Bills Digest No.
76, 2019–20
PDF Version [710KB]
Paula Pyburne
Law and Bills Digest Section
3
February 2020
Contents
Purpose of the Bill
Structure of the Bill
Committee consideration
Statement of Compatibility with Human
Rights
Unfair contract terms
Policy position of non-government
parties/independents
Position of major interest groups
Financial implications
Key issues and provisions
Funeral expenses facilities
Policy position of non-government
parties
Position of major interest groups
Financial implications
Key issues and provisions
Mortgage brokers
Policy position of non-government
parties/independents
Position of major interest groups
Financial implications
Key issues and provisions
Concluding comments
Date introduced: 28
November 2019
House: House of
Representatives
Portfolio: Treasury
Commencement: Sections
1–3 on Royal Assent; Schedules 2 and 3 on the day after Royal Assent; and
Schedule 1 on 5 April 2021.
Links: The links to the Bill,
its Explanatory Memorandum and second reading speech can be found on the
Bill’s home page, or through the Australian
Parliament website.
When Bills have been passed and have received Royal Assent,
they become Acts, which can be found at the Federal Register of Legislation
website.
All hyperlinks in this Bills Digest are correct as
at February 2020.
Purpose of
the Bill
The purpose of the Financial Sector Reform (Hayne Royal
Commission Response—Protecting Consumers (2019 Measures)) Bill 2019 (the Bill)
is to:
Structure of
the Bill
The Bill comprises three Schedules:
Structure of
this Bills Digest
As the matters covered by each of the Schedules are
independent of each other, the relevant background, stakeholder comments (where
available) and analysis of the provisions are set out under each Schedule
number.
Committee
consideration
Standing Committee
for the Selection of Bills
At its meeting of 5 December 2019, the Standing Committee
for the Selection of Bills (Selection of Bills Committee) determined that the Bill
not be referred to Committee for inquiry and report.[2]
Senate
Standing Committee for the Scrutiny of Bills
The Standing Committee for the Scrutiny of Bills (Scrutiny
of Bills Committee) commented on the use of delegated legislation in Schedule 3
to the Bill.[3]
The comments are canvassed under the heading ‘Mortgage brokers’ in this Bills
Digest.
Statement of Compatibility with Human Rights
As required under Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed
the Bill’s compatibility with the human rights and freedoms recognised or
declared in the international instruments listed in section 3 of that Act. The
Government considers that the Bill is compatible.[4]
Parliamentary
Joint Committee on Human Rights
At the time of writing this Bills Digest the Parliamentary
Joint Committee on Human Rights (Human Rights Committee) had not commented on
the Bill.
Unfair
contract terms
The Hayne RC identified a number of issues in relation to
insurance including issues relating to the use of, and reliance upon,
potentially unfair contract terms (UCT).[5]
|
Recommendation 4.7 – Application of unfair contract
terms provisions to insurance contracts
The unfair contract terms provisions now set out in the ASIC
Act should apply to insurance contracts regulated by the Insurance
Contracts Act.
The provisions should be amended to provide a definition
of the ‘main subject matter’ of an insurance contract as the terms of the
contract that describe what is being insured. The duty of utmost good faith
contained in section 13 of the Insurance Contracts Act should operate
independently of the unfair contract terms provisions.[6]
|
Unfair contract terms regime
Background
In 2008, the Productivity Commission undertook a review of
Australia’s Consumer Policy Framework which included amongst other things, the
use of unfair contract terms and their effect on consumers.[7]
According to the Productivity Commission:
Unfair contract terms are those that disadvantage one party
but that are not reasonably necessary to protect the legitimate interests of
the other. Examples of such ‘unfair’ terms include reserving the right to vary
the contract at any time for any reason, or removing liability for
interruptions in supply, which may have the effect of inefficiently shifting
risk from suppliers to consumers ...
The biggest concerns arise for standard-form
contracts—typically used in the supply of a broad range of services including
air travel, telecommunications, energy, consumer credit, car hire, holiday
packages, home improvements and software sales. Such non-negotiated contracts
have advantages for consumers—in particular, in competitive markets, lower
business costs will be passed on to consumers as lower prices. But, by their
nature, these contract terms are offered on a ‘take-it-or-leave-it’ basis, are
often complex and apparently mostly not read. The concern is that businesses
sometimes use unfair terms against consumers and the public interest generally.[8]
Subsequently, the Government enacted the Australian
Consumer Law (which is located in Schedule 2 to the Competition and
Consumer Act 2010 (CCA)) to establish the unfair contracts
regime.[9]
The ASIC Act contains unfair contract provisions which are in broadly
equivalent terms except that they apply to a financial product or to a contract
for the supply, or possible supply, of services that are financial services.[10]
Initially the unfair contract terms regime applied only to business-to-consumer
contracts. Later amendments extended the unfair contract terms regime to small
business contracts.[11]
How the unfair contract terms regime operates
A term of a consumer contract is void if the
term is unfair[12]
and the contract is a standard form contract.[13]
The existing unfair contract term protections operate as follows:
-
an unfair term is one which would cause a
significant imbalance in the parties’ rights and obligations arising under the
contract, is not reasonably necessary in order to protect the legitimate
interests of the party who would be advantaged by the term and would cause
detriment (whether financial or otherwise) to a party if it were to be applied
or relied on[14]
-
in deciding whether a contract is unfair a court must take into
account the transparency of the term—that is, whether it is
expressed in reasonably plain language, is legible, is presented clearly and is
readily available to any party affected by the term[15]
-
the exceptions to the unfair contract term provisions are terms
that:
- define
the main subject matter of the contract
- set
the upfront price payable under the contract or
- are
required, or expressly permitted, by a law of the Commonwealth, a state or a territory.[16]
The upfront price payable is the amount that
is provided for the supply or sale under the contract. It is disclosed at, or
before, the contract is entered into. It does not include any other
consideration that is contingent on the occurrence or non-occurrence of a
particular event.[17]
If a party to a proceeding alleges that a contract is a
standard form contract, it is presumed to be a standard form contract unless
another party to the proceeding proves otherwise.[18]
The relevant Acts list a number of matters which a court may take into account
in determining whether a contract is a standard form contract.[19]
Insurance
contract exception
While the unfair contract terms regime applies to most
financial products and services, it does not currently apply to insurance
contracts regulated under the Insurance Contracts Act. This is because the
Insurance Contracts Act states that a contract of insurance is not
capable of being made the subject of relief under any other Act.[20]
Rationale
for the exception
Both parties to an insurance contract must act with utmost
good faith or uberrima fides towards each other.[21]
Part II of the Insurance Contracts Act contains
provisions about the duty of utmost good faith.
According to the High Court, in relation to the insurer, the touchstone of the
duty of utmost good faith is ‘to act, consistently with commercial standards of
decency and fairness, with due regard to the interests of the insured’.[22]
Under the duty of utmost good faith, each party must
voluntarily disclose to the other, during pre-contractual negotiations, any
fact of which he or she is aware and which he or she knows, or ought to have
known, would be material to those negotiations. That duty
continues up until the time that the insurance contract is formed.[23]
Where there is a breach of this duty of disclosure, an insurer may, depending
on the terms of the insurance contract, elect to avoid the contract ab
initio[24]
or refuse to pay a claim.
