Regulation of Finance Brokers

Consumers’ Federation of Australia

submission to

National Finance Broking Regulation

Regulatory Impact Statement

Discussion Paper

February 2005

Table of Contents

PART 1. INTRODUCTION 4

1.1. ABOUT CFA 41.2. ABOUT THIS SUBMISSION 4

PART 2. EXECUTIVE SUMMARY 4

PART 3. PRELIMINARY OBSERVATIONS 5

3.1. SIMPLER SOLUTIONS 53.2. RELATIONSHIP WITH THE UCCC 63.3. PERPETUATING OR CREATING LOOPHOLES 7

PART 4. PROPOSALS SUPPORTED BY CFA 7

4.1. NATIONAL UNIFORM LEGISLATION 74.2. BROAD SCOPE 84.3. LICENSING 84.4. COMPETENCY STANDARDS AND PROBITY CHECKS 94.5. WRITTEN BROKER AGREEMENT AND APPROPRIATE DISCLOSURE 94.6. OBLIGATION TO MAKE REASONABLE RECOMMENDATIONS 104.7. OBLIGATION TO ASSESS CAPACITY TO PAY 104.8. STATEMENT OF REASONS 114.9. COMPENSATION FOR CONSUMERS 124.10. PENALTIES FOR BREACHES 124.11. ALTERNATIVE DISPUTE RESOLUTION 12

PART 5. ADDITIONAL COMMENTS 13

5.1. WHO SHOULD HOLD A LICENSE? 135.2. OTHER ISSUES REGARDING THE BROKER AGREEMENT AND APPROPRIATE DISCLOSURE 145.3. DISCLOSURE 155.4. STAY OF PROCEEDINGS 165.5. COMPENSATION 175.6. ALTERNATIVE DISPUTE RESOLUTION – DISPUTES ACROSS MORE THAN ONE SCHEME 17

2

PART 6. PROPOSALS OPPOSED BY CFA 18

6.1. NON-UNIFORM OBLIGATIONS – PARTICULARLY LICENSING AND ACCESS TO ALTERNATIVE DISPUTE RESOLUTION 186.2. DEFINITION OF BROKER 186.3. EXEMPTION OF SECOND-TIER INTERMEDIARIES, DOCUMENT HANDLERS OR COMMERCIAL LEASES. 196.4. RELIANCE ON PROFESSIONAL INDEMNITY INSURANCE 20

PART 7. ADDITIONAL MATTERS 20

7.1. UNLICENSED BROKERS AND SINGLE CREDIT PROVIDER INTERMEDIARIES SHOULD BE AGENTS 207.2. COST OF SERVICES 217.3. URGENT REFORM OF UCCC REQUIRED IN RELATION TO BUSINESS PURPOSES DECLARATIONS. 217.4. SPECIFIC OFFENCES AND REMEDIES FOR AVOIDANCE OF THE UCCC 22

3

Part 1. Introduction

1.1. About CFA

Consumers’ Federation of Australia (CFA) is the national peak body for consumer groups in Australia. CFA’s 95 members include legal centres, health rights groups, local consumer organisations and public interest bodies. CFA’s role is to put the view of its member organisations to government and industry and advocate on behalf of consumers. Established in 1974, our focus is primarily on advancing the interests of disadvantaged or vulnerable consumers.

1.2. About this submission

The CFA welcomes this opportunity to comment on the Discussion Paper in relation to this important issue and asks to remain involved as the proposals in Discussion Paper are further developed. In particular our casework agency members would appreciate the opportunity to test any proposed Bill against the experience of their clients and current industry practice.

Part 2. Executive Summary

Subject to some preliminary comments about the complexity of the regime proposed compared to other possible solutions, the CFA broadly supports the regulatory scheme proposed in the Discussion Paper.

In particular the CFA supports:

National Uniform Legislation

Broad scope

Licensing

Competency standards and probity checks

Requirement for a written broker agreement and reasonable disclosure

4

Obligation to make reasonable recommendations

Obligation to assess capacity to pay

Statement of reasons

Compensation for consumers

Penalties for breaches

Alternative Dispute Resolution

Stay of Proceedings

The CFA opposes:

Non-uniformity in relation to licensing and ADR

The definition of broker/intermediary proposed

The exemption of either second tier intermediaries or commercial leases

The reliance on PII alone to meet consumer claims

The CFA further submits that:

Unlicensed brokers and single credit provider intermediaries should be agents of the credit provider

The cost of services must be robustly controlled to avoid exploitation of vulnerable consumers

Urgent reform of the Uniform Consumer Credit Code (UCCC) is required to address the misuse of business purposes declarations

Specific offences and remedies related to avoiding the UCCC need to be included in the broker legislation.

Finally, the CFA believes it is essential that any proposed legislation be tested against common broker scenarios to ensure it is actually effective.

5

Part 3. Preliminary Observations

3.1. Simpler solutions

Many member organisations assist clients affected by the problems outlined in the Discussion Paper and have intimate knowledge of the complexity of these issues and the damage that can result. CFA therefore broadly supports the changes suggested in the Discussion Paper. However, we submit that there may be some less complex solutions that could be explored.

Many of the issues that continue to surround finance broking could be ameliorated if there was an expansion of the definition of “financial product” in the Financial Services Reform Act regime to include credit. This would have a follow-on effect on the definitions of “financial services” and “financial advice”, and would mean that brokers would have to comply with the various FSRA requirements in relation to licensing, disclosure, membership of an EDR scheme, and training. Another effect of such a change would be that the credit provider would be responsible for any negligence or misconduct on the part of the broker who arranged the credit provided to the consumer.

As has been noted elsewhere, “the line between broking and advice and planning is very hazy”. In addition, for many consumers, a home loan will be their biggest investment. Apart from historical reasons, it is not obvious why there should be separate regulatory regimes for advice about credit and advice about other financial services. Introducing credit into the existing FSRA regime also has considerable administrative and practical advantages, in that there would be no need to establish a separate infrastructure and administering agency.

We acknowledge that, to date, the Commonwealth government has not indicated an interest in taking responsibility for broker regulation, however, we believe that it is important to acknowledge that Commonwealth involvement may be the most effective and cheapest solution.

6

Another simple solution, requiring minimal regulatory reform, might be to introduce legislation that deems a broker the agent of the credit provider from whom credit is obtained and permits the legal consequences of this deemed relationship to take its course. As well as maintaining rights consumers have under current legislation, we believe that this would force credit providers to only deal through reputable brokers, and that brokers would upgrade their practices and procedures to meet lender-imposed operational benchmarks. All of this would have the benefit of exposing consumers to a broking industry which has more consistent and higