Finance

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Chapter 3

Legislative and Regulatory

Framework

Legislation  Mortgage broking activities are regulated by

various kinds of legislation in Australia: – National Credit Code – ASICs regulations – Anti-money laundering legislation – Privacy Act 1988 – Code of Conducts of industrial associations

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National Credit Code  The reform package was introduced into the

Parliament in June, 2009. The package includes various pieces of legislation, called as whole ‘The National Consumer Credit Protection Reform Package’.

 The reform package initially aimed to transfer all consumer credit regulations to the Commonwealth from the States and Territories to achieve a standard industry level code of practice. The package is to be implemented within two phases.

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National Credit Code…  The first phase was enacted in 2009.

 ASIC has become the sole, national regulator for consumer credit lending and finance broking. ASICs power has been extended as the sole regulator of the new national credit framework with enhanced policing scope.

 The National Consumer Credit Protection Reform Package aims to amend the previous State-based Uniform Consumer Credit Code (UCCC).

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National Credit Code…  The UCCC, which had been in place since the early

1990s, was developed in response to business and consumer concerns as a national initiative to standardise credit practice in Australia. – UCCC was ‘national’ administration and was the

responsibility of eight different State and Territory Governments.

 Like the previous UCCC legislation, the National Credit Code is based on the principles of truth- in-lending, allowing borrowers to make informed choices when purchasing credit.

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National Credit Code…

 The new code largely replicates the previous State- based UCCC, it also regulates a wider range of credit products including:

– credit cards – investment loans – hire purchase agreements – personal and home loans – mortgages and guarantees

 The National Credit Code has introduced change in the following areas by creating:

1. a comprehensive licensing regime for all providers of consumer credit and services;

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National Credit Code… 2. responsible lending conduct requirements on

licensees that are not unsuitable for the consumer’s needs and that the consumer has the capacity to repay

3. improved sanctions and enhanced enforcement powers for ASIC as the government regulator

4. greater consumer protection through court arrangements, remedies for consumers and penalties for misconduct

5. an expanded scope for the National Credit Code to include credit provided to purchase, renovate, improve or refinance a residential investment property;

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National Credit Code…

 The National Credit Code mainly deals with consumer lending that use the main part of the loan proceeds for personal, domestic or household purposes

 The code extends to credit provided for the purchase, renovation or improvement of a residential property for investment purposes.

 Residency status of the debtor does not affect whether or not the code applies.

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National Credit Code…

 The application form of the loan must include a declaration if the loan is to be used predominantly for business purposes.

 If more than 50% of a loan’s proceeds are for business purposes, the credit will not be subject to the code.

– Vital that the purpose of the loan is determined beyond any doubt.

 A simple, written declaration from the borrower stating that the loan is for business or investment purposes does not have conclusive evidentiary value.

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Second Phase of Reform Package

 The second phase of consumer credit reforms has begun and is continuing. The changes already enacted include: – the banning of exit fees on home loans for contracts

entered into after 1 July 2011; – the introduction of one-page ‘Key Facts Sheet’ for home

loans and credit cards; – the banning of unsolicited credit limit increase

invitations without obtaining the express consent of the consumer;

– the banning of over-the-limit fees on credit cards, unless the fees are expressly requested by the consumer;

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Second Phase of Reform Package…

– that credit card providers first allocate payments to the part of the closing balance shown in the last account statement to which the highest rate of interest applies; and

– that all credit providers clearly warn consumers on their account statements about the consequences of only making minimum repayments.

 Further changes are contained in the Consumer Credit Legislation Amendment (Enhancements) Bill 2012 (Enhancements Bill).

– “Regulatory Guide 203 Do I need an Australian credit licence?” has also be updated.

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National Credit Code Regulation of Mortgage

Broking Activities  All actions of the parties involved in a mortgage lending

process must comply with the NCCs provisions.

 These parties will include all employees of credit providers such as directors, managers, brokers, contractors, mobile lenders, satellite offices.

 The actions of all intermediaries will be deemed to be the actions of the actual credit provider.