According to the Australia Law Reform Commission report
which was the catalyst for the enactment of the Insurance Contracts Act
the requirement of both parties to act with utmost good faith ‘should provide
sufficient inducement to insurers and their advisers to be careful in drafting
their policies and to act fairly in relying on their strict terms’.[25]
However, the Consumer Action Law Centre considers that the
duty of utmost good faith is not achieving its stated aims because:
-
it does not hold the insurer to account for policy terms which
are harsh, oppressive, unconscionable, unjust, unfair or inequitable
-
it does not require an insurer to draft policy clauses ‘fairly’
-
it does not prevent an insurer from selling an insurance policy
which is unsuitable, or which the customer does not understand and
-
people are overwhelmingly unaware of it and, if they are aware of
it, it is very unlikely to assist them in common disputes.[26]
The Consumer Law Committee of the Law Council of Australia
echoed this sentiment stating that the duty of utmost good faith has ‘not
succeeded as an adequate consumer protection against unfair contract terms’ and
expressed the view that ‘the insurance sector should not have received an
exemption from the 2010 UCT reforms’.[27]
Examples of
terms in insurance contracts which may be ‘unfair’
The type of terms that are problematic include:
-
for home building insurance:
- terms
that provide that the most the insurer will pay in the event of loss or damage
to a building is the cost to the insurer for rebuilding or repairing the
building (as opposed to the actual cost of the repair, which may be higher for
the insured) and
- terms
that allow the insurer to require the insured to pay an excess before paying
the claim
-
for car insurance: terms that require the insured to provide the
name, registration and contact details of an uninsured at-fault driver when
making a claim
-
for consumer credit insurance: terms that prevent an insured from
making a disability claim if they were not diagnosed with the disability prior
to leaving work and
-
for travel insurance: terms that allow a claim to be denied on
the basis of a blanket mental health exclusion.[28]
Previous consideration
of the insurance contract exception
The question of whether the Insurance
Contracts Act needs to be supplemented in some manner by unfair contract
terms provisions—that is, to operate in addition to the requirement of utmost
good faith—had been considered prior to the recommendation of the Hayne RC. The
considerations included, but are not limited to:
- in
March 2017, the final report of the Consumer Affairs Australia and New Zealand
(CAANZ) review of the Australian Consumer Law recommended applying unfair
contract terms protections to contracts regulated under the Insurance
Contracts Act[29]
-
the 2017 Senate Economics Committee inquiry into the general
insurance industry[30]
which recommended that the government ‘introduce the legislative changes
required to remove the exemption for general insurers to unfair contract terms
laws’[31]
-
the 2018 Parliamentary Joint Committee on Corporations and
Financial Services inquiry into the life insurance industry[32]
which recommended, amongst other things, that ‘section 15 of the Insurance
Contracts Act be reformed to enable consumer protections to apply to life
insurance contracts’ and that the ‘consumer protections for life insurance be
aligned with consumer protections for other financial services and products’[33]
and
-
the Australian Competition and Consumer Commission first interim
report in the Northern Australia Insurance inquiry in 2018[34]
which stated that the ‘unfair contract term protections in the Australian
Securities and Investments Commission Act should apply to insurance
contracts regulated by the Insurance Contracts Act’.[35]
Treasury consultation
In June 2018, Treasury began consulting on a
Proposals Paper to extend unfair contract terms laws to insurance contracts
relating to both life and general insurance.[36]
The paper proposed that section 15 of the Insurance Contracts Act be
amended to allow the unfair contract terms laws in the ASIC Act to apply
to insurance contracts. This amendment would provide insureds with the same
protections as consumers under the Australian Consumer Law.
According to the Australian Securities and Investment
Commission (ASIC) extending the protections:
-
would give life and general insurance policyholders the same
protections that are currently available for other financial products and
services and other standard form contracts throughout the economy
-
will require insurers to review their standard form contracts and
proactively address any terms that could be unfair
- can play an important role in promoting trust and integrity in
the insurance sector and
-
when appropriately tailored to the specific features of insurance
contracts, can help protect consumers and small businesses while still
accommodating the legitimate interests of insurers.[37]
Treasury received 23 submissions for its consultation on
the proposals paper[38]
and an equivalent number for its consultation on the subsequent exposure draft
of the Bill.[39]
Government
response to the Hayne RC
On 5 February 2019 the Government announced it would take
action in relation to all of the Hayne RC recommendations. This includes extending
the unfair contract terms regime to insurance contracts in response to recommendation
4.7 of the Hayne RC.[40]
Policy
position of non-government parties/independents
At the time of writing this Bills Digest none of the
non-government parties or independent Members and Senators had commented on the
Bill.
Position of
major interest groups
Consumer
advocates
In their submissions to Treasury in response to the
proposals paper, consumer advocates such as Choice and the Consumer Action Law
Centre strongly supported the notion that the unfair contract protections be
extended to insurance contracts. For instance, Choice stated:
... insurance is the ideal case study for why a prohibition on
UCT should exist. General insurance contracts are often so complex that
consumers need an additional layer of protection against harmful terms. Contracts
extend over pages of information, few people read or understand them, and they
contain complex terms which most people are unlikely to understand. As a
consequence, consumers suffer detriment by having claims denied due to the
mismatch between what they thought the policy covered and what was actually
covered. Allowing insurance contracts to include provisions that are unfair
leaves consumers open to exploitation.[41]
Insurers
Generally speaking, insurers took a different view—arguing
that the reform is unnecessary because the Insurance Contracts Act
contains sufficient protections. According to Suncorp:
... it is essential [the reform] does not adversely impact the
availability of affordable and accessible insurance products for our customers
and the broader community. We want to ensure the reforms are workable, do not
impose an unreasonable compliance burden, and do not result in the limitation
of choice for consumers.[42]
Similarly, the Insurance Council of Australia is concerned
that the Bill ‘would operate more severely, and create far more uncertainty,
than the general UCT regime ... does for other sectors of the economy’.[43]
Specific comments by stakeholders in relation to the
amendments contained in Schedule 1 to the Bill are canvassed under the heading
‘Key issues and provisions’ below.
Financial
implications
According to the Explanatory Memorandum the measures in
Schedule 1 ‘have no financial impact’.[44]
In relation to compliance costs for insurers, ‘it is
estimated that there will be upfront costs of under $4 million in the
first year to implement the reform with no ongoing costs’.[45]
Key issues
and provisions
Amending the
Insurance Contracts Act
Currently subsection 15(1) of the Insurance Contracts
Act provides that a contract of insurance is not capable of being made the
subject of relief under any other Act of the Commonwealth, a state or a territory.
Subsection 15(2) makes it clear that the ‘relief’ referred to in subsection
15(1) is by way of judicial review of a contract on the ground that it is
harsh, oppressive, unconscionable, unjust, unfair or inequitable or relief for
insureds from the consequences in law of making a misrepresentation.
Item 9 of Schedule 1 to the Bill amends subsection
15(2) so that relief under the ASIC Act under the unfair contract terms
provisions is available.
Amending the
ASIC Act
Application to
insurance contracts
Items 2–5 of Schedule 1 to the Bill amend Subdivision
BA of Division 2 of Part 2 of the ASIC Act which is about unfair
contract terms. Currently section 12BF(1) operates so that a term of a consumer
contract[46]or
small business contract[47]
is void if:
-
the term is unfair
-
the contract is a standard form contract and
-
the contract is a financial product or a contract for the supply,
or possible supply, of services that are financial services.
