financial Services

Financial Services Professional Practice, Legislation and Codes of Practice

Learning Guide V3.2 © AAMC Training Group 5

Section 1 The Australian financial sector, financial

system and external forces

The sector is vibrant and diverse, and provides an extensive range of

products such as, home loans, credit cards, personal loans and personal

overdrafts. It is one of the fastest growing sectors in our economy and a

significant contribution to our Gross Domestic Product (GDP).

The industry maintains a highly responsible approach to ensure financial

providers are safe and transparent. It’s large and mature financial

services sector has assets equivalent to almost three and half times

Gross Domestic Product.

The rapid growth in Australia’s government-mandated retirement

savings has contributed to a strong, sophisticated and innovative

financial services sector. Australia offers global financial institutions

opportunities in a rapidly expanding domestic market and an ideal

location for servicing markets in the Asian time zone.

The Australian financial sector in a global context

Australia is the first major financial centre to open in the Asian time

zone, providing a trading day that bridges the closing of the USA market

and the opening of European markets. Global financial services firms are

able to provide after-hours coverage for their USA and European

operations from Australia in a ‘follow the sun’ system. With their

strategic advantage over Tokyo, Hong Kong and Singapore, Australia is

an ideal base from which to offer financial services throughout the Asia-

Pacific region.

The Australian financial system

The Australian financial system provides financial services and products.

Its role is to serve the financial needs of consumers and producers, and

to allocate financial services between these competing needs. When it

allocates financial services, it exercises significant control over the

pattern of goods and services produced in the Australian economy

The primary function of the Australian financial system is to:

 Enable transactions for goods and services to take place without

reliance upon the process of barter

 Make possible the transfer of funds and financial assets between savers

and borrowers

 Assists investors who are seeking to balance their risk, liquidity and

returns.

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To carry out this function efficiently the Australian financial system is

required to:

 Provide an effective and certain payments mechanism

 Fully mobilise savings

 Channel those savings into fields of investment which generate the

highest return, consistent with the risk involved

 Offer a suitable range and diversity of financial instruments and

intermediaries

 Operate at minimum cost in terms of resources used per unit of service

provided.

External forces that influence the industry

The financial services sector is continually changing with many external

forces impacting the performance and progression of the industry. The

impact of these forces are at varying degrees, depending on the timing

and level of change.

 Government, Regulation and Compliance - Government regulation

affects the financial services industry in many ways, but the specific

impact depends on the nature of the regulation. Increased regulation

typically means a higher workload for people in financial services,

because it takes time and effort to adapt business practices to ensure

that the new regulations are being followed correctly.

 Employment & Outsourcing - There is an increasing demand for

Australian companies to move internal operations and some services

offshore due to strong competitive pressures, cheaper skilled labour, as

well as advances in communication technologies. Financial Services

companies such as major banks and other providers are following this

trend. However, the long term negative impact may see a fall in

employment in Australia and thus impact the ability for many

Australians to borrow and invest.

 Technology - In recent years, two key developments have helped

facilitate rapid advancements in digital technology: information and

internet connections have become faster and more reliable, and mobile

internet has become increasingly widespread due to the rollout of 3G

and 4G wireless internet networks and the popularity of smartphones

and tablet computers. These technological advances have been both a

challenge and an opportunity for the financial services industry. The

free flow of information has intensified the competitive environment

and technological advances are providing new means to change internal

processes in order to raise efficiency and remain competitive.

 Population Growth and Trends – Population growth effects the

financial services in many ways including increased needs for products

and services. Population trends show that people are living longer and

either remaining in the workforce beyond retirement age or living

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longer in retirement. The desire for sustained living standards impacts

the financial services industry due to increased product developments

such as more flexible superannuation, investment and lending products.

 Changing customer needs and expectations – Demographic and

technology changes bring demands for new products and services,

along with increasing complexity in customer interactions. Increasing

educational standards and increased information via information

technology and media, allows borrowers and investors to be better

informed when making decisions.

 Socially responsible investing, sustainability and climate change

– The increasing physical impacts of climate change, bringing warmer

temperatures, increased water scarcity, and more frequent and severe

weather events, pose immediate and long-term threats that will ripple

throughout the financial services sector’s operations by impacting

investments made on behalf of financial services clients. Sustainability

effects many aspects of a business not just environmental, it also

impacts economic prosperity and social well-being. Demand from

consumers for better products and services pushes businesses to have

more streamlined operations through enhanced technology, quicker

turnaround times and the provision of more efficient services.

Financial services sectors

The financial service industry is considered as a sector in its own right.

It is however made up of many sectors which are generally referred to

as a conglomerate of participants who share commonality in their

products and services of a larger sector. The financial sectors in

Australia could be broken down into some of the following:

 Regulatory - Australian Securities and Investment Commission,

Australian Stock Exchange, Reserve Bank of Australia, AUSTRAC

 Banking – Australian banks, foreign banks and merchant banks

 Non-banks –credit unions, building societies, non-conforming lenders,

mortgage managers, private funders

 Insurance – insurers, reinsurers

 Superannuation – industry superannuation funds, retail

superannuation funds, self-managed superannuation funds

 Investment – fund Managers, share market, asset management,

hedge funds

 Finance Broking – aggregators, finance brokers, mortgage brokers,

industry associations

 Accountancy & Taxation – accountants, Australian Taxation Office,

Tax Practitioner’s Board, industry associations

 Financial Planning – financial planners, investment advisers,

insurance brokers, dealer groups, product providers, industry

associations.

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The individual participants in these sectors are the relevant companies

and professionals working within some of these sectors. The sectors can

be broken down in several ways; by business types (as indicated above)

or by services. For example; retail banking, private banking and

investment banking. These sectors work together to maintain a

functioning system by ensuring regulation standards and compliance are

adhered to. These sectors are further explored in more detail within

further sections of the learner guide.

Financial services providers

Financial services providers are entities directly involved in the transfer

of funds between borrowers and savers. By harnessing the savings of

the community and in turn providing the funds necessary to fuel an

economy based on private ownership, they are an essential element in

the efficient allocation of financial resources for productive purposes.

The major financial service providers in the Australian financial services

industry are:

 Banks

 Non-bank financial institutions such as credit unions, building societies,

money market corporations and finance companies

 Insurance companies.

Financial institutions in Australia may also be categorised as:

 Authorised Deposit Taking Institutions (ADI’s) which includes banks,

credit unions and building societies

 Non ADI Financial Institutions, Insurers and Funds Managers.

Banks

A bank may be defined as a body of persons, whether incorporated or

not, which carries on the business of banking. This is specified as:

 Conducting current accounts for its customers

 Paying cheques drawn on it, and

 Collecting cheques for its customers.

Banks act as payment agents by conducting chequing or current

accounts for customers, paying cheques drawn by customers on the

bank, and collecting cheques deposited to customers' current accounts.

Banks also enable customer payments via other payment methods such

as telegraphic transfer, Electronic Funds Transfer at Point of Sale

(EFTPOS), and Automated Teller Machines (ATM).