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National Credit Code Regulation of Mortgage

Broking Activities…  In case of a breach, the courts will determine which party

bears liability for the breach.  These parties may be held personally liable for a breach

of the National Credit Code under the following sections: – Relations and correspondence with prospective borrowers – Relations with borrowers throughout the loan term – Prohibition of the conflict of interest – Misconduct and unjust transactions – Documentation, reporting and disclosure

requirements – Liabilities and penalties under the code

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Relations with Prospective Borrowers

 Mortgage brokers must not make false claims or mis- leading representations about specifications or features of a credit product to induce their clients to enter into a contract, mortgage or guarantee.

 Mortgage brokers are not allowed to provide taxation or financial advice.

 Mortgage brokers should explain to their clients that the interest rates quoted or stated in the offer documents are indicative representations.

 These rates are subject to change as negotiations occur.

 The actual rates will be determined on settlement day.

Cold Calling  The National Credit Code prohibits visiting a

customer’s home without having a prior appointment.

 Consumers in their own home are particularly vulnerable to making uninformed decisions due to a variety of factors, including:

– the inability to walk away from a sale; – an inherent politeness towards a person who is a

guest in their own home; – the nature of the sales staff who are often trained

to exploit this sense of obligation and who may refuse to leave until the sale is complete; and

– logistical difficulties in comparing prices, often resulting in the consumer committing themselves to paying excessive fees.

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Relations with Borrowers throughout the Loan Term

 Customer correspondence is strictly regulated under the National Credit Code.

 Interest rates changes will affect the minimum repayment amount.

 Lenders must notify their customers about the changes in interest rates at least 20 days before the new repayment amount becomes effective.

 Statement of accounts and statement of pay-out figure should be provided by lenders within seven days of a borrower’s request.

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Relations with Borrowers throughout the Loan Term…

 Statement of accounts should also be sent on a regular basis every six months for term loans and every month for transaction accounts.

 The code requires the notifications being sent by lenders to all borrowers whereby there are more than two or more borrowers in a credit arrangement.

 If a debtor makes an application under the hardship provisions of the code, the credit provider must reply within 21 days stating whether or not the credit provider agrees with the changes requested.

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Relations with Borrowers throughout the Loan Term…

 If the credit provider does not agree to the changes, the notice must state the name of the credit provider’s External Dispute Resolution (EDR) Scheme and the debtor’s rights under that scheme.

 Hardship provisions of the code under which consumers can request a change to certain terms of their credit contract apply to loans up to $500,000 or any higher amount prescribed by the regulations.

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Prohibition of the Conflict of Interest

 The prevalence of commission-based remuneration creates the possibility of conflicts of interest between the interests of the broker and their client.

 A mortgage broker is expected to act as an intermediary between a client and lending institution to negotiate the approval of a loan, in return for a commission.

 The broker’s principle function is to: – find suitable lenders that offer loan products to

match the client’s needs – refer the client’s loan application to a lender – obtain approval for the loan

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 The prevalence of commission-based remuneration creates the potential for conflicts of interest when brokers try to maximise their incomes to the detriment of their clients, who are seeking the best and cheapest brokers. – As a professional, a mortgage broker should always

act in the best interests of their clients.

 Some of the broker firms, seek to mitigate the effect of commissions on the choice of product by rebating part of the payment to the borrower, or by paying fixed salaries to their employee brokers.

Prohibition of the Conflict of Interest…

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Prohibition of the Conflict of Interest…

 Similarly, the aggregators generally have commission- splitting arrangements with individual brokers. These may vary with the identity of the lender and/or the volume of business placed.

 To the extent that broker remuneration is based purely on volume (rather than the identity of the lenders or the value of commissions offered), this may remove conflicts of interest that might otherwise arise in relation to the advice being offered.

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Misconduct and Unjust Transactions

 All professionals working in the mortgage industry have a duty of care to ensure that they conduct their business activities within the regulatory framework.

 It is the mortgage broker’s responsibility that borrowers and their guarantors are fully informed about all the circumstances of the contract.

 Mortgage brokers must ensure that they have undertaken all reasonable enquiries to collect correct and complete information from their clients and they have analysed these appropriately.

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Misconduct and Unjust Transactions…

 The courts may decide that a credit contract, mortgage or guarantee is invalid due to the credit providers’ or its representatives’ misconduct or unjust behaviour.

 The code states that unjust behaviour may include unconscionable, harsh or oppressive behaviour.

 The court may invalidate the contract due to the vulnerabilities of the borrowers or the guarantors. – The court will definitely consider the age, mental

and physical condition of the parties involved in the contract.

