The pace of change continues for financial services. This article highlights some of the current challenges and changes facing the financial services sector.
Unfair contract terms for small business
Financial services providers will be significantly affected by the Unfair Contract Terms Law (UCTL). This is being increased in scope to include Standard Form Small Business Contracts (SFSBC).
The UCTL will apply to SFSBCs entered into or renewed on or after the enforcement date of 12 November 2016. ASIC expects businesses to review their SFSBCs to remove any “unfair terms” prior to the enforcement date.
If a court finds that a term in a SFSBC is unfair, there are various orders that can be made,1 including:
- determining that the unfair term(s) is void, making it unenforceable. However, the rest of the contract is still binding
- determining that the entire contract is void
- varying the unfair term(s) of the contract
- refusing to enforce the unfair term(s) of the contract
- refusing to enforce the entire contract
- directing the party to refund the affected party or to return the affected party’s property
- directing the party to provide services, at its expense, to the affected party.
This presents a major challenge for lenders as from 12 November 2016 onwards certain terms within renewed SFSBCs, certain varied terms within existing SFSBCs as well as terms in SFSBC precedents could be considered unfair.
These unfair terms could be deemed void and unenforceable. If the ‘unfair term(s) within a contract is deemed void, there is a risk of the commercial value of the contract being compromised, leaving a party bound by a contract which may no longer be commercially viable.
Other negative impacts include:
- the reputation of the business being compromise;
- court orders being imposed to compensate the contracted party affected by the unfair term;
- the threat of injunctions and specific performance orders being placed on the business, and
- possible penalties for misleading and deceptive conduct being placed on a business.
For more information, see article titled Update: unfair contract terms – small business 2 published in the Lexis Nexis Financial Services Newsletter (2016 Volume 15 No 5) written by Andrea Beatty and Jack McIntosh.
ASIC powers increase and additional Government funding
The Commonwealth Government announced reforms to provide ASIC with stronger powers and to increase funding to ASIC to increase ASIC’s data analytics, surveillance capabilities and its ability to combat misconduct - principally in the areas of financial advice, responsible lending, life insurance and breach reporting. There will also be an update to ASIC’s data management systems. These reforms were in response to the ASIC Capability Review (commissioned in July 2015).3
The increased funding will be offset by increased levies for the financial sector. The Commonwealth Government will also introduce an industry funding model for ASIC, to commence in the second half of 2017. This means that the costs of regulation will be covered by businesses operating in the sector.
This represents a significant challenge to businesses operating in the sector as they must comply with the additional costs associated with the increased levies as well as the Government’s industry funding model for ASIC.
For further information on the reform measures to further empower ASIC, see ‘Fit for the future: a capability review of the of the Australian Securities and Investments Commission’, released on 20 April 2016.
Responsible lending is creating issues when looking at lending to non-Australian residents (e.g. for residential investment loans and other credit products).
Cultural factors can also influence the types of documents and information that can be produced to satisfy the responsible lending criteria.
Some of the major financial institutions have suspended lending to non-Australian residents for residential investment loans.
Regulatory Sandbox Licensing Exemption proposed by ASIC
The current Australian Credit License (ACL) and Australian Financial Services License (AFSL) regulatory regimes are complex, time consuming and financially onerous to comply with. The time factor and financial burden to obtain regulatory approval is a significant barrier to the development of successful Fintech initiatives.
Once the license has been obtained, the cost of complying with the license obligations are onerous. Additionally, ASIC may impose licensing conditions or enforceable undertakings requiring audits of operations. This is an additional cost to establishing financial services and credit ventures. It can cause surprises to the particular licensee that is subject to those conditions.
Currently there is no ‘pilot license’ allowing a Fintech startup to test the market with its Fintech technology prior to engaging in the full blown licensing and regulatory regime.
ASIC has a potential solution to this major challenge faced by all Fintech startups in the form of a proposed regulatory sandbox licensing exemption (RSLE).
ASIC has released a consultation paper to seek feedback on a proposed RSLE.4 This exemption will provide an industry-wide licensing waiver for limited financial services provided to a capped number of retail clients for a period of 6 months. The purpose of the RSLE is for eligible businesses to test their products in the market without being initially subject to the standard regulatory mechanisms.
The primary Challenge for ASIC is balancing the interests of Fintech startups whilst ensuring rigorous consumer protection. The RSLE must be flexible enough to reduce the initial burden on Fintech start-ups whilst effectively protecting consumers.
The UK has already established its own version of a regulatory sandbox. The Financial Conduct Authority’s version of the RSLE in the UK only has a limited number of places available, making eligibility for it competitive. However, currently there is no indication that this will occur in Australia.
Unrealistic expectations of ASIC from Fintech firms
Although there are public statements from members of ASIC stating that ASIC supports and will facilitate Fintech innovation, at an operational level, ASIC officers must follow the ACL and AFSL regulatory regimes. ASIC officers are not in a position to invoke a discretionary approach to the legal systems underlying the ACL and AFSL regimes.
This creates unrealistic expectations with Fintech innovators as to the time required and ease for a license application to be processed by ASIC.
ASIC and the OAIC
The high level of scrutiny and reviews by ASIC is often under-estimated in the financial services sector. Additionally, special attention needs to be paid to the increased powers of ASIC and the OAIC as well as the increased penalties that ASIC can place on businesses for breach of their license obligations and/or responsible lending practices.
External Dispute Resolution (EDR) Schemes
Special attention needs to be paid to the rise and increasing reach of EDR Schemes, such as the Financial Ombudsmen Service (FOS), the Credit and Investments Ombudsmen (CIO) and the Telecommunications Industry Ombudsmen (TIO).