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Banks borrow money by accepting funds deposited on current accounts, by

accepting term deposits, and by issuing debt securities such as banknotes

and bonds. Banks lend money by making advances to customers on

current accounts, by making instalment loans, and by investing in

marketable debt securities and other forms of money lending.

Banks provide almost all payment services, and a bank account is

considered indispensable by most businesses, individuals and

governments.

Banks' activities can be divided into:

 Retail banking, dealing directly with individuals and small businesses;

 Business banking, providing services to mid-market business;

 Corporate banking, directed at large business entities;

 Private banking, providing wealth management services to high net

worth individuals and families; and investment banking, relating to

activities on the financial markets.

Banks have traditionally been the dominant institutions in the financial

sector and are held in a position of special confidence by the public. The

collapse of a bank would undermine public confidence in the entire

financial sector and thus would have severe repercussions.

The role of the bank is to:

 Place the interests of depositors ahead of those of shareholders, thus

absorbing some of the risks of default.

 Spread the risk of loan default amongst all depositors and shareholders.

 Pool and utilise depositors’ funds.

 Use their expertise for conducting transactions.

The importance of the banking sector is reflected by its role in the

payments system as much as by the scale of banking operations. Banks

play an essential role in the operation of the two most common methods

of settling debt in Australia, cheques and cash.

Banks indirectly bear the cost of organising the distribution of notes and

coins to meet the demand for currency as well as the associated transport

and security costs. They also have an exclusive right to issue cheque

accounts and although there have been developments in cheque payment

systems that have permitted non-bank groups to provide cheque accounts

to clients, banks remain the dominant providers of cheque facilities.

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Private banking and wealth management

Private banking is a term for banking, investment and other financial

services provided by banks to private individuals disposing of sizeable

assets. The term "private" refers to the customer service being rendered

on a more personal basis than in mass-market retail banking, usually

via dedicated bank advisers.

Wealth Management is classified as an advanced type of financial planning

that provides individuals and even families with private banking, estate

planning, asset management, legal service resources, trust management,

investment management, taxation advice, and portfolio management.

Thus, wealth management encompasses asset management, client

advisory services, and the distribution of investment products.

Persons engaged in wealth management may work for law firms,

accounting firms, brokerage firms, large banks, trust departments, or

investment and portfolio management firms.

As the array of potential investment products widens, the job of a

private banker and wealth management adviser are becoming

increasingly complex. Both private bankers and wealth management

advisers need an understanding of financial products, from basic shares

and bonds to complex financial derivatives. An increasing proportion of

their clients' wealth is now also invested in hedge funds.

Non-banking financial institutions

Before deregulation, banks were subject to a variety of regulations that,

to a certain extent, inhibited their ability to be competitive and explore

new fields of endeavour. A void was created which non-bank financial

institutions filled, catering for that end of the market, which banks were

less interested in servicing – that is, the small investor, the short-term

borrower, or the person wanting a more personal service with a degree

of face-to-face contact.

The Australian financial system includes a range of non-bank financial

institutions (NBFIs). NBFIs include:

 Building societies

 Credit unions

 Finance companies

 Merchant banks

 Authorised money dealers

 Fund managers

 Wholesale funders

 Mortgage managers.

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Building societies

Building societies are involved mainly in the provision of mortgage

finance for owner-occupied housing. They collect funds mainly by

tapping into household savings, along with the issuing of credit cards

and the provision of current account deposit facilities via the

establishment of agency arrangements with a trading bank. Due to

economies of services and networks, there has been a trend for building

societies to merge with existing banks.

Whilst building societies are primarily providers of deposit services and

lending, there has been some expansion into funds management, which

has resulted in the provision of limited investment advice.

Credit unions

Credit unions are co-operative organisations, owned by their members

and run on a non-profit basis. They concentrate upon meeting the

financial requirements of members, providing avenues for investment

and borrowing. They differ from building societies in two main respects.

Firstly, membership is limited to those with some common bond. For

example, people working in the same industry. However, with

amalgamations between different credit unions these bonds are less

prevalent and most people would now qualify to join a credit union.

Secondly, lending to members is for more general purposes than

housing. For example, cars, holidays, boats.

Membership of a credit union is usually achieved through the purchase

of non-transferable (but redeemable) shares.

Finance companies

Finance companies provide various types of loans, including credit for

retail sales, personal loans, finance for housing, wholesale financing,

lease financing and other commercial loans. Most loans to consumers

are for the purchase of consumer durables over relatively short-terms.

Lending to the business sector includes lease financing as well as other

commercial loans, including loans for non-residential property

investment. These are generally for short to medium-term periods.

Finance companies represent an alternative destination for individuals

and business savings because funds required for lending are borrowed

from the public, mainly by way of debentures, notes and deposits.

As a general rule, finance companies are not big lenders of mortgage

finance for residential purposes. They normally provide finance for

consumer goods, home improvements, commercial property, leasing

and factoring. Those companies that do lend for residential property will

likely specialise in non-conforming lending to borrowers who may not be

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able to obtain mortgage finance from traditional lenders because of

credit impairments such as a history of bankruptcy or loan delinquency,

or other circumstance.

Whilst finance companies are providers of debt instruments they

normally do not provide financial product advice.

Merchant banks

Merchant banks (also known as money market corporations) operate at

the ‘wholesale end’ of the financial markets, the ‘middleman’ between

companies issuing securities to raise funds and the investors who buy

the paper. They perform an important intermediary role, channelling

sizeable parcels of funds to large private corporations and Government

agencies and are an important conduit by which overseas capital is

brought into Australia.

Merchant banks deal in private and government securities, acceptance

of bills, underwriting issues of debt and equity capital, and devising

innovative finance packages (in return for a fee) for corporate clients.

They are not subject to the same regulation as ordinary banks nor do

they accept deposits from the public like ordinary banks.

Merchant banks derive their income chiefly from fee-based activities or

profits from trading securities, rather than from a margin between

borrowing and lending costs.

Authorised money dealers

Authorised money market dealers operating within the short-term money

market (STMM) provide a source of wholesale funding at market-

determined rates, enabling companies and financial institutions to

efficiently manage risk and liquidity by utilising money market instruments.

In 1996 the special role played by the authorised money market dealers

was effectively terminated. The Reserve Bank of Australia now deals with a

wider range of institutions in both the official and unofficial money markets

when trading short-term Commonwealth government securities.

Fund managers

Managed funds pool the investment funds of individual investors and

invest it on their behalf. By utilising a managed fund, investors gain

access to markets, instruments and expertise that would otherwise be

unavailable to them. Each has a proportional share (according to the

number of units they own) in all the distributions of income earned by

the fund.

Changes in the value of the fund’s underlying assets are reflected for

each unit holder by changes to the unit price of the fund.

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In the last decade, funds management has been the fastest growing

area of the finance sector. The variety of institutions involved in funds

management now includes superannuation funds, life offices, public unit

trusts, friendly societies and trustee companies.