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Documentation, Reporting & Disclosure Requirements

 Both the National Credit Code and the Corporations Act 2001 prohibit secret commissions between agents and principals.

 Both Commonwealth and state criminal codes state that the corrupt payment or receipt of commissions is a criminal offence and penalties apply.

 Penalties may also apply where commissions are not disclosed in relation to commercial transactions.

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Documentation, Reporting & Disclosure Requirements…

 To comply with the National Credit Code, brokers must satisfy the disclosure and documentation requirements, meaning: – making sure that all the relevant information has been

discussed – all the necessary documents have been completed

and collected from borrowers and guarantors – documents have been filed appropriately.

 The loan agreement is a written contract that is signed by all the parties privy to the contract.

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Documentation, Reporting & Disclosure Requirements…

 This contract sets out the terms and conditions of the product.

 The first page of the contract will include a summary table about the key details.

 Interest rates must be expressed as indicative and as an annual percentage rate.

 The contract may specify 30-years or shorter maturity for the loan, monthly or more frequent instalments and customised repayment amounts.

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Documentation, Reporting & Disclosure Requirements…

 The code sets specific disclosure requirements about all the fees, charges and any sort of commissions arising from the contract.

 Throughout the credit relationship, some amendments can be made regarding the terms of the contract.

 Major amendments include changing the loan type, nature of the credit (domestic/business), loan amount, primary security, collateral and any change in the parties to the contract.

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Liabilities and Penalties under the Code

 Breaches of the National Credit Code are subject to both civil and criminal penalties.

 Unjust transactions or unfair contracts may lead to contracts being invalid and the requirement to be re- drafted. The following actions are in breach of the code: – making false or misleading representations. – arriving at a borrower’s home without an appointment. – harassment of the client. – failing to notify a borrower of contractual changes. – failing to notify a borrower of interest rate changes. – failing to notify a borrower of changes to fees and charges.

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Liabilities and Penalties under the Code…

 ASIC may suspend or cancel a licensee’s licence if: – the person is insolvent;

– the person is convicted of serious fraud; or

– the person is incapable of managing his or her affairs because of physical or mental incapacity; or

– a prescribed state or territory order is in force against the person; or

– the licensee has contravened the obligation under the code.

Comparison Rates  A comparison rate is a tool to help consumers identify

the true cost of a loan.

 It is a rate which includes both the interest rate and fees and charges relating to a loan, reduced to a single percentage figure.

 For example, a bank’s advertised interest rate may be 2.84% and its comparison rate from 2.71%. (2020)

 As it includes all kinds of non-interest fees and charges, the prospective borrower would know exactly how much the loan would cost to them.

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Comparison Rates…

 Comparison rates will apply to the credits which is wholly or mainly for personal, domestic or household purposes or has fixed term credit that is, credit that must be repaid within a specified time period.

 A home loan with a term of 25 years, and a car loan with a term of 5 years are examples of fixed term credit.

 In contrast, credit cards, which do not have to be repaid within a particular time period, are examples of continuing credit.

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Comparison Rates…

 According to the code, a comparison rate must be included in any advertisement for fixed-term consumer credit which contains an interest rate.

 Comparison rates are calculated in accordance with a standard formula, which takes into account the:

– amount of the loan; – term of the loan; – re-payment frequency; – interest rate, and – fees and charges connected with the loan.

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Comparison Rates…

 There are exceptions for certain government charges such as:

– the fees and charges connected with the loan (except for government charges, such as stamp duty or mortgage registration fees;

– fees and charges which may or may not be charged, because they depend on some event which may or may not occur, e.g., fees for early re-payment or re-draw fees, and

– fees and charges which are not ascertainable at the time the comparison rate is provided.

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Comparison Rates…

 The comparison rate does not include:

– government and statutory fees, although these are standard across all lenders and loans.

– lender mortgage insurance or valuation charges.

– fee waivers or any discounts that your lender might apply to the loan.

– Event-based charges, like re-draw fees or early re-payment fees.

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Responsible Lending Conduct obligations

 According to the National Credit Act, a credit contract will be unsuitable if the: ‒ consumer will be unable to meet the repayments; or ‒ consumer can make the payments under substantial

hardship; or ‒ credit arrangements do not meet consumer’s

requirements or objectives.

