Any other legally required fee info is to be incorporated by reference.
7. Tax – warning about tax consequences, and status of the investment and recommendation to seek professional tax advice.
8. How to apply – summary re how to invest and note the cooling-off period, and how to complain.