Wholesale funders

Securitisation is a financing technique involving the conversion of non-

liquid assets with predictable cash flows into marketable securities.

Loans or mortgages fall into this category. Normally a lender may hold

all loans as non-liquid assets on its balance sheet. Since these assets

provide cash flows consisting of both principal and interest payments,

they can be packaged and turned into securities which are then sold to

investors through trusts or companies. As the transaction is generally

structured as an asset sale, they will be removed from the seller’s

balance sheet.

To fund the purchase they would be reissued as mortgage backed

securities or bonds. These bonds, worth millions of dollars, are then sold

to large-scale investors, which are attracted to better than bank-interest

returns of an extremely safe nature. In fact, this type of investment is

AAA rated by both Moody’s and Standard and Poor’s (S and P) of the US

(the highest rating achievable).

Australia has a well-established and increasingly sophisticated

securitisation market. In fact, Australia has one of the oldest

securitisation markets in the world. As a result most of the structural,

regulatory and legal issues, which may arise in global securitisation

transactions, have been successfully addressed in the Australian market.

Mortgage originators

Mortgage originators are intermediaries who originate (or locate)

mortgage business. There is a growing preference for mortgage industry

professionals to be called mortgage originators because it is firstly seen

as a more modern term clearly aligned with their practice and secondly

because it is seen as a more reputable term because of the damage

done to mortgage brokers by unscrupulous practitioners in the past.

Mortgage originators may be independent or carry out their business as

an appointed franchisee or licensee. They may also be real estate agents

who sell loans through existing real estate offices.

Mortgage originators are generally seen as working in the best interests

of borrowers. They may have access to a number of different lenders

products. A mortgage originator represents a borrower whereas a

mobile lender working for one lender represents that lender.

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The regulators and their impact on the

Australian financial sector

The regulatory framework is the system of legislation, common law and

government oversight for the financial services industry. It comprises

two parts:

 The Respective Federal or State Parliaments

 The corresponding regulators.

Regulators at the federal level include the following:

 Australian Securities and Investment Commission (ASIC)

 Australian Prudential Regulatory Authority (APRA)

 Reserve Bank of Australia (RBA)

 Australian Securities Exchange (ASX).

 Australian Transactions and Reports Analysis Centre (AUSTRAC)

 Office of the Australian Information Commissioner (OAIC)

 Foreign Investment Review Board (FIRB)

 The Australian Human Rights Commission (AHRC)

 Australian Competition and Consumer Commission (ACCC)

In financial markets there are other institutions, which participate, in the

regulatory framework. These tasks cover the governance and the

implementation of the requirements of the acts and regulations. Some

provide guidelines for practice. For example, ASIC publishes a large and

growing number of policy statements known as regulatory guides

(formerly called “policy statements”). Many also investigate breaches of

the regulations and unlawful activities, and prosecute offenders

accordingly. ASIC and the ACCC activities in this regard are highly

publicised. Some, such as the ASIC and the ACCC, can seek severe

penalties for deliberate and major breaches.

The Australian Securities and Investments

Commission (ASIC)

The Australian Securities and Investments Commission (ASIC) is

Australia’s corporate, markets and financial services regulator.

ASIC contribute to Australia’s economic reputation and wellbeing by

ensuring that Australia’s financial markets are fair and transparent,

supported by confident and informed investors and consumers.

ASIC is an independent Commonwealth Government body. ASIC is set

up under and administers the Australian Securities and Investments

Commission Act 2001 (ASIC Act), and carries out most of its work under

the Corporations Act 2001 (Corporations Act).

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The ASIC Act requires ASIC to:

 maintain, facilitate and improve the performance of the financial system

and entities in it

 promote confident and informed participation by investors and

consumers in the financial system

 administer the law effectively and with minimal procedural

requirements

 enforce and give effect to the law

 receive, process and store, efficiently and quickly, information that is

given to us

 make information about companies and other bodies available to the

public as soon as practicable.

Who ASIC regulates

ASIC regulates Australian companies, financial markets, financial

services organisations and professionals who deal and advise in

investments, superannuation, insurance, deposit taking and credit.

As the consumer credit regulator, ASIC licenses and regulates people

and businesses engaging in consumer credit activities (including banks,

credit unions, finance companies, financial planners ,mortgage and

finance brokers).

It ensures that licensees meet the standards – including their

responsibilities to consumers – that are set out in the National

Consumer Credit Protection Act 2009.

As the markets regulator, ASIC assess how effectively authorised

financial markets are complying with their legal obligations to operate

fair, orderly and transparent markets. ASIC also advise the Minister

about authorising new markets.

On 1 August 2010, ASIC assumed responsibility for the supervision of trading

on Australia’s domestic licensed equity, derivatives and futures markets.

As the financial services regulator, ASIC license and monitor financial

services businesses to ensure that they operate efficiently, honestly and

fairly. These businesses typically deal in superannuation, managed

funds, shares and company securities, derivatives and insurance.

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Which laws do ASIC administer?

ASIC administers the following legislation (or relevant parts of it), as

well as relevant regulations made under it:

 Australian Securities and Investments Commission Act 2001

 Corporations Act 2001

 Business Names Registration Act 2011

 Business Names Registration (Transitional and Consequential

Provisions) Act 2011

 Insurance Contracts Act 1984

 Superannuation (Resolution of Complaints) Act 1993

 Superannuation Industry (Supervision) Act 1993

 Retirement Savings Accounts Act 1997

 Life Insurance Act 1995

 National Consumer Credit Protection Act 2009, and

 Medical Indemnity (Prudential Supervision and Product Standards) Act

2003.

Other regulators also administer some parts of these Acts. For example,

parts of the last four Acts dealing with prudential regulation are

administered by the Australian Prudential Regulation Authority (APRA).

ASIC is responsible for the way in which financial institutions relate

products to consumers. The remaining provisions of these acts are

administered by other regulators within the Australian financial system.

What are regulatory guides (RGs)?

In order to carry out its duty of implementing legislation, ASIC will seek

feedback from stakeholders on matters ASIC is considering, such as

proposed relief or proposed regulatory guidance proceeding the

implementation or updates to the regulatory guides.

Regulatory guides provide guidance to reporting and regulated entities by:

 explaining when and how ASIC will exercise specific powers under

legislation (primarily the Corporations Act)

 explaining how ASIC interprets the law

 describing the principles underlying ASIC’s approach, and/or

 giving practical guidance (e.g. describing the steps of a process such as

applying for a licence or giving practical examples of how regulated

entities may decide to meet their obligations

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The complete list of regulatory guides is available at ASIC’s website

(http://www.asic.gov.au/regulatory-resources/find-a-

document/regulatory-guides/).

The Australian Prudential Regulation Authority (APRA)

The constitution and broad powers of the Australian Prudential

Regulation Authority (APRA) are described in the Australian Prudential

Regulation Authority Act 1998. As a prudential authority, the main focus

of APRA is to oversee the ability of financial institutions to honour their

commitments as and when they fall due.

APRA’s duties often overlap with other regulatory bodies and in

particular ASIC. Both APRA and ASIC assert the close links that exist

between the agencies.