The contract continues to bind the parties if it is
capable of operating without the unfair term.[48]
Item 2 of Schedule 1 to the Bill adds a note after section 12BF to make
clear that the section applies to insurance contracts under the Insurance
Contracts Act.
Terms that
are unaffected
Currently subsection 12BI(1) of the ASIC Act
provides that a term of a contract will not be an unfair term (in the context
of section 12BF) if:
-
it defines the main subject matter of the contract
-
sets the upfront price payable under the contract or
-
is a term required, or expressly permitted, by a law of the
Commonwealth or a state or territory.
Key issue—main
subject matter
Item 4 of Schedule 1 to the Bill inserts proposed
subsection 12BI(4) into the ASIC Act so that the main subject
matter of a contract is a description of what is being insured.[49]
This is consistent with the recommendation of the Hayne RC that the definition
of the main subject matter of a contract should be drafted
narrowly, as the purpose of extending the UCT regime to insurance contracts
would be undermined if a broader definition were adopted.[50]
According to the Insurance Council of Australia:
With this narrow definition, the terms of an insurance
contract setting out the risks covered would be reviewable, and the insurer
would be required to justify why they are necessary to protect their legitimate
interests ... the terms describing the risk an insurer covers (which is used
as a basis for determining the premiums charged by insurers) goes to the commercial
bargain at the heart of the contract and are necessary to protect the interests
of the insurer. Being required to justify the specified cover in the insurance
policy is more onerous than what is required in other sectors. For example, a
cleaning service is not required under the existing UCT regime to justify terms
setting out areas that it will and will not clean. The failure to exclude from
review terms in insurance contracts relating to the risks an insurer will and
will not cover causes significant uncertainty. The scope of application of the
proposed UCT regime in the draft Bill and impact of the uncertainty created by
this scope on insurers will be significant, and will be passed on to consumers.[51]
[emphasis added]
Key
issue—upfront price payable
Item 3 of Schedule 1 to the Bill amends section
12BI so that a term of an insurance contract will not be unfair (within the
terms of section 12BF) if the term is a transparent term that:
-
is disclosed at or before the time the contract is entered into
and
-
sets an amount of excess or deductible under the contract.[52]
The question of whether the amount of an excess or
deductible should come within the unfair contract terms regime was strongly
contested. In particular, the Financial Rights Legal Centre provided a number
of examples of car insurance policies in its submission to Treasury’s proposals
paper. The Financial Rights Legal Centre sought to demonstrate that car
insurance policies often contain ‘complex and confusing excesses’.[53]
The rationale for the examples was:
Firstly the excess payable is not usually one single excess.
The excess payable is regularly made up of multiple, complex excesses at
different rates, so that it is not clear what the quantum of excess actually is
upfront.
Secondly, the “basic excess” may be highlighted upfront but
additional excesses are rarely if ever highlighted. This emphasising of the
“basic excess” over all applicable and potential excesses is misleading. There
is very little transparency with additional excesses, largely invisible to
consumers. A customer must search for them and know to click on a number of
links and know to read further documents to find out the full information and
potential excess quantum.
Thirdly, the circumstances in which an excess is payable are
not straightforward and are structured in complicated ways so that it is not
clear upfront when an excess will be paid. To understand the way the excesses
work, the customer must go digging in the Product Disclosure Statement (or
other documents).[54]
However, according to Suncorp ‘[t]erms that describe
different excess options provide customers with choice, and therefore should
not be reviewable’.[55]
Excluded
policies
Currently section 12BL of the ASIC Act lists those
matters which are not covered by Subdivision BA of Division 2 of Part 2 and so
are not subject to the unfair contract terms provisions. Item 5 of
Schedule 1 to the Bill inserts proposed subsection 12BL(1A) into the ASIC
Act to also exclude a contract of insurance for medical indemnity
cover (as described in section 5 of the Medical Indemnity
(Prudential Supervision and Product Standards) Act 2003) for a medical
practitioner[56]
or registered health professional[57]
to which that Act applies.
Third party
beneficiaries
Item 6 of Schedule 1 to the Bill amends the ASIC
Act to insert proposed paragraphs 12GND(1)(c) and 12GND(2)(c)
in equivalent terms so that a court may declare a term of a consumer contract
or a small business contract respectively to be unfair on an application by a
person who is a third party beneficiary under the contract.
Application
Items 7 and 10 of Schedule 1 to the Bill insert
application provisions which operate so that the amendments apply only in
relation to a contract of insurance entered into, renewed or varied on or after
5 April 2021.
Funeral
expenses facilities
The interim report of the Hayne RC identified a number of
issues with funeral insurance—in particular the sale of funeral insurance
products to Aboriginal and Torres Strait Islander people.[58]
|
Recommendation 4.2 – Removing the exemptions for
funeral expenses policies
The law should be amended to:
- remove
the exclusion of funeral expenses policies from the definition of ‘financial
product’ and
- put
beyond doubt that the consumer protection provisions of the ASIC Act
apply to funeral expenses policies.[59]
|
Nature of funeral insurance
There are two kinds of funeral insurance: funeral life
insurance and funeral expenses insurance.
A consumer buying funeral life insurance nominates a
benefit amount (typically between $5,000 and $20,000) payable, on the death of
the nominated life, to a person nominated by the policy holder. The recipient
may apply the benefit as the recipient thinks fit. By contrast, funeral
expenses insurance will pay funeral costs up to a nominated limit. Often
the funeral expenses will be less (sometimes much less) than the nominated
limit of cover.[60]
[emphasis added]
Both funeral life policies and funeral expenses policies
are life policies under the Life Insurance Act
1995 and contracts of life insurance under the Insurance Contracts
Act.
Importantly, the consumer protection provisions in the Corporations Act
2001 do not currently apply to funeral expenses policies. This means
that issuers of funeral expenses insurance are not required to comply with the
general obligations of financial services licensees to ‘do all things necessary
to ensure that the financial services they provide are provided efficiently,
honestly and fairly’.[61]
Background
to the recommendation
In its submission to the Hayne RC, ASIC stated that its work
suggests that funeral expenses policies are especially prone to poor selling
practices.[62]
The Hayne RC took evidence about both types of funeral
insurance. The final report states:
... statistics gathered by ASIC as at 30 June 2014 suggest that
funeral insurance policies sold directly to consumers are of little value.
Those statistics indicate that at that time, there were about 430,000 policies
covering about 740,000 insured lives. In the 2014 financial year, more than
12,500 claims were accepted by insurers. The amount paid out in claims was
about one-third of the value of premiums collected over the same period. In the
preceding year, the proportion was one-fifth.[63]
[emphasis added]
Policy
position of non-government parties
Greens
It is expected that the Australian Greens (the Greens)
will support this aspect of the Bill. Senator Rachel Siewert acknowledged that
during the Royal Commission there was ‘sickening evidence of companies
targeting regional and remote areas for funeral insurance’ and has urged the
Government to:
... act quickly to remove the exclusion of funeral expenses
policies from the definition of ‘financial product’; so that they are properly
regulated and put beyond doubt that the consumer protection provisions of the ASIC
Act apply to funeral expenses policies.[64]
Position of
major interest groups
At the time of writing this Bills Digest, stakeholders had
not commented on this element of the Bill.