In the ASIC Capability Review Factsheet titled ‘Improving Consumer Outcomes in Financial Services’ released on 20 April 2016,5 the Commonwealth Government supports the extension of FOS’s current jurisdiction to include a larger range of small business loans and believes reviewing current monetary limits and compensation caps to be advantageous.
The Commonwealth Government also plans to establish a panel to assess the merits of better integrating current EDR Schemes. The objective of this improved integration is to enhance the handling of consumer complaints.
Financial institutions must maintain a delicate balance in complying with the various obligations placed on them from several regulatory regimes. Challenges arise with complying with regulatory regimes that have opposing purposes.
A prime example of compliance with regulatory regimes with opposing purposes is the Responsible Lending Requirements (RLR) and the Australian Privacy Regime (APR). The RLR requires banks and lenders to collect additional information and ‘positive reports’ about consumers. However, banks and lenders must also comply with the APR, which seeks to safeguard the consumer by limiting the lender’s access to the consumer’s information.
Search engines impacting credit market
Special attention needs to be paid to the danger posed by large online search engines - without fully understanding the global regulatory landscape - influencing consumer choice through advertising bans on certain types of credit products.
A prime example of this is Google, which was reported to of brought into effect an advertising ban on Wednesday 13 July 2016. Google will no longer host ads for loans that last for under 60 days. Google has also banned ads in the US for credit products with annual percentage rates higher than 35%.6
Small business and investment lending
In the past few years, the National Consumer Credit Protection Act 2010 (NCCP) regime has been amended to regulate specific types of credit products such as reverse mortgages, small amount credit contracts and medium amount credit contracts.
Prior to 2012, the National Credit Code (NCC) did not specifically distinguish between specific types of products offered by credit providers falling within the definition of ‘credit contract’ (Instead, the NCC distinguished between continuing and non-continuing credit contracts, consumer leases and real property mortgages or goods mortgages).
In 2012 amendments changed this regulatory philosophy. The NCC now contains different applications of certain NCC provisions depending on whether a non-continuing contract is a:
- small amount credit contract (SACC);
- medium amount credit contract (MACC);
- “reverse mortgage” credit contract (RMCC); or
- a credit contract that is not an SACC, MACC or RMCC (ordinary CC).
the result is that the NCC effectively contains ‘sub-regulatory’ regimes for the products mentioned above.
It remains to be seen whether future enhancements to the NCC will contain specific regulatory provisions for other types of credit products – for example, small business and investment loans.
This is a departure from the NCC’s (and previously the Uniform Consumer Credit Code’s) original philosophy that as long as the NCC’s pre-contractual and contractual disclosure and other requirements were met then a credit provider was free to offer any type of credit product.
There has been much discussion about the regulation of small business credit and investment lending over the past few years. It remains to be seen whether reforms will be introduced to regulate those forms of credit. It has been a frequent topic of discussion and no doubt the debate will continue in the future.
For a summary of the recent proposals to regulate small business and investment lending, see “Annotated National Credit Code”, 7
EU - U.S. Privacy Shield
In July 2016 the European Commission announced the EU-U.S. Privacy Shield, which imposes stronger obligations on U.S. companies to protect the personal data of EU citizens. It also requires the U.S. Government to monitor U.S. companies and enforce the Privacy Shield as well as to cooperate to a greater degree with the European Data Protection Authorities. This privacy shield mirrors the ruling of the European Court of Justice, which ruled the previous ‘Safe Harbour framework’ invalid.
This Privacy Shield creates obligations on U.S. companies to:
- have a process in place where complaints are promptly replied to
- have oversight mechanisms in place to ensure it complies with the new rules. Additionally, it is recommended that U.S. companies have a process in place where they self-check annually that they are complying with the requirements, and
- ensure complete cooperation and compliance with European Data Protection Authorities in instances where the U.S company is dealing with human resource data.
European citizens gain the benefit of:
- having increased transparency about the transfer of their personal data to the U.S.
- stronger protections in place of their personal data
- easier and more cost effective means of dealing with complaints, either directly with the U.S. Company or through the Local Data Protection Authority.
Although this Privacy Shield does not affect Australian institutions in the consumer credit sector, a similar agreement could be established between Australia and another Nation, such as the U.S. This would have impacts on Australian institutions in terms of their data collection and transferring policies and practices.
This article highlights some of the key challenges and changes facing the financial services sector for both established institutions and Fintech Startups. Some of the challenges are unique to the consumer credit regulatory landscape and/or Fintech startups. Other challenges and changes apply across the board for financial services.
1. Australian Securities and Investments Commission “Unfair contract term protections for small businesses” Information sheet 211 (23 March 2016) ]]>http://asic.gov.au/aboutasic/what-we-do/laws-we-administer/unfair-contra...]]>.
2. A Beatty and J McIntosh “Update: unfair contract terms —small business” (2016) 15(5) FSN 84.
3. Australian Securities and Investments Commission Fit for the Future: A Capability Review of the Australian Securities and Investments Commission (20 April 2016) ]]>www.treasury.gov.au/PublicationsAndMedia/Publications/2016/ASIC-capabili...]]>.
4. For more information, please see Australian Securities and Investments Commission “ASIC consults on a regulatory sandbox licensing exemption” media release (8 June 2016) ]]>http://asic.gov.au/about-asic/media-centre/find-a-media-release/ 2016-r...]]>.
5. Australian Securities and Investments Commission “Improving consumer outcomes in financial services” Fact Sheet (20April 2016)
6. For more information, please see P Hatch “Google doomsday for payday lenders” (13 July 2016) ]]>www.smh.com.au/business/banking-and-finance/google-doomsday-for-payday]]> lenders-20160712-gq41pl.html.
7. See s 6 in “overview of the NCCP Act regime” at A Beatty and A Smith Annotated National Credit Code (5th edn) LexisNexisButterworths, 2014 xxi.