APRA administers the prudential components of the following pieces of legislation:

 Superannuation Industry (Supervision) Act 1993 (the ‘SIS’ Act)

 Retirement Savings Accounts Act 1997

 Life Insurance Act 1995

 Insurance Act 1973.

These acts give APRA responsibility for the prudential regulation of

superannuation funds, banks, credit unions, building societies, friendly

societies and insurance companies. APRA can intervene when it believes

that a financial entity either has, or is likely to become unable to meet

its obligations as and when they fall due. This intervention may even

allow APRA to assume effective control of ‘at risk’ entities.

APRA also takes responsibility for the authorisation of Authorised

Deposit Taking Institutions (ADIs), a list of which is published on the

APRA website. In 2017, responsibility to regulate non-bank lenders has

moved from ASIC over to APRA.

Activity 1 - ASIC

All ASIC regulatory guidance can be accessed, free of charge,

online at www.asic.gov.au. These course materials will

occasionally refer to particular ASIC regulatory guidance.

Identify the key regulatory guides, which would apply to financial

services and the provision of consumer credit advice.

Check the model answers section

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The Reserve Bank of Australia (RBA)

The Reserve Bank of Australia (RBA) is Australia’s central bank and is

responsible for the implementation of monetary policy and the

maintenance of financial stability in the Australian economy.

The major tool of monetary policy is interest rates, which are heavily

influenced by RBA policy. In addition, the RBA provides some banking

and registry functions to various government entities. The RBA is

administered under the Reserve Bank Act 1959.

The Australian Stock Exchange (ASX) and market

supervision

In accordance with the Corporations Act 2001 the Australian Stock

Exchange (ASX) is required to ensure that its markets are fair, orderly

and transparent. As a result, ASX’s overarching supervisory objective is

to meet these statutory obligations and hold three Australian Financial

Services Licences (AFSL) to achieve this – a market operator licence

which is held by ASX entity and two clearing and settlement facility

licences held by Australian Clearing House (ACH) and ASX Settlement

and Transfer Corporation (ASTC) respectively.

ASX customer charter

The Customer Charter does not mean always agree with its customers;

it may adopt different positions when it comes to the best way to secure

the future of Australia’s financial markets. But it is because differences

may arise that need to be engaged more, not less.

Activity 2 – APRA

You can visit the APRA website using the link www.apra.gov.au to

gain an insight into the operations of this regulatory body. You can

also find out information about APRA’s blueprint for supervision

using the following link:

www.apra.gov.au/AboutAPRA/Documents/APRA-Supervision-

Blueprint-FINAL.pdf

What are APRA’s phases for supervision?

Check the model answers section

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The ASX Customer Charter makes the following commitments. That ASX:

 Works with its customers to deliver products and services that meet

their needs and that provide them with choice

 Supports Australia’s aspiration to be globally competitive and become

one of the leading financial centres in the Asia Pacific region

 Makes its products and services available on a non-discriminatory basis

and on reasonable commercial terms

 Manages its businesses and operations on a commercial basis to

benefit its customers and provide appropriate returns to ASX

shareholders

 Recognises its role as a provider of critical financial infrastructure to

the Australian financial markets, and makes the necessary investments

to ensure it can fulfil this role and provide confidence to market

participants, investors and regulators

 Runs its operations in compliance with all legal and regulatory

obligations

 Has conflict handling arrangements in place that provide assurance and

transparency about the way ASX conducts its business.

Australian Transaction Reports and Analysis Centre

(AUSTRAC)

Australia’s anti-money laundering program places obligations on

financial institutions and other financial intermediaries through the

Financial Transaction Reports Act (FTRA) and requires ‘cash dealers’

(financial institutions) to report to the Director of The Australian

Transaction Reports and Analysis Centre (AUSTRAC).

The Act relates mainly to:

 Reporting of cash transactions of A$10,000 or more or the foreign

currency equivalent

 Suspicious transactions

 Identification procedures when opening accounts.

The FTRA requires accounts to be opened in the correct name of the

customer to avoid the risk of accounts being used for tax avoidance or

criminal purposes.

Accounts include cheque accounts, deposit accounts and loans to

customers. Proposed changes to anti money laundering laws may well

see an extension of these requirements to include other products.

Agencies like AUSTRAC play a vital role in following the money trail of

criminals, particularly organised crime syndicates and, more recently,

terrorism funding and related transactions.

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Avoidance of reporting and reporting false or incomplete information

attract penalties for an organisation and its staff as well as persons who

facilitate or assist these activities.

The Office of the Australian Information

Commissioner (OAIC)

The Office of the Australian Information Commissioner (OAIC) has

regulatory functions with matters related to the handling of information.

Specifically the Commissioner administers and enforces the Privacy Act

1988 (Commonwealth) as amended by the Privacy Amendment

(Enhancing Privacy Protection) Act 2012 (Privacy Amendment Act) and

the Privacy Amendment (Notifiable Data Breaches) Act 2017.

This Act contains 13 Australian Privacy Principles (APPs) that set out

how private sector organisations should collect, use, keep, secure and

disclose personal or sensitive information about individuals and the

rights of those individuals to access and correct such information.

This Act affects all individuals who use or can access personal

information in the course of their work.

The OAIC has regulatory functions with matters related to the handling

of information and administers and enforces the Privacy Act.

The principles of the Privacy Act aim to protect personal information by

emphasising the need for confidentiality and ensuring the individual is

given a measure of control over the manner in which personal information

is used and disseminated. You must not disclose any information to any

other third party without the written consent of your customer.

Every person working in the financial services industry must be

concerned with confidentiality.

You will have access to detailed personal information about your

customers. You need to take this responsibility very seriously and be

very clear on whom information can be provided to, and when.

The following principles provide a good guide to ensuring customer

confidentiality:

 Customer information is only to be given to the customer or another

party who has a legal right to access the information.

 Customers must be identified in some way (in accordance with your

organisation’s policies and procedures) before giving out information.

You may only change a customer’s information upon written advice from

the customer or a legitimate legal or administrative person.

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The Foreign Investment Review Board (FIRB)

The FIRB examines proposals by foreign interests seeking to obtain 'an

interest' in Residential, Commercial and Rural real estate.

'An interest' includes buying real estate but can also involve obtaining or

agreeing to enter into a lease, or financing or profit sharing arrangements.

Foreign purchasers intending to acquire real estate in Australia must seek

prior approval from the government through the FIRB unless specifically

exempted by the Foreign Acquisitions and Takeovers Regulations. The

types of properties that may be purchased by foreign investors vary with

some restrictions placed on those that are permissible.

Agriculture

Proposed direct interests in an agribusiness generally require approval

where the value of the investment is more than $57 million, with an

exemption applying to investors from Australia’s trade agreement

partners and a $0 threshold applying to Foreign Government investors.

Proposed investments in agricultural land generally require approval

where the cumulative value of a foreign person’s agricultural land

holdings exceeds $15 million, with exceptions applying to investors from

Australia’s trade agreement partners and a $0 threshold applying to

Foreign Government investors.