Financial
implications
According to the Explanatory Memorandum the measure in
Schedule 2 of the Bill has ‘no financial impact’ on the Government.[65]
Further, the measure ‘will result in low increases to compliance costs’.[66]
Key issues
and provisions
Amending the
Corporations Act
Chapter 7 of the Corporations Act is about financial
services and markets. The objects of Chapter 7 are, amongst other things, to
promote:
-
confident and informed decision making by consumers of financial
products and services while facilitating efficiency, flexibility and innovation
in the provision of those products and services
-
fairness, honesty and professionalism by those who provide
financial services and
-
fair, orderly and transparent markets for financial products.[67]
Defining
what is not a financial product
Section 761A defines the term funeral benefit
as a benefit that consists of the provision of funeral, burial or cremation
services, with or without the supply of goods connected with such services. A
funeral benefit is not a financial product.[68]
In addition, paragraph 765A(1)(y) of the Corporations
Act provides that a facility, interest or other thing declared by
regulations for the purposes of the subsection is not a financial product.
Currently, section 7.1.07D of the Corporations
Regulations 2001 defines a funeral expenses policy as a
scheme or arrangement for the provision of a benefit consisting of the payment
of money, payable only on the death of a person, for the sole purpose of
meeting the whole or part of the expenses of, and incidental to the person’s
funeral and burial or cremation. The Regulation makes clear that a funeral
expenses policy is not a financial product.
That being the case, providers of funeral expenses
policies:
-
do not have to obtain an Australian financial services licence
-
are not bound by the general conduct obligations contained in
section 912A of the Corporations Act and
-
are not restrained by the anti-hawking provisions in sections
992A and 992AA of the Corporations Act.
Repealing
the Regulation
The Treasury Laws
Amendment (Financial Services Improved Consumer Protection) (Funeral Expenses
Facilities) Regulations 2019 repeals section 7.1.07D of the Corporations
Regulations with effect from 1 April 2020.
What the
Bill does
As the definition of funeral expenses policy will be
repealed when section 7.1.07D of the Corporations Regulations is repealed, item
3 of Schedule 2 to the Bill inserts an updated version of the definition of
the term funeral expenses facility into section 761A. The term
means a scheme or arrangement for the provision of benefits consisting of the
payment of money, on the death of a person, for the purpose of meeting the
whole or a part of the expenses of and incidental to the funeral, burial or
cremation of the person.
For clarity, item 4 of Schedule 2 to the Bill
inserts proposed section 765B into the Corporations Act to
specify that a funeral expenses facility is not a funeral
benefit.[69]
Amending the
ASIC Act
Similarly item 1 of Schedule 2 to the Bill inserts proposed
subsection 12BAA(10) into the ASIC Act to provide that a funeral
expenses facility is not a funeral benefit for
the purposes of that Act.
Operation of
the amendments
The amendments to the Corporations Act essentially
remove the exemption currently existing which operates so that providers of
funeral expenses policies are not required to comply with certain obligations
in Chapter 7.
Currently paragraph 12BAA(8)(o) of the ASIC Act
provides that funeral benefits are not financial products. This
means that they are not subject to the consumer protection provisions in Division
2 of Part 2 of that Act. The amendment to the ASIC Act distinguishes the
difference between a funeral expenses facility and a funeral
benefit and makes clear that they are not the same.
Mortgage
brokers
About mortgage brokers and aggregators
Mortgage brokers act as an intermediary by matching
borrowers to lenders (and their loan products), assisting and advising
borrowers on the loan application process and negotiating interest rates on
home loans. Mortgage brokers engage in credit activities. That being the case,
mortgage brokers are regulated by ASIC under the Consumer Credit Act and
must either hold an Australian credit licence (ACL) or be an authorised credit
representative of a mortgage aggregator (or any other entity) that holds an
ACL.[70]
Mortgage aggregators act between mortgage brokers
and lenders by providing mortgage brokers with access to the lenders on its
aggregator’s ‘panel’. Aggregators have contractual arrangements with lenders
which allow brokers operating under the aggregator to arrange loans from those
lenders. Mortgage aggregators engage in credit activities by acting as an
intermediary and must hold an ACL.[71]
How mortgage
brokers are paid
Mortgage brokers and mortgage aggregators generally do not
charge borrowers directly for their services. Instead, most brokers’ income is
derived from commissions:
-
the first form of commission paid by lenders is an upfront
commission. This is generally a once-off payment after settlement and based on
a proportion of the settled amount, drawn amount or the approved limit[72]
-
the second form of commission paid by lenders is a trail
commission. This is a regularly recurring commission based on a proportion of
the current or average loan balance.[73]
In 2017, ASIC published the results of its review of the
mortgage broking market. The review was undertaken to determine the effect of
extant remuneration structures on the quality of consumer outcomes.[74]
According to that report:
In 2015, based on data we received from aggregators, the
average rate of upfront commission and annual rate of trail commission paid by
lenders to aggregators was 0.62% and 0.18%, respectively. On a $500,000 home
loan, this equates to an upfront payment of $3,100 and a trail payment of $75
per month (or $900 in the first year of the home loan).
The average rate of upfront commission and annual rate of
trail commission passed on by aggregators to broker businesses was 0.54% and
0.14%, respectively. On a $500,000 home loan, this equates to an upfront
payment to the broker business of $2,700 and a trail payment of $58 per month
(or $700 in the first year of the home loan).[75]
Risks of
mis-selling
In 2017, Stephen Sedgwick AO undertook an independent review of
product sales commissions and product based payments in retail banking in
Australia. The review was commissioned by the Australian Bankers’ Association.[76]
The final report of the review (the Sedgwick Review) noted several factors
which pointed to significant risks of mis-selling arising from the existing
arrangements to remunerate mortgage brokers.[77]
These include, but are not limited to:
- that banks seeking to increase market share through a sales
campaign often improve both the terms and conditions they offer the borrower
and the commission they pay the mortgage broker
-
that some banks believe they need to offer volume based
incentives to mortgage brokers over and above the upfront and trail commissions
to remain competitive
-
many banks believe they need to offer significant ‘soft dollar’
payments to mortgage brokers[78]
- data presented show that mortgages arranged through the broker
channel are likely to be larger, paid off more slowly, and more likely to be
interest-only loans than those provided to equivalent customers who dealt
directly with bank staff and
-
a few banks had changed (or were intending to change) trail
commission arrangements because some customers draw down a larger loan amount
than they need, with the surplus being deposited in an offset account or a loan
account (that is as a redraw amount).[79]
Who does a mortgage broker work for? According to the
Hayne RC an intermediary is ‘paid only by the lender’.[80]
... in most cases, even if an intending borrower believes or
expects the intermediary to be acting in the interests of the borrower, the
intermediary owes no general duty to the borrower to seek out the best and most
appropriate deal for the borrower ...