 Mortgage brokers and lenders cannot: ‒ assist their clients to enter into, or increase the

limit on an unsuitable credit contract; or ‒ suggest that their client remains in an unsuitable

credit contract. 137

Responsible Lending Conduct obligations…

 Mortgage brokers have three main responsibilities with respect to responsible lending requirements: ‒ making reasonable inquiries about the consumer; ‒ making an assessment about whether the proposed

credit contract is not unsuitable for the consumer; ‒ providing the following disclosure documents during

the credit process: • A written assessment that the credit would

be unsuitable, if requested. • Credit guide. • Quote for providing assistance. • Credit proposal disclosure document.

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Making reasonable inquiries about a Consumer  Mortgage brokers must make reasonable inquiries about

the consumer to make sure that the proposed home loan cannot be deemed unsuitable, by consideration of: ‒ the scale of the credit arrangement ‒ the potential impact of the credit arrangement on the

consumer ‒ consumer entered into an unsuitable credit contract ‒ the consumer’s capacity under the credit contract ‒ if the consumer is new or an existing customer of

the credit provider.

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Making reasonable inquiries about a Consumer…

 The nature of the reasonable inquiries necessary and the reasonable steps required to verify the information will also depend on the nature of the service being provided to the consumer.

 It can be said that mortgage brokers are expected to make more detailed inquiries when the credit product is complex.

 For home loans, detailed inquiries need to be made because the amount is usually significant and if the client’s capacity is not appropriate it may result in substantial hardship.

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Making inquiries into Consumer’s Finances

 Reasonable inquiries must include proper analysis of a consumer’s financial situation. ‒ The legislation does not prescribe which specific inquiries

have to be made with regard to financial circumstances.

 ASIC guidelines list the following issues: ‒ current income and benefits ‒ fixed and variable expenses ‒ value and nature of assets and liabilities ‒ extent to which existing debts will be repaid

from the credit ‒ credit history ‒ consumer’s other circumstances ‒ any significant foreseeable changes

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Making inquiries into Consumer’s Finances…

 Based on the inquiries into the consumer’s financial situation and the steps taken to verify this information, the broker will have to decide whether the consumer has the capacity to repay the loan.

 Generally the National Credit Act presumes that a consumer should be able to meet the financial obligations of the credit contract from their income, not equity in an asset ‒ Reverse mortgages and bridging loans may

be exceptions to this position.

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Consumer’s Requirements and Objectives

 Mortgage brokers should also assess whether the credit contract is ‘fit for purpose’: ‒ whether it meets the consumer’s requirements

 A home loan product must be appropriate for the consumer’s requirements and objectives, this includes: ‒ whether it meets the consumer’s requirements ‒ an appropriate credit limit is offered to the

consumer ‒ an appropriate maturity is arranged ‒ the reason for the credit product is justified ‒ the benefits of the credit product are detailed

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Consumer’s Requirements and Objectives…

‒ appropriate features and flexibilities are offered to consumer

‒ the costing structure of the credit product and its associated risks are well understood by consumer

‒ the consumer’s stated objectives in obtaining the credit are met

‒ the nature of the credit requested by the consumer is not deemed unsuitable

‒ if the consumer is refinancing, the benefit of the new credit product is justified

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Having adequate Processes and Documentation

 Internal processes and procedures must address the consumer’s capacity to repay the credit contract and measure the credit risk of the consumer.

 The process must also include the reasonable steps for the verification of consumer information.

 Both lenders and brokers share the responsibility for the verification of the information provided by a consumer. ‒ Compared to the lender’s, a mortgage broker’s

responsibility is limited because they may not have access to all of the information that a credit provider does.

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Adequate Processes and Documentation…

 A mortgage broker should at least refer to the following documents when verifying a consumer’s financial situation: ‒ recent payroll receipts/payslips and confirmation

of employment for PAYG employees ‒ recent income tax returns, a statement from their

accountant and Business Activity Statements for self-employed persons

 Additional inquiries would need to be made if the consumer provides information that is inconsistent.

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Making preliminary Assessment

 The preliminary assessment must be made on whether the proposed credit contract is unsuitable for the consumer.

 Mortgage brokers must reasonably make sure that: ‒ the consumer would be able to meet their financial

obligations without incurring substantial hardship, and ‒ the credit product meets the consumer’s objectives

 Additional analysis is required where a credit assistance provider engages in switching and refinancing activities.