Business

Proposals to acquire an interest of 20 per cent or more in any business

valued at over $261million (or the higher threshold of $1,134 million for

agreement country investors from Chile, China, Japan, Korea, Singapore

New Zealand and the United States) require prior approval. All foreign

government investors also require approval to acquire a direct interest in

an Australian entity or an Australian business or to start a new Australian

business, regardless of the value of the investment ($0 threshold).

The Treasurer can prohibit foreign investment proposals found to be

contrary to the national interest, or can impose conditions on an

investment to address national interest concerns.

Commercial real estate

Foreign persons may be required to notify and receive a no objections

notification before acquiring an interest in commercial land in Australia.

Different rules apply depending on whether the land is vacant or not,

whether the proposed acquisition falls into the category of sensitive

commercial land that is not vacant, and the value of the proposed

acquisition.

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Residential Real Estate

The Government’s policy is to channel foreign investment into new

dwellings as this creates additional jobs in the construction industry and

helps support economic growth. It can also increase government revenues,

in the form of stamp duties and other taxes, and from the overall higher

economic growth that flows from the additional investment.

Foreign investment applications are therefore generally considered in light of the

overarching principle that the proposed investment should increase Australia’s

housing stock (be creating at least one new additional dwelling).

The annual vacancy fee is part of the Government’s comprehensive housing

affordability plan and seeks to increase the number of properties available for

Australians to live in. Foreign persons who purchase residential real estate will be

subject to an annual vacancy fee where the property is not residentially occupied

or rented out for more than six months in a year.

It is important that foreign investors understand and comply with

Australia’s foreign investment framework as strict criminal and civil

penalties may apply for breaches of the law, including disposal orders.

Applications to purchase new dwellings are usually approved without

conditions. Applications to purchase vacant land are normally approved

subject to construction being completed within four years (to prevent

land banking). Once new dwellings are built or purchased, they may be

rented out, sold, or retained for the foreign investor’s own use.

Land that has previously had an established dwelling on it would

generally not be treated as vacant land for the purposes of Australia’s

foreign investment framework.

Non-resident foreign persons are generally prohibited from purchasing

established dwellings in Australia. However, reflecting the fact that

foreign persons who are temporary residents need a place to live during

their time in Australia, temporary residents can apply to purchase one

established dwelling to use as a residence while they live in Australia.

The purchase of an established dwelling in these circumstances would

normally be conditional on the foreign person selling the property when

they leave Australia, or cease being a temporary resident and do not

become a permanent resident or an Australian citizen. Temporary

residents cannot acquire established dwellings to rent out or for use as a

holiday home.

Consistent with the aim of increasing the housing stock, foreign persons

(both temporary residents and non-residents) can apply for approval to

purchase an established dwelling for redevelopment (that is demolishing

the dwelling and constructing new residential dwellings in its place).

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These applications are normally approved on the condition that at least

two dwellings are built for the one demolished.

Foreign persons must have received foreign investment approval before

they acquire an interest in residential real estate.

Amendments based on the Budget 2017 changes

The Australian Government, via the 2017-18 Budget, announced several

changes regarding the foreign investment framework.

 A 50 per cent cap on the total amount of dwellings a developer can sell

to foreign persons under a New Dwelling Exemption Certificate

 Annual vacancy Charge. A levied charge on foreign owners of

residential property where the property is not occupied or genuinely

available on the rental market for at least six months per year.

 Application fees for foreign purchases of residential properties valued at

less than $10 million will increase by 10 per cent

Australia's Foreign Investment Policy (1 July 2017)

The foreign investment review framework includes the Foreign

Acquisitions and Takeovers Act 1975 (Act) and the Foreign Acquisitions

and Takeovers Fees Impositions Act 2015 (Fees Imposition Act) and

their associated regulations.

The Government has introduced a range of amendments that will reduce

the requirement for investors to seek multiple approvals for similar low

risk transactions, amend the commercial fee framework to improve

transparency and consistency, and improve the treatment of low risk

commercial transactions to enable the system to operate more

efficiently and reduce regulatory burden.

Key changes include:

 Streamlining and simplifying the commercial fee framework

 Introducing a new business exemption certificate:

 Introducing two new Residential Exemption Certificates:

 Amending the treatment of residential land used for commercial

purposes:

 Narrow the scope of the ‘low threshold’ non-vacant commercial land

definition:

 Other minor amendments including Solar and wind farms.

Additional information, in greater detail than above, can be located

under ‘Policy Documents’ on the FIRB website at www.firb.gov.au

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24 © AAMC Training Group Learning guide V3.2

The Australian Human Rights Commission (AHRC)

Formerly the Human Rights and Equal Opportunity Commission, the

Australian Human Rights Commission (AHRC) was established in 1986

by an act of the federal Parliament. The AHRC is an independent

statutory organisation and reports to the federal Parliament through the

Attorney-General.

The AHRC has statutory responsibilities under the following federal laws:

 Age Discrimination Act 2004

 Disability Discrimination Act 1992

 Australian Human Rights Commission Act 1986

 Sex Discrimination Act 1984

 Racial Discrimination Act 1975

Australian Competition and Consumer Commission

(ACCC)

The ACCC is an independent Commonwealth statutory authority whose role

is to administer and enforce the Competition and Consumer Act 2010 along

with a range of additional legislation, promoting competition, fair trading and

regulating national infrastructure for the benefit of all Australians.

Role of the ACCC

Competitive markets increase the prosperity and welfare of Australian

consumers. The ACCC's role is to protect, strengthen and supplement the way

competition works in Australian markets and industries to improve the

efficiency of the economy and to increase the welfare of Australians.

This means the ACCC will take action where this improves consumer

welfare, protects competition or stops conduct that is anti-competitive

or harmful to consumers, and promotes the proper functioning of

Australian markets.

Our priorities are reflected in four key goals:

1. Maintain and promote competition and remedy market failure

2. Protect the interests and safety of consumers and support fair

trading in markets

3. Promote the economically efficient operation of, use of and

investment in monopoly infrastructure

4. Increase our engagement with the broad range of groups affected by

what we do.

ACCC initiatives also include promoting consumer education in regional

and rural areas and with indigenous communities.

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Learning Guide V3.2 © AAMC Training Group 25

The role complements that of state and territory consumer affairs

agencies who administer mirror consumer protection legislation in their

jurisdictions, and the policy work of The Treasury’s Competition and

Consumer Policy Division.

Financial services professionals

In addition to banks and non-bank financial institutions, there are a range of

professionals who play a significant role in the Australian financial system.

Some of these professionals specialise in providing advisory services to retail

clients, such as stockbrokers, and other financial advisers who work in

financial planning, insurance, wealth management and private banking whilst

other professionals, such as actuaries focus on servicing the needs of

institutional clients. Credit providers and finance brokers are also part of the

finance professional industry.

Industry associations

Most industries in Australia are represented by industry related

associations. Typically not-for-profit organisations, industry associations

provide members with a range of services and support.