But very often, the relationship between broker and would-be
borrower will either be obscure or a relationship in which the broker owes the
borrower no duty larger than not to negotiate an unsuitable loan.[81]
[emphasis added]
|
Recommendation 1.2 – Best interests duty
The law should be amended to provide that, when acting in
connection with home lending, mortgage brokers must act in the best interests
of the intending borrower. The obligation should be a civil penalty
provision.[82]
Recommendation 1.3 – Mortgage broker remuneration
The borrower, not the lender, should pay the mortgage
broker a fee for acting in connection with home lending. Changes in brokers’
remuneration should be made over a period of two or three years, by first
prohibiting lenders from paying trail commission to mortgage brokers in
respect of new loans, then prohibiting lenders from paying other commissions
to mortgage brokers.[83]
|
Government
response
In February 2019, the Government issued its formal
response to the recommendations of the Hayne RC.[84]
In relation to recommendation 1.2, it stated:
The Government agrees to introduce a best interests duty
for mortgage brokers to act in the best interests of borrowers ... The Government
also agrees that a breach of the best interests duty should be subject to a
civil penalty. The Government agrees, following the implementation of the best
interests duty, to further align the regulatory frameworks for mortgage brokers
and financial advisers. This also responds to the Productivity Commission’s
report Competition in the Australian Financial System, which also
recommended imposing a best interests duty on mortgage brokers ....[85]
[emphasis added]
In relation to recommendation 1.3, it stated:
The Government agrees to address conflicted remuneration
for mortgage brokers ... From 1 July 2020, the Government will prohibit for
new loans the payment of trail commissions from lenders to mortgage brokers
and aggregators. From that date, the Government will also require that the
value of upfront commissions be linked to the amount drawn-down by borrowers
and not the loan amount, and ban campaign and volume-based commissions and
payments. The Government will additionally limit to two years the period over
which commissions can be clawed back from aggregators and brokers and prohibit
the cost of clawbacks being passed on to consumers.[86]
Policy
position of non-government parties/independents
At the time of writing this Bills Digest no comments had
been made in relation to the Bill by members of non-government parties or
independents.
Position of
major interest groups
The Property Council of Australia expressed concern about
the proposed ban on conflicted remuneration stating:
The proposed alignment of the regulatory framework for
mortgage brokers with that of financial advisers may impact on the future
structure of the industry and access to finance.... The property industry will
need to be consulted on the transitional arrangements, particularly given the
current uncertain state of the residential property cycle. It is important not
to break the economy as policy makers set about fixing the banks. The abolition
of trail commissions and the proposed shift in future to a ‘borrower pays’
model for broker commissions will need to be very carefully managed.[87]
Following the Government’s announcement that it had accepted
the Hayne RC’s recommendation to ban trail commissions, the Australian Finance
Group called on the local industry to back a campaign against a blanket ban on
broker commissions paid by lenders.[88]
It has since been reported that ‘brokers and consumer
groups support the new duty in principle, but are at loggerheads over how
broadly the duty should extend, and the size of penalties for breaching it’.[89]
Financial
implications
According to the Explanatory Memorandum the measures in
Schedule 3 have ‘no financial impact’.[90]
However, it is estimated that the measures will have the
following compliance costs:
-
recommendation 1.2 (mortgage broker best interests duty)—$58.2
million a year for business and $10.2 million a year for individuals/consumers
and
-
recommendation 1.3 (broker remuneration)—$18.9 million a year for
business.[91]
Key issues
and provisions
Operation of
the Corporations Act
The Corporations Act imposes two important
obligations on holders of an Australian Financial Licence and their
representatives.
First, a person who provides personal advice to a retail
client must act in the best interests of the client in relation
to the advice.[92]
They must only give advice if it is reasonable to assume that the advice is
appropriate for the client[93]
and, if there is a relevant conflict, they must give priority to the interests
of the client.[94]
However, these provisions do not currently apply to mortgage brokers.[95]
Second, a financial services licensee must not receive
conflicted remuneration.[96]
Section 963A of the Corporations Act defines conflicted
remuneration as any benefit (whether monetary or non‑monetary)
given to a financial services licensee or a representative of the licensee, who
provides financial product advice to persons as retail clients, that, because
of the nature of the benefit or the circumstances in which it is given, could
have either of two effects:
-
it could reasonably be expected to influence the choice of
financial product recommended by the licensee or representative to retail
clients or
- it could reasonably be expected to influence the financial
product advice given to retail clients by the licensee or representative.
Schedule 3 to the Bill amends the Consumer Credit Act
to:
- require
mortgage brokers to act in the best interests of consumers and
- prohibit
mortgage brokers and mortgage intermediaries accepting conflicting
remuneration.[97]
Amendments
to the Consumer Credit Act
For the purposes of the Consumer Credit Act a licensee
is a mortgage broker if all of the following are satisfied:
-
the licensee carries on a business of providing credit assistance
in relation to credit contracts secured by mortgages over residential property
-
the licensee does not perform the obligations, or exercise the
rights, of a credit provider in relation to the majority of those credit
contracts and
-
in carrying on the business, the licensee provides credit
assistance in relation to credit contracts offered by more than one credit
provider.[98]
A credit representative of a licensee is a mortgage
broker in equivalent circumstances.[99]
A licensee is a mortgage intermediary if all
of the following are satisfied:
-
the licensee carries on a business of acting as an intermediary
in relation to credit contracts secured by mortgages over residential property
-
the licensee does not perform the obligations, or exercise the
rights, of a credit provider in relation to the majority of those credit
contracts and
- in
carrying on the business, the licensee acts as an intermediary in relation to credit
contracts offered by more than one credit provider.[100]
A credit representative of a licensee is a mortgage
intermediary in equivalent circumstances.[101]
Best
interests obligation
Item 5 of Schedule 3 to the Bill inserts proposed
Part 3-5A—Mortgage brokers and mortgage intermediaries into the Consumer
Credit Act.
Credit
assistance by a licensee to a consumer
Proposed sections 158L–158LB of the Consumer
Credit Act apply where credit assistance is given to a consumer by a
licensee who is a mortgage broker.[102]
In that case, the licensee must act in the best interests
of the consumer in relation to the credit assistance. A failure to do so incurs
a maximum civil penalty of 5,000 penalty units.[103]
Further, if the licensee knows, or reasonably ought to
know, that there is a conflict between the interests of the consumer and the
interests of the licensee, an associate[104]
or representative of the licensee or an associate of a representative of the
licensee, the licensee must give priority to the consumer’s interests when
providing the credit assistance.[105]
A failure to do so incurs a maximum civil penalty of 5,000 penalty units.
Credit
assistance by a credit representative to a consumer
Proposed sections 158LD–158LF of the Consumer
Credit Act apply to credit assistance that is provided to a consumer by a
credit representative of a licensee—provided that either the credit
representative or the licensee is a mortgage broker.[106]
In that case the following rules apply:
-
the credit representative must act in the best interests of the consumer
in relation to the credit assistance[107]
-
the licensee must take reasonable steps to ensure that the credit
representative acts in the best interests of the consumer[108]
-
the credit representative must give priority to the consumer’s interests
when providing the credit assistance if he or she, knows, or reasonably ought
to know, that there is a conflict between the interests of the consumer and the
interests of:
- the
licensee
- an
associate of the licensee
- the
credit representative
- an
associate of the credit representative
- another
representative of the licensee or
- an
associate of another representative of the licensee[109]
and
-
the licensee must take reasonable steps to ensure that the credit
representative gives priority to the consumer’s interests as above.[110]
A maximum civil penalty of 5,000 penalty units applies for
a breach of each of those rules.
Conflicted
remuneration
Nature of
conflicted remuneration
For the purposes of the Bill conflicted remuneration
means any benefit, whether monetary or non-monetary that is given to a
licensee, or a representative of a licensee where the nature of the benefit or
the circumstances in which it is given,
could reasonably be expected to influence the credit assistance provided to
consumers. An equivalent definition applies to a benefit that is given to a
licensee, or a representative of a licensee, who acts as an intermediary.[111]
In addition, regulations may further define the
circumstance in which a benefit is, or is not, conflicted remuneration.[112]
Ban on
accepting conflicted remuneration
The Bill prohibits the following persons from accepting
conflicted remuneration in circumstances prescribed by the regulations:
-
a licensee who is a mortgage broker, or a mortgage intermediary[113]
and
-
a credit representative of a licensee—if the credit
representative or the licensee is a mortgage broker or a mortgage intermediary.[114]
A breach of the prohibition attracts a maximum civil
penalty of 5,000 penalty units.