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Making preliminary assessment…

 Additional analysis is required where a credit assistance provider engages in switching and refinancing activities.

 A higher level of inquiries will be required if the consumer is refinancing.

 Refinancing often suggests they are either having trouble meeting their repayments or they are in arrears on their existing contract.

 If a new credit contract has the same repayments, on face value it will be unsuitable.

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Documents given during the Credit Process

 Credit Guide – Must be in writing and include all statutory requirements.

 Quote for providing assistance. – The quote must be in writing – Must include information about the credit assistance

and other services, – Whether the maximum amount, or any other

amount, will be payable by the consumer for credit assistance and other services,

– State whether the maximum amount, or any other amount, will be payable to the licensee if a credit contract is not entered or a credit limit is not increased.

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Documents given during the Credit Process…

 Credit proposal disclosure document must contain the following information: – the total amount of any fees or charges that the consumer

will be liable to pay. – reasonable estimates of the total amount of any

commissions the credit representative is likely to receive and the method used for working it out.

– reasonable estimates of the total amounts of any fees or charges.

– if the credit is to be applied to any of the amounts, a reasonable estimate of the likely amount of credit that will be available to the consumer after they are paid.

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Documents given during the Credit Process…

 Written preliminary or final assessment when the credit contract is unsuitable: – If requested by the consumer, mortgage brokers must

provide the assessment that the credit contract is unsuitable and may refer to: • the consumer’s requirements and objectives • reasonable inquiries carried out by mortgage broker • the consumer’s capacity to repay.

– The consumer should be given the opportunity to check this information to ensure that any inaccurate information is corrected.

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Unconscionable Conduct  Defined as unfair or unreasonable conduct in business

transactions that goes against good conscience.

 The exact meaning of ‘unconscionable conduct’ is not defined in the ASIC Act.

 The courts determine whether there is a contravention or not, by considering several factors including the bargaining positions of the supplier and consumer.

 For a mortgage broker, it is important that the client could understand all the documents relating to the credit product.

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 In order to avoid committing unconscionable conduct, a mortgage broker should:

– use plain, uncomplicated language when servicing and advertising to a wide range of consumers;

– avoid harsh or oppressive terms in agreements or contracts.

• If a dispute arises, these terms cannot be relied on, and any attempt to enforce them may be considered unconscionable;

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Unconscionable Conduct…

– clearly set out all key terms of the agreement by ensuring that clients are made aware of key terms and conditions in the credit product. • A key term buried at the back of a long contract or

hidden in fine print, may not be enforceable.

– make full and frank disclosure, which means ensuring their client is aware of and understands the key terms of the agreement. • Should ensure the customer understands

any unusual or important terms and any possible consequences they may have.

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Unconscionable Conduct…

Unconscionable Conduct… – avoid high-pressure sales tactics, in fact there are

limits on how far they can go to make a sale. • Conduct that is appropriate for some consumers may

threaten or intimidate others.

– have an effective complaint-handling structure by ensuring their business has a system which allows customers to easily raise disputes and have them resolved.

– be prepared to negotiate and set aside the contract if required.

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Misleading and Deceptive Conduct

 National Credit Code and the ASIC Act explicitly prohibits misleading and deceptive conduct in the financial services industry.

 Any advertisement, promotion, quotation, statement or other representation made by a mortgage broker must not create a misleading impression in client’s mind otherwise the conduct is likely to breach the Act. – These misleading impressions might be related to fees,

charges, special features, conditions or any other specifications of the credit product.

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Competition and Consumer Act 2010

 The Competition and Consumer Act 2010 (CC Act) is administered by the Australian Competition and Consumer Commission (ACCC) and applies to the conduct of corporations, their employees, agents and officers.

 Apart from misleading, deception and unconscionable conduct, the CC Act also prohibits some other certain actions such as collusion, restrictive trade practices and exclusive dealing.

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Competition and Consumer Act 2010…

 These actions are deemed in the CC Act to be anti- competitive. Where a borrower, mortgagor, guarantor or any other person has suffered a loss as a result of a breach of the CC Act, the credit provider may be ordered to compensate that person or entity.