Industry associations may:

 give you information about your industry (i.e. how changes to

legislation will affect your business)

 provide you with useful resources (i.e. information and programs to

help you meet industry standards)

 run training and education programs

 organise seminars

 facilitate networking events

 manage mentoring programs

 connect you with other businesses in your industry

 arrange public relations or advertising activities to promote your

industry

 organise advertising campaigns to educate or persuade the public about

issues relevant to your industry

 lobby on behalf of your industry to influence government policy.

These associations offer some information and services for free, but, in

most cases, you need to become a member and pay a fee to access

their full range of information, resources and services.

In many industries, becoming a member of the peak body can give your

business credibility as your membership proves to customers that you

have met strict criteria and have certain qualifications and experience.

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Some common industry associations for finance broking are as follows:

 Mortgage Finance Association of Australia (MFAA) – www.mfaa.com.au

 Finance Brokers Association of Australia (FBAA) – www.fbaa.com.au

 Commercial Finance Brokers Association of Australia (CAFBA) –

www.cafba.com.au

These associations are described in further detail, including their code of

conduct, in further sections of the learner guide.

Some industry associations for other finance professionals include:

 Financial Planners Association (FPA)

 Institute of Public Accountants (IPA)

 Certified Public Accountants (CPA)

 Association of Financial Advisers (AFA)

There are many more that have not been mentioned above as the list

would be too exhaustive. The ones selected above are ones you may

more commonly come across in the finance broking industry.

Finance Brokers

Historically, finance brokers were labelled into three distinct categories and

thus the term, ‘’Mortgage Broker’’ may be used as a term to differentiate

between what a mortgage and finance broker offer in terms of lending

support to their clients.

 Mortgage Brokers – commonly provide support to clients for residential

property and personal debt refinancing/consolidation

 Equipment and Asset Finance Brokers – more commonly provide

support to business or self-employed clients with asset and equipment

finance requirements. They may also offer personal finance on items

such as motor vehicles.

 Commercial Finance Brokers – commonly assist with predominantly

business lending and commercial property finance.

However, mortgage and finance brokers may also choose to offer lending

and lease support in one or several particular areas or demographic. This is

to ensure that they are meeting all their clients financing requirements.

Having a diversified offering is a key focus for many brokers and

aggregators with industry training and support becoming more readily

available. Especially, for mortgage brokers where traditionally they could

not achieve lender accreditations from commercial lenders, who instead

offered an internal specialist referral mechanism for commercial and

equipment finance requirements.

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Aggregators

Aggregators act as an intermediary between lenders and Finance

Brokers. Many brokers join an aggregator to access their wide panel of

available lenders, take advantage of sophisticated business resources

and marketing power. Aggregators often provide a range of other

services to brokers such as branding, software and technology, training,

compliance and risk management, marketing and lead generation,

general business support and back office administration. Their software

and technology systems provide the capability to complete loan

comparisons, loan lodgement, CRM management and marketing

capability. They may act as the licensee of an Australian Securities

Investments Commission (ASIC) approved Australian Credit Licence

Holder (ACL) and provide the opportunity for a the broker to join as an

Authorised Credit Representative (ACR) of their licence. However, some

brokers holding their own licence and operate via an aggregator due to

reduced ability to obtain a direct accreditation with many lenders and

the advantages as mentioned above.

Whether the individual is joining as part of the aggregator licence as an

ACR or as an individual licence holder (ACL), the aggregator will

complete in-depth interview and analysis of the individual. As the

licensee the aggregator is responsible for ensuring the individual has

adequate systems, resources and training to act compliantly and

professionally as part of their group. Whilst the aggregator has more

direct responsibility for those operating under their own licence, there

are almost equal responsibilities for ACL’s who are accessing services via

their business platform. The aggregator will perform regular audits to

ensure the individuals are adhering to their compliance standards.

Aggregators generally charge a fee for their services which is paid at the

settlement of each loan settled by the broker. These fees may be a

percentage of the commissions received by the lenders or capped

monthly/annual fee or a combination of both. The type of service,

support and business model they offer will vary and associated costs

commensurate to the level of support the individual desires. There are

many aggregators in the Australian market offering varied business

models and services. The common options for aggregation are briefly

detailed below:

 Own Branding - joining directly as an individual member and operating

under your own brand as a small business owner

 Franchise Model - allows the broker, as a small business owner, to use

the licensor's brand and method of doing business to distribute

products or services.

 Aggregator Branding (non-franchise) – allows the broker to use the

licensor’s brand and method of doing business.

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There is also the option to join an established broker business as an

employee or contractor under any of the above models.

Sub-Aggregation

Whilst there are several options of direct membership of an aggregator,

there are also many options to join a sub-aggregator. Sub–aggregators

are members of a head aggregator either as an ACR or ACL. They are

often referred to as being smaller or more boutique, offering new to

industry brokers additional services such as; mentoring and one to one

business support.

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Example Flowchart 1: Franchise Broking Model

New Enquiry

Student holds FNS40815 Certificate IV in Finance and Mortgage Broking or FNS50315 Diploma of Finance and Mortgage Broking

Management

NO YES

Complete Qualification Franchise BDM will meet with candidate and complete their own due diligence, including potential

interview and review of business plan

Candidate will need to provide details of business entity they wish to operate under

Company Sole Trader

Franchise company provides relevant forms, Franchise Agreement and Disclosure document

Franchise company provides relevant forms, Franchise Agreement and Disclosure document

Candidate signs to confirm receipt of Disclosure Document. Must then wait 14 days before signing Franchise Agreement

After 14 days have elapsed, candidate executes Franchise Agreement and other documents and returns them along

with supporting documents including police and credit check

Candidate finalises PI Insurance and joins industry body (either MFAA or FBAA) and AFCA

If new to the industry, candidate needs to engage a Mentor*

Candidate is registered as a Credit Representative by ASIC under the Franchise’s Credit Licensee

Candidate completes Lender Accreditation Forms

Franchise company processes completed Accreditation Forms

*Some franchise companies may have special conditions for

new to industry

* Please note this is an example only and there may be a different process for each franchise model

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30 © AAMC Training Group Learning guide V3.2

* Please note this is an example only and there may be a different process for each franchise model

Example Flowchart 2: Own/Aggregator Brand Model

Enquiry

Student holds FNS40815 Certificate IV in Finance and Mortgage Broking

BDM to request company details Complete Qualification

NO YES

BDM to request company details

Relevant Credit Representative Forms

& Agreement

Admin to Prepare

Agreements

Relevant Credit Representative Form & Agreement

Broker to sign Agreements, supporting documentation & forms

Documents Check

Does the Broker have AFCA Membership? Complete AFCA Membership

YES

Does the Broker have PI Insurance? Arrange with relevant provider

YES

Does the Broker have Association Membership? MFAA, FBAA and/or CAFBA and complete relevant training

Does the Broker have a police check & Veda file? Broker to acquire a police check

and Veda file.