In addition, a licensee must take reasonable steps to
ensure that the credit representative complies with the ban on accepting
conflicted remuneration. A failure to comply with that requirement attracts a
maximum civil penalty of 5,000 penalty units.[115]
Ban on
giving conflicted remuneration
The Bill bans the giving of conflicted remuneration in
circumstances prescribed by the regulations:
-
by the employer of a licensee to the licensee—if the licensee is a
mortgage broker or a mortgage intermediary[116]
-
by the employer of a representative of a licensee to the representative—if either the licensee or the
representative is a mortgage broker or a mortgage intermediary[117]
-
by a credit provider to a licensee—if the licensee is a mortgage
broker or a mortgage intermediary[118]
-
by a credit provider to a representative of a licensee—if either the
licensee or the representative is a mortgage broker or a mortgage intermediary[119]
-
by a mortgage intermediary to a licensee who is a mortgage broker
or a mortgage intermediary[120]
-
by a mortgage intermediary to a representative of a licensee—if either
the licensee or the representative is a mortgage broker or a mortgage
intermediary.[121]
In each case a failure to comply with the ban attracts a
maximum civil penalty of 5,000 penalty units.
Scrutiny of
Bills Committee
The Scrutiny of Bills Committee expressed concern that the
circumstances in which the proposed bans on conflicted remuneration will apply
will be set out in regulations.[122]
The Committee also noted that the amendments to the National Consumer
Credit Protection (Transitional and Consequential Provisions) Act 2009,
(inserted by item 6 in Schedule 3 to the Bill) would operate so that the
regulations could prescribe circumstances in which the whole of Division 4 of
new Part 3-5A of the Consumer Credit Act (which is about conflicted
remuneration) applies, or does not apply, to a benefit given to a licensee. In
effect this could mean that the ban on receiving and giving conflicted
remuneration could be negated.
The Scrutiny of Bills Committee noted the statement in the
Explanatory Memorandum:
The ability to prescribe by regulation what is and is not
conflicted remuneration provides flexibility for the regime to efficiently and
effectively respond to changes in industry practice and to ensure that the new
regime operates for the benefit of consumers. Regulations also give effect to
the ban on conflicted remuneration. This provides flexibility to provide the
circumstances in which conflicted remuneration is banned.[123]
However, the Committee was of the view that ‘the need for
flexibility does not, of itself, provide an adequate justification for leaving
significant matters to delegation legislation. In this instance, it is unclear
why these matters cannot be included on the face of the primary legislation’.[124]
Accordingly, the Scrutiny of Bills Committee has requested
advice from the Minister. However, at the time of writing this Bills Digest no
response from the Minister has been published.
Anti-avoidance
The Bill provides that a person must not, either alone or
together with one or more other persons, enter into, begin to carry out or
carry out a scheme if the sole purpose or a non-incidental purpose of the
scheme is to avoiding the application of any provision in new Part 3-5A of the Consumer
Credit Act.[125]
The maximum penalty for a breach of this section is 5,000 penalty units.
Concluding comments
The Bill largely puts in place various recommendations of
the Hayne RC—with one exception. The broad power to make regulations about what
is, or is not conflicted remuneration and the circumstances in
which conflicted remuneration must not be accepted or given could seriously
undermine the intention of recommendation 1.3 of the Hayne RC.
[1]. K
Hayne (Commissioner), Final report: Royal Commission into Misconduct in the Banking,
Superannuation and Financial Services Industry, vol. 1, 2019, pp. 31–32.
[2]. Senate
Standing Committee for Selection of Bills, Report,
10, 2019, The Senate, 5 December 2019.
[3]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny digest,
10, 2019, The Senate, 5 December 2019, pp. 6–8.
[4]. The
Statement of Compatibility with Human Rights can be found at pages 41–43 of the
Explanatory
Memorandum to the Bill.
[5]. Hayne,
Final report: Royal Commission into Misconduct in the Banking,
Superannuation and Financial Services Industry,
op. cit., p. 277.
[6]. Ibid.,
p. 32.
[7]. Productivity
Commission (PC), Review
of Australia’s Consumer Policy Framework, Inquiry report, 45, two
volumes, PC, Canberra, 30 April 2008.
[8]. Ibid.,
vol. 2, p. 149.
[9]. See
Trade Practices
Amendment (Australian Consumer Law) Act (No. 1) 2010 and Trade Practices
Amendment (Australian Consumer Law) Act (No. 2) 2010.
[10]. Australian Securities
and Investments Commission Act 2001,
(ASIC Act), section 12BF.
[11]. By
the enactment of the Treasury
Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015.
[12]. ASIC
Act, section 12BH and CCA, Schedule 2, clause 25 list
examples of terms that may be unfair.
[13]. ASIC
Act, section 12BF; CCA, schedule 2, clause 23.
[14]. ASIC
Act, subsection 12BG(1); CCA, Schedule 2, subclause 24(1).
[15]. ASIC
Act, subsection 12BG(3); CCA, Schedule 2, subclause 24(3).
[16]. ASIC
Act, subsection 12BI(1); CCA, Schedule 2, subclause 26(1).
[17]. ASIC
Act, subsection 12BI(2); CCA, Schedule 2, subclause 26(2).
[18]. ASIC
Act, subsection 12BK(1); CCA, Schedule 2, subclause 27(1).
[19]. ASIC
Act, subsection 12BK(2); CCA, Schedule 2, subclause 27(2).
[20]. Insurance Contracts
Act 1984, section 15.
[21]. ‘Utmost
good faith’ means the obligation of the promisee to communicate to the promisor
every fact and circumstance which might influence the promisor’s decision
whether or not to enter into the contract. Where only one of two parties knows
the material facts, a duty is imposed upon that party to disclose them to the
other party. See: Carter v Boehm (1766) 3 Burr 1905,
[1558–1774] All ER Rep 183.
[22]. CGU
Insurance Ltd v AMP Financial Planning Pty Ltd, [2007]
HCA 36, paragraph 15.
[23]. A
fact is considered to be material if it would have affected the mind of
a prudent insurer in determining whether to accept the insurance, on what terms
and at what premium. The test of materiality was stated by Samuels J in Mayne
Nickless Ltd v Pegler (1974) 1 NSWLR 228 at p. 239 and cited in Russell
Young Abalone Pty Ltd v Traders Prudent Insurance Company Ltd [1991]
TASSC 94 at paragraph 15.
[24]. That
is, the contract is null and void from the beginning.
[25]. Australian
Law Reform Commission (ALRC), Insurance
contracts, ALRC report, 20, 1982, Australian Government Printing
Service, Canberra, 1982, p. 32.
[26]. Consumer
Action Law Centre, Denied:
levelling the playing field to make insurance fair, Consumer Action Law
Centre, Melbourne, February 2018, p. 12.
[27]. Law
Council of Australia, Consumer Law Committee, Submission
to Treasury proposals paper, Extending unfair contract terms protections to
insurance contracts, 27 August 2018, p. 16.
[28]. The
Treasury, Extending
unfair contract terms protections to insurance contracts, Proposals
paper, Treasury, Canberra, June 2018, p. 8.