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Licensing requirements for Mortgage Brokers

 Financial Services Regulations under the Corporations Act 2001 states that all providers of financial products as defined under the Corporations Act 2001 must hold an Australian Financial Services License (AFSL).

 Mortgage brokers do not require an AFSL and are not required to be appointed as ‘authorised representatives’ of an AFSL holder unless they also distribute financial products.

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Licensing requirements for Mortgage Brokers…

 Although offset accounts are defined as financial products in the Corporations Act 2001, mortgage industry representations to ASIC resulted in offset accounts being exempted from the regime. – ASIC considers these products to be incidental to

a housing loan.

 ASIC granted conditional relief if the financial services providers belong to an ASIC-approved external dispute resolution scheme (EDR scheme).

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Licensing requirements for Mortgage Brokers…

 Lenders are liable to the borrower for the conduct of brokers only in extremely limited circumstances.

 The NCC licensing regime ensures individual brokers can be easily traced to ensure appropriate conduct.

 The credit activities that the licensee is authorised to engage in are those specified in a condition of the licence the licensee is authorised to engage in. – Brokers may apply for their own credit licence

or they may be an authorised credit representative of a credit licence holder.

Protection of Privacy  The Privacy Act 1988 regulates ‘information privacy’

in Australia.

 The Office of the Privacy Commissioner administers the Act.

 The Australian Federal Privacy Act 1988 authorised the implementation of the principles developed by the Organisation for Economic Cooperation and Development (OECD) in 1980.

 The Privacy Act 1988 was extended in December of 2000 via the Privacy Amendment (Private Sector) Act to include most private organizations.

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Protection of Privacy…

 The Privacy Act 1988 was further extended by the Privacy Amendment (Enhancing Privacy Protection) Act 2012 setting out how organizations should use, keep and disclose personal information.

 When preparing a loan application, mortgage brokers collect private information of their clients.

 The main principles of the Act cover the following areas:

– manner and purpose of collection of personal information;

– solicitation of personal information from the individual concerned;

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Protection of Privacy… – solicitation of personal information generally; – storage and security of personal information; – information relating to records kept by a record-

keeper; – access to records containing personal information; – alteration of records containing personal;

information, and – record-keeper to check accuracy, etc., of

personal information before use.

 If an agency or organization breaches the privacy principles, the Office of the Privacy Commissioner may investigate the matter.

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Protection of Privacy…

 Mortgage brokers must comply with the principles of the Privacy Amendment (Enhancing Privacy Protection) Act 2012 when collecting personal information

 A mortgage broker may face serious consequences if they breach privacy rights by:

– accessing credit information files without authorisation

– misplacing privacy documentation – disclosing private information to third parties

without authorisation, or – dealing with a credit report that has been

altered. 165

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The Code of Banking Practice

 The Code of Banking Practice aims to promote the best practices between banks and consumers in Australia. – It is the banking industry’s customer charter on best

banking practice standards. – The code applies to personal and small business

bank customers.

 The code applies to mortgage brokers in an indirect way because banks should make sure that their affiliated brokers also comply with the code when originating loan products.

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The Anti-Discrimination Act 1977

 In mortgage broking, discrimination may occur in the process of approving a loan.

 In general, discrimination can be defined as… ‘a phenomenon in which someone is treated unfairly because they happen to belong to a particular group of people or have a particular characteristic’.

 Both ‘direct’ and ‘indirect’ discrimination are against the law.

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The Anti-Discrimination Act 1977…

 ‘Direct’ discrimination occurs when someone is treated unfairly compared to someone else in the same or similar circumstances, and this is because of their gender, pregnancy, race, age, marital or domestic status, religion, homosexuality, disability, transgender status or carers’ responsibilities. – For example, if an employer won’t hire someone

just because they are a woman, this is likely to be direct sex discrimination.

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The Anti-Discrimination Act 1977…

 ‘Indirect’ discrimination means a requirement (or rule) that is the same for everyone but has an effect or result that is unequal and unreasonable having regard to the circumstances. – For example, an employer who says that they need a female

“with an Australian accent” to do a certain job could be indirectly discriminating against an individual and some ethnic groups, who are less likely to be able to meet to this criteria compared to Australian-born residents.

 They could claim indirect sex or race discrimination if they could show that the job does not really need this criteria to function.