YES

Broker to provide an up to date resume

YES

Has the broker got Finance/Banking Experience? NO Is the Broker a Mentee?

YES

Broker to provide a Mentor Letter

Broker to sign Lender Accreditation Forms.

Complete Broker Accreditation Form

Admin to Process Lender Accreditations

NO

NO

NO

NO

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Financial planners

Financial planning is a holistic process whereby a client’s total position,

both financial and non-financial, is examined and a set of actions or

plans is put in place which, once implemented, will assist in meeting the

client’s ultimate goals and objectives.

Based on this definition, financial planners provide a wide range of

services including preparing comprehensive financial plans which

evaluate a client’s total situation, or alternatively focus on a specific

concern, such as managing a client’s investments and retirement

planning. Financial planning covers areas such as:

 Risk management and insurance planning – managing cash flow risks

through sound risk management and insurance techniques

 Investment and planning issues – planning, creating and managing

capital accumulation to generate future capital and cash flows for

reinvestment and spending

 Retirement planning – planning to ensure financial independence at

retirement

 Tax planning – planning for the reduction of tax liabilities and the

freeing up of cash flows for other purposes

 Estate planning - planning for the creation, accumulation, conservation

and distribution of assets

 Cash flow and liability management– maintaining and enhancing

personal cash flows through debt and lifestyle management.

Dealer groups

A dealer group is defined as: “the distribution arm typically of funds

management groups or banking institutions, designed to offer investors

financial planning services. Dealer groups often employ large numbers of

financial planners, offering them training, licensing and support services.

They also often provide financial planners with lists of recommended

investment products from which to service their clients”.

Not unlike aggregators, dealer groups may be the licensee of an

Australian Financial Services Licence (AFSL) and authorise independent

Financial Advisers, known as Authorised Credit Representatives (ACR’s),

under their licence. This allows those advisers authority to offer clients

advice on a range of products, as authorised under that licence.

Stockbrokers

Stockbrokers act as agents for investors in the buying and selling of

stock market securities. Stockbrokers are the only entities permitted to

operate in stock exchange markets and are authorised to access the

trading and settlement systems of a stock exchange.

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Accountants

Accountants provide taxation services and advice to clients. All

accountants who wish to provide financial product advice are required to

either hold an Australian Financial Services License (AFSL) or become a

representative of a licensee. There are however, certain concessions

which are in force for accountants who are registered tax agents. As part

of the Future of Financial Advice (FOFA) reforms Accountants offering

limited advice in Self-Managed Superannuation (SMSF), where they are

assisting a client to acquire or depose of an interest in an SMSF, must

either hold an ASFL Licence or be a representative of a licensee.

Actuaries

Actuaries are financial services professionals who specialise in numerical

analysis and design for insurance products, though some may diversify

into other areas such as securitisation. Although they are not usually

associated with the provision of investment advice, they may be licensed

to do so.

Solicitors

Solicitors have always been exposed to the financial service industry but

predominantly in the areas of mortgage lending and real estate. Whilst

solicitors may be allowed to provide investment advice, which is merely

incidental to their profession, they are required to be licensed or

authorised if they give financial product advice. Solicitors are commonly

used in the financial services industry for conveyancing and legal advice.

Real estate agents

Real Estate Agents act as the conduit between the buyer and seller of

real property.

The role of an estate agent is to:

 act on behalf of owners and landlords to arrange the sale or lease of

property including houses, buildings, factories, shops, farms, land and

businesses

 act on behalf of buyers when engaged as a buyers agent or advocate to

negotiate the purchase of property

 provide market appraisals of properties and businesses for clients

 negotiate the sale or lease of properties and businesses

 collect rents and manage rental properties.

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Buyers agents

A buyer’s agent specialises in scoping out and evaluating properties on

behalf of their client, a buyer (i.e. a purchaser).

Why do people use buyer’s agents?

 Industry knowledge and sometimes access to properties that may not

be advertised

 Time saving - having a professional do the groundwork on their behalf

(potentially saving on a lot of open homes and lost weekends

searching)

 Investment knowledge of potential capital growth and rental yields

 Expert negotiating and bidding skills.

Difference between a buyer’s agent and a real estate agent

In a nutshell, the difference between a buyer’s agent and a real estate

agent is their client. A real estate agent’s client is the seller (or vendor)

of the property, whereas the client of the buyer’s agent is, as the name

suggests, the buyer (or purchaser). The real estate agent is paid by the

seller/vendor to market and sell the property. The buyer’s agent is paid

by the buyer to find a property (or undertake a range of services

associated with that). They also have different standards of education

and must be licenced from the Office of Fair Trading of the state or

territory in which they work.

Other brokers

There are a range of brokers who are specialists and may be licensed

only in their own area of expertise. They include insurance brokers,

investment brokers and superannuation consultants.

Other industry groups and organisations

Within the finance broking industry there are ‘representative groups’

such as:

IFBF

The Independent Finance Brokers Forum (IFBF) is a not for profit

organisation, run by volunteers for the betterment of the industry as a

whole. Monthly meetings, held on the last Friday of the month between

February and October and recognised by both of our industry

associations for the awarding of CPD, focus on three main points;

education, compliance and diversification.

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AELA

Australian Equipment Lessors Association (AELA) is the ‘peak

professional body’ of the lease and equipment finance industry, with its

mission being to represent and serve the interests of the equipment

finance industry. The Association provides technical and legal

information services to members, liaison and ‘lobby’ functions in respect

of governmental/regulatory dealings, and it facilitates various education

programs for members and their employees.

ABA

With the active participation of 24 member banks in Australia, the

Australian Banking Association (ABA) provides analysis, advice and

advocacy for the banking industry and contributes to the development of

public policy on banking and other financial services.

The ABA works with government, regulators and other stakeholders to

improve public awareness and understanding of the industry’s

contribution to the economy and to ensure Australia’s banking

customers continue to benefit from a stable, competitive and accessible

banking industry.

The professional collections industry

Debt collection is a legitimate and necessary business activity where

creditors and collectors are able to take reasonable steps to secure

payment from consumers who are legally bound to pay or to repay money

they owe. It is important that any organisation involved in recovering debt

is aware of their legal obligations. The law requires debtors and third

parties to be treated fairly, respectfully and with courtesy.

The debt collection industry is vital to the effective and efficient

operation of the Australian economy. Not only does it employ thousands

of Australians, but it also allows businesses to better manage cash flow.

It provides an efficient way of collecting debts that may otherwise result

in increased prices for goods and services.

Mercantile agents

Mercantile agents or debt collectors are business which specialise in the

recovery of overdue debts by acting as agent for the original creditor,

collecting the debt on their behalf (contingent debts).

Mercantile agents but use knowledge and skill to lawfully obtain

payment on the client’s behalf.

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Debt buyers

Debt buyers are companies which purchase delinquent debts from a

creditor for a fraction of the face value of the debt. The debt buyers can

then collect the debts, utilise the services of a collection agency, repackage

and resell portions of the purchased portfolio or any combination of these

options.