[29]. Consumer
Affairs Australia and New Zealand (CAANZ), Australian
consumer law review: final report, CAANZ, Canberra, 2017, proposal 10,
p. 6.
[30]. The
terms of reference for the inquiry into Australia’s general insurance industry,
submissions to the Senate Committee on Economics and the Committee’s final
report are available on the inquiry
homepage.
[31]. Senate
Economics References Committee, Australia’s
general insurance industry: sapping consumers of the will to compare,
Senate, Canberra, August 2017, recommendation 11, p. x.
[32]. The
terms of reference for the inquiry into the life insurance industry,
submissions to the Parliamentary Joint Committee on Corporations and Financial
Services and the Committee’s final report are available on the inquiry
homepage.
[33]. Parliamentary
Joint Committee on Corporations and Financial Services, Life insurance
industry, Commonwealth of Australia, March 2018, recommendation 3.1, p.
xv.
[34]. The
terms of reference for the inquiry into Northern Australia insurance,
submissions to the Australian Competition and Consumer Commission (ACCC),
various updates and interim reports are available on the
inquiry homepage.
[35]. ACCC,
Northern
Australia insurance inquiry: first interim report, ACCC, Canberra,
2018, recommendation 6, p. x.
[36]. The
Treasury, Extending
unfair contract terms protections to insurance contracts, op. cit.
[37]. Australian
Securities and Investments Commission (ASIC), Submission
to Treasury proposals paper, Extending unfair contract terms protections to
insurance contracts, August 2018, pp. 3–4.
[38]. The
Treasury, Extending
unfair contract terms protections to insurance contracts, op. cit.
[39]. The
Treasury, Extending
unfair contract terms to insurance contracts, exposure draft, 2019,
Treasury website.
[40]. J
Frydenberg (Treasurer), Government
response to the Final Report of the Royal Commission into Misconduct in the
Banking, Superannuation & Financial Services Industry, press
conference, Parliament House, Canberra, 5 February 2019.
[41]. Choice,
Submission
to Treasury proposals paper, Extending unfair contract terms protections to
insurance contracts, 23 August 2018, p. 1; Consumer Action Law
Centre, Submission
to Treasury proposals paper, Extending unfair contract terms protections to
insurance contracts, 24 August 2018, p. 1.
[42]. Suncorp,
Submission
to Treasury proposals paper, Extending unfair contract terms protections to
insurance contracts, 24 August 2018, p. 1.
[43]. Insurance
Council of Australia, Submission
to Treasury proposals paper, Extending unfair contract terms protections to
insurance contracts, 24 August 2018, p. 1.
[44]. Explanatory
Memorandum, Financial Sector Reform (Hayne Royal Commission
Response—Protecting Consumers (2019 Measures)) Bill 2019, p. 3.
[45]. Ibid.
[46]. ASIC
Act, subsection 12BF(3) provides that a consumer contract is
a contract at least one of the parties to which is an individual whose
acquisition of what is supplied under the contract is wholly or predominantly
an acquisition for personal, domestic or household use or consumption.
[47]. ASIC
Act, subsection 12BF(4) provides that a contract is small business
contract if: (a) at the time the contract is entered into, at least one
party to the contract is a business that employs fewer than 20 persons and (b)
either (i) the upfront price payable under the contract does not exceed
$300,000 or the contract has a duration of more than 12 months and the upfront
price payable under the contract does not exceed $1,000,000.
[48]. ASIC
Act, subsection 12BF(2).
[49]. A
contract of insurance offers protection against the consequences arising
from the occurrence of an event specified in the contract (the risk). In effect, therefore, a contract of
insurance insures the interests of the insured in the subject matter of the
insurance. See, for instance: Castellain v Preston (1883) 11 QBD
380, per Bowen LJ at p 397. The subject matter of the
insurance may be a physical item such as a house or a car; it may be a
chose in action (which is a contractual or proprietary right enforceable by
action) such as a debt, contractual right or licence; it may be a potential
legal liability such as one road-user's potential liability to other road-users
for damage or injury caused by the former's negligence; or, as in the case
of life, accident or sickness insurance it may be a person. Source: CCH
Limited, Australian & New Zealand insurance commentary at ¶I-410.
[50]. Hayne,
Final report: Royal Commission into Misconduct in the Banking,
Superannuation and Financial Services Industry, op. cit., p. 307.
[51]. Insurance
Council of Australia, Submission
to Treasury exposure draft, Extending unfair contract terms protections to
insurance contracts, op. cit., pp. 1–2.
[52]. ASIC
Act, proposed paragraph 12BI(1)(d) inserted by item 3 of
Schedule 1 to the Bill.
[53]. Financial
Rights Legal Centre, Submission
to Treasury proposals paper, Extending unfair contract terms protections to
insurance contracts, August 2018, pp. 21–29 at p. 23.
[54]. Ibid.,
p. 29.
[55]. Suncorp,
Submission
to Treasury exposure draft, Extending unfair contract terms protections to
insurance contracts, op. cit., p. 5.
[56]. Medical
Indemnity (Prudential Supervision and Product Standards) Act, section 4
defines a medical practitioner as an individual registered or
licensed as a medical practitioner under a state or territory law that provides
for the registration or licensing of medical practitioners.
[57]. Medical
Indemnity (Prudential Supervision and Product Standards) Act, section 4 provides
that an individual is a registered health professional if they
practise a health care related vocation; and they are registered under a state
or territory law to practise that vocation.
[58]. K
Hayne (Commissioner), Interim report:
Royal Commission into Misconduct in the Banking, Superannuation and Financial
Services Industry, vol. 1, 2018, p. 262.
[59]. Hayne,
Final report: Royal Commission into
Misconduct in the Banking, Superannuation and Financial Services Industry, op. cit., p. 288.
[60]. Hayne,
Interim report: Royal Commission into Misconduct in the Banking,
Superannuation and Financial Services Industry, op. cit., p. 263.
[61]. Corporations Act
2001, section 912A.
[62]. A
White, ‘Funeral
insurer’s hard sell draws ASIC legal fire’, The Australian, 10
September 2019, p. 17; C Yeates, ‘Customers
not “told the truth” about funeral policies: inquiry’, The Sydney
Morning Herald, 4 July 2018, p. 8.
[63]. Hayne,
Final report: Royal Commission into
Misconduct in the Banking, Superannuation and Financial Services Industry, op. cit., p. 285. See also: A Keane, ‘Funeral
insurance cost trap can add to family’s grief’, The Daily Telegraph,
11 November 2019, p. 37; C Yeates, ‘Funeral
insurance in spotlight’, The Canberra Times, 2 July 2018,
p. 41.
[64]. R
Siewert (Australian Greens Senator for Western Australia), Industry
that has preyed on vulnerable people must pay up, media release, 5
February 2019.
[65]. Explanatory
Memorandum, Financial Sector Reform (Hayne Royal Commission Response—Protecting
Consumers (2019 Measures)) Bill 2019, p. 4.
[66]. Ibid.
[67]. Corporations
Act, section 760A
[68]. Corporations
Act, paragraph 765A(1)(w).
[69]. Item
2 in Schedule 2 to the Bill inserts a note in equivalent terms at the end
of the definitions in section 761A of the Corporations Act.
[70]. Royal
Commission into Misconduct in the Banking, Superannuation and Financial
Services Industry, Some features
of the Australian mortgage broking industry, Background paper 2, 2018,
p. 5.