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Anti-Money Laundering and Counter-Terrorism

Financing Act 2006  Financial Transaction Reports Act 1988 (FTR Act) and

the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) place certain obligations on providers of designated financial, bullion and gambling services. (*Please note; IIT offer a ML3 AML course online also.)

 The Australian Transaction Reports and Analysis Centre (AUSTRAC) is established under the FTR Act and continues in existence under and administers the AML/CTF Act.

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Anti-Money Laundering and Counter-Terrorism Financing Act 2006…

 Regarding the financial services industry, the legislation poses substantial reporting requirements of suspicious transactions and customer-identity verification.

 Reporting takes place between financial service providers and the AUSTRAC.

 Under the AML/CTF Act, a reporting entity can authorise a broker to be an agent for the purpose of carrying-out customer-identification procedures on its behalf.

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Anti-Money Laundering and Counter-Terrorism Financing Act 2006…

 A mortgage broker’s responsibility starts at this point. Mortgage brokers are expected to complete AML/CTF training and compliance training which have been prepared by both the MFAA and FBAA.

 Brokers need to make sure that they comply with industry best practice and any AML/CTF procedures imposed by lenders.

Complaints and Conflict Resolution

 When consumers have suffered damage or loss as a result of a broker’s conduct, they should be able to access timely and effective remedies.

 Brokers are required to be members of a dispute resolution scheme such The Australian Financial Complaints Authority (AFCA).

 Apart from increased accountability, consumers have the option to obtain financial remedies without having to be involved in expensive legal proceedings.

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Complaints and Conflict Resolution…

 The common characteristics of the ASIC-approved EDR schemes are:

– they are free for customers to use, – they may involve some investigation, including requests

of both parties for information and documents, – they use somewhat, informal processes and the claim

does not have to put in the form of pleadings, – their decision is binding only on the industry

member and not on the customer, – hearings in person are rarely conducted –

a decision will usually be made on the papers. 179

Complaints and Conflict Resolution…

 Some of the most common kinds of complaints are: – problems arising from advertisements offering easy

credit to people in financial difficulty; – complaints about paying excessive fees and poor

disclosure of these brokerage fees; – loans were incorrectly documented as being for business

purposes; – brokers requiring up-front payment of fees,

and refusing to provide refunds when unable to arrange finance;

– mis-representations about the transaction by the broker;

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Conflict Resolution…

 The Australian Financial Complaints Authority (AFCA) is the new financial dispute resolution body that amalgamates the Financial Ombudsman Services )FOS), the Superannuation Complaints Tribunal (SCT) and the Credit and Investments Ombudsman (CIO)

 These dispute resolution schemes are part of the regulatory framework although they are not regulators or government agencies.

 Membership of an ASIC-approved scheme is a financial services requirement.

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Fraud risk in the Mortgage Broking Industry

 Recent survey indicated as many as 2.7 million Australians deliberately falsified details on their loan applications by exaggerating or under-estimating figures.

 Most common types of Mortgage Fraud are: – Application forms contain falsified information about

income, debt, employment and other issues. – Tax returns commonly manipulated/altered to leave

the impression of higher income. – Employment verification documents changes to

employment dates, hourly/salaried earning, job position, or other work-related information.

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Fraud risk in the Mortgage Broking Industry…

– Bank deposit documents inflated.

– Fraudulent valuation processes by the borrower, valuer or both.

– ‘Jacking up’ or valuation fraud by inflating the value of a particular property.

– Forged title deed or stolen identities.

– a Certificate of Title in the wrong hands allows a con artist to pretend they are the homeowner, perpetrate a fraud and obtain loan funds.

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Mortgage Brokers role in Fraud Prevention

 Mortgage brokers play an important role in the prevention of fraud because they are in the best position to detect any falsified documents and evaluate the originality of the application.

 Mortgage brokers should: – establish a proper file management practice and

procedure; – make sure that proper standards have been

applied during the valuation process; – check that an applicant actually owns the title of

the property;

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Mortgage Brokers role in Fraud Prevention…

– not hesitate to visit the property personally to have a look at who lives there and who owns a particular property.

– make sure they obtain original documents and not facsimile or photocopied records.

• Conduct a verbal verification of employment status of the client by calling their employer.

– require the original of the forms and documents at the front-end to discourage fraudulent borrowers.

– verify the seller on the contract is the owner of record on the preliminary title report.