Most of the major banks and finance companies in Australia sell delinquent

consumer debt, as do the major telecommunications and utility companies.

The ACCC recognises the responsibilities of original creditors in addition

to third party collectors to enhance debt collection practices. However, it

is the ACCC’s view that original creditors cannot not wash their hands of

the responsibilities of debts once they have been sold.

The role of the Reserve Bank of Australia (RBA) in

Australia’s economy

The RBA operates a substantial banking business and provides a range

of financial services, including Australia’s monetary policy. It is the main

tool for controlling growth as it affects the flow of money through the

economy.

The RBA prefers that the economy does not grow too quickly. Historically,

growth that is too fast has actually destabilised economies, by introducing

inflationary pressures that quickly reduce the level of real wealth in the

economy. Loans increase the speed with which money is being used. More

loans make for a faster flow of money through the economy.

Interest rates are the price of borrowed money. The theory of demand

and supply dictates that higher rates will reduce demand for borrowings.

In practice, this is what occurs. By manipulating the cash rate, the RBA

is able to influence most interest rates in the economy, and thereby

influences the demand for borrowing. If the RBA increases interest

rates, then demand for loans will fall. If the RBA reduces interest rates,

then demand for loans will increase.

In implementing their monetary policy, the RBA take care not to raise

interest rates too sharply. Doing so would slow the flow of money

through the economy, which might reduce the level of economic growth,

causing reduced profits and increased unemployment. As can be

imagined, the RBA has to walk quite a delicate line in its manipulation of

interest rates. If rates are too low, inflation can rise; if rates are too

high, then the economy can slow.

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Prevailing interest rates

Prevailing interest rates tend to dominate most of the types of

borrowing made by investors. A prevailing interest rate is one that

borrowers and lenders have no choice other than to accept. An example,

is the home lending market in Australia. Because there are a relatively

large number of home loan lenders, borrowers in this market have a

reasonable range of choice between lenders. As a result, lenders who

are offering higher interest rates than their competitors will find that

they cannot attract significant business. They therefore have to set their

interest rates at a level similar to their competitors. This effectively puts

a ceiling on the interest rates they offer.

While there will often be some small discrepancy in the published

interest rates of various lenders, this discrepancy is often offset by fees

charged by the lenders, or services they offer. Lower rate lenders tend

to offer fewer services and will often charge higher fees. The effect of

this is that the effective cost of borrowing for a borrower does not vary

much between the various lenders.

Most lenders are also borrowers. They tend to borrow money in one

market for lending, at an increased rate in another. For example, a

lender may issue a bank bond at an interest rate of 3 per cent, and then

lend the money raised at an interest rate of 5 per cent. The 2 per cent

differential is used to pay for other costs (staff, admin, marketing etc.)

and provide a profit margin to the lender.

As well as the upper limit for lending rates imposed by ‘the market,’ there

is also a minimum rate which the lender cannot afford to go below. This

minimum rate will be the lender’s own cost of borrowing (including all

business costs), plus their required profit margin. In the home loan market,

most lenders source their funds from similar places, meaning that they are

paying similar interest rates to each other. Profit margins are also quite

similar, as the lenders often use similar processes. Thus, the lenders have

similar minimum interest rates which they will charge to borrowers.

The effect of these limits on the minimum and maximum price is that

the interest rate offered by all the lenders is similar. Thus, borrowers

have no choice but to access borrowings at this rate – there is not really

a cheaper option to be had. Borrowers cannot influence the rate and

neither really can lenders. This rate is then said to be the prevailing one.

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The RBA and the prevailing interest rate

In Australia, the most significant individual participant in loan markets is

the Australian Government. The Reserve Bank of Australia acts as the

agent for the Government in these loan markets.

The Government borrows via one of two means: treasury notes, which

are repaid within a year, and treasury bonds, which are repaid over

periods of up to ten years. The Government identifies lenders by putting

its treasury notes and bonds out to tender. Given who it is, the

Government probably represents the safest loan a lender can make.

Therefore, the rate at which lenders make loans to the Government –

which is set by the price which they pay for the treasury notes and

bonds – is taken as a basis for most lending in the country. This is

particularly the case for treasury notes.

The target cash rate

As the Government’s agent, the RBA uses its issue of treasury notes to

achieve what it calls its target cash rate. Due to its size, the RBA can

almost always achieve this rate.

The Australian Federal Government is probably the most secure

borrower in the country. Therefore, the rate of interest it pays on its

treasury notes represents the lowest risk rate of return that a lender can

achieve on their money. Lenders use this rate of return as the basis on

which they charge interest on their other loans.

All non-Government loans are more risky than those to the Government,

so lenders will typically charge rates higher than the target cash rate on

all non-Government loans. If they weren’t able to charge a higher price,

there would be no point in making the riskier loan.

For example, suppose a lender has $100,000 available to lend. They are

looking for the maximum return on this amount. Say the target rate set

by the Government is 5 per cent. Therefore, the lender could earn a 5

per cent return on their investment with very little risk, by buying a

treasury note from the Government. If another borrower, for example

an individual investor looking to purchase a property, wants to borrow

the $100,000, they also offer the lender 5 per cent interest. The lender

has two choices, both of which pay 5 per cent; the low risk Government,

or the higher risk individual.

The lender will choose the lower risk option every time. The only way

that the individual can attract the $100,000 is to offer an increased

interest rate. Say the individual is prepared to pay 7 per cent. The

lender now has two choices: the Government at 5 per cent, or the

individual at 7 per cent. Because of the potential for higher return, the

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38 © AAMC Training Group Learning guide V3.2

lender might choose the individual borrower, even though the individual

loan has greater risk.

Loans, for which the risk is considerably greater, such as unsecured

loans and credit card debt, attract relatively high rates of interest.

Loans, for which the risk is not substantial, such as home loans secured

against property, attract relatively low rates. But loans to individuals will

always be at rates higher than loans to Government.

In this way, the target rate set by the RBA has a flow on effect on the

prevailing interest rates in the retail borrowing markets available in Australia.

The rate paid by the Government represents the low risk return available to

lenders. All higher risk loans will require a higher rate of interest.

Investors and interest rates

It is common for investors to also have debt, which may or may not be

directly linked to the specific investment. The financial position of all

borrowers is affected by changes in interest rates. Investors are no different.

The effect of interest rates varies from investor to investor. Broadly, the

effect will depend on whether the investor is a net borrower or a lender.

Investors are borrowers if the funds they use to invest are financed by

borrowing. For example, an investor who borrows to buy a property is a

net borrower (presuming they have no other investments).

Investors are lenders if the money they invest is used by someone else

to make further investment. For example, an investor who owns a fixed

rate investment in a cash management fund has in effect lent their

money to the operator of the fund. The operator then uses the monies it

receives from investors to make its own investments.

In addition, the specific effect of interest rates on an investor’s situation

is affected by a number of variables, including their tax position,

whether the debt is used to purchase enduring assets or consumables,

whether enduring assets are for personal or investment use and the size

of their debt relative to their portfolio.