[71]. ASIC,
Review of
mortgage broker remuneration, Report 516, ASIC, 2017, pp. 7–8.
[72]. Ibid.,
p. 241.
[73]. Ibid.
[74]. Ibid.
[75]. Ibid.,
p. 76.
[76]. Australian
Banking Association, Review
into retail banking remuneration begins, media release, 11 July 2016.
[77]. S
Sedgwick, Retail
banking remuneration review: report, n.p., 19 April 2017.
[78]. ASIC
states that the main types of ‘soft dollar’ benefits are loyalty programs (much
like an airline frequent flyer program); and travel and hospitality-related
benefits. See: ASIC, Review of
mortgage broker remuneration, op. cit., p. 12.
[79]. Sedgwick,
Retail banking remuneration review, op. cit., pp. 33–34.
[80]. Hayne,
Interim report: Royal Commission into Misconduct in the Banking,
Superannuation and Financial Services Industry, op. cit., pp. 56–57.
[81]. Ibid.,
pp. 57–58.
[82]. Hayne,
Final report: Royal Commission into
Misconduct in the Banking, Superannuation and Financial Services Industry, op. cit., p. 73.
[83]. Ibid.,
p. 80.
[84]. Australian
Government, Restoring
trust in Australia’s financial system, Australian Government, Canberra,
February 2019.
[85]. Ibid.,
p. 6.
[86]. Ibid.,
p. 7.
[87]. O
Galacho, ‘Broker
shake-up concern’, The Herald Sun, 6 February 2019, p. 53.
[88]. G
Tauriello, ‘Brokers
vow to oppose reforms’, The Advertiser, 9 February 2019, p. 28.
[89]. C
Yeates, ‘Stoush
heats up on mortgage brokers’ best interest duty’, The Age, 7
October 2019, p. 28.
[90]. Explanatory
Memorandum, Financial Sector Reform (Hayne Royal Commission Response—Protecting
Consumers (2019 Measures)) Bill 2019, p. 4.
[91]. Ibid.,
p. 5.
[92]. Corporations
Act, subsection 961B(1).
[93]. Corporations
Act, section 961G.
[94]. Corporations
Act, section 961J.
[95]. The
provisions in the Corporations Act about providing financial product
advice to retail clients do not apply to giving advice about a residential home
loan. Those provisions do not apply because a mortgage that secures obligations
under a credit contract (not otherwise expressly included by operation of some
particular sections of Chapter 7 of the Corporations Act) is not a
‘financial product’ for the purposes of Chapter 7 of that Act. That being the
case, making a recommendation or stating an opinion about a mortgage is not
giving ‘financial product advice’. Nor is it considered to be personal advice,
even though the broker would be expected to consider the borrower’s objectives,
financial situation and needs. It follows that the best interests duty that the
Corporations Act imposes on those who provide personal advice to a
retail client does not apply to a mortgage broker. Source: Hayne, Final
report: Royal Commission into Misconduct in the
Banking, Superannuation and Financial Services Industry, op. cit., pp. 62–63.
[96]. Corporations
Act, section 963E.
[97]. National Consumer Credit Protection Act 2009,
(Consumer Credit Act), proposed section 158K inserted by item
5 of Schedule 3 to the Bill.
[98]. Consumer
Credit Act, proposed subsection 15B(1) inserted by item 4 of
Schedule 3 to the Bill.
[99]. Consumer
Credit Act, proposed subsection 15B(2).
[100]. Consumer
Credit Act, proposed subsection 15C(1) inserted by item 4 of
Schedule 3 to the Bill.
[101]. Consumer
Credit Act, proposed subsection 15C(2).
[102]. Consumer
Credit Act, proposed subsection 158L(1).
[103]. Consumer
Credit Act, proposed subsection 158LA. The Crimes Act 1914,
section 4AA provides that a penalty unit is equivalent to $210. This means the
maximum penalty is $1,050,000.
[104]. Consumer
Credit Act, proposed section 15A (inserted by item 4 of
Schedule 3 to the Bill) provides that if a person is associated with a credit
provider for the purposes of the National Credit Code the person is an associate
of the credit provider; and the credit provider is an associate
of the person. Otherwise, the person is an associate of another
person in the circumstances prescribed by the regulations. The National Credit
Code is set out at Schedule 1 to the Consumer Credit Act.
[105]. Consumer
Credit Act, proposed section 158LB.
[106]. Consumer
Credit Act, proposed section 158LD.
[107]. Consumer
Credit Act, proposed subsection 158LE(1).
[108]. Consumer
Credit Act, proposed subsection 158LE(2).
[109]. Consumer
Credit Act, proposed subsection 158LF(1).
[110]. Consumer
Credit Act, proposed subsection 158LF(2).
[111]. Consumer
Credit Act, proposed section 158N.
[112]. Consumer
Credit Act, proposed section 158NA.
[113]. Consumer
Credit Act, proposed section 158NB.
[114]. Consumer
Credit Act, proposed subsection 158NC(1).
[115]. Consumer
Credit Act, proposed subsection 158NC(2).
[116]. Consumer
Credit Act, proposed subsection 158ND(1).
[117]. Consumer
Credit Act, proposed subsection 158ND(2).
[118]. Consumer
Credit Act, proposed subsection 158NE(1).
[119]. Consumer
Credit Act, proposed subsection 158NE(2).
[120]. Consumer
Credit Act, proposed subsection 158NF(1).
[121]. Consumer
Credit Act, proposed subsection 158NF(2).
[122]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny digest, 10, 2019,
op. cit., p. 6.
[123]. Explanatory
Memorandum, Financial Sector Reform (Hayne Royal Commission Response—Protecting
Consumers (2019 Measures)) Bill 2019, pp. 36–37.
[124]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny digest, 10, 2019,
op. cit., pp. 6–8.
[125]. Consumer
Credit Act, proposed section 158T.
For copyright reasons some linked items are only available to members of Parliament.
© Commonwealth of Australia
Creative Commons
With the exception of the Commonwealth
Coat of Arms, and to the extent that copyright subsists in a third party,
this publication, its logo and front page design are licensed under a Creative Commons
Attribution-NonCommercial-NoDerivs 3.0 Australia licence.
In essence, you are free to copy and
communicate this work in its current form for all non-commercial purposes, as
long as you attribute the work to the author and abide by the other licence
terms. The work cannot be adapted or modified in any way. Content from this
publication should be attributed in the following way: Author(s), Title of
publication, Series Name and No, Publisher, Date.
To the extent that copyright subsists
in third party quotes it remains with the original owner and permission may
be required to reuse the material.
Inquiries regarding the licence and
any use of the publication are welcome to webmanager@aph.gov.au.
Disclaimer: Bills Digests are prepared to support the work of the Australian Parliament.
They are produced under time and resource constraints and aim to be available
in time for debate in the Chambers. The views expressed in Bills Digests do
not reflect an official position of the Australian Parliamentary Library, nor
do they constitute professional legal opinion. Bills Digests reflect the
relevant legislation as introduced and do not canvass subsequent amendments
or developments. Other sources should be consulted to determine the official
status of the Bill.
Any concerns or complaints should be
directed to the Parliamentary Librarian. Parliamentary Library staff are
available to discuss the contents of publications with Senators and Members
and their staff. To access this service, clients may contact the author or
the Library’s Central Enquiry Point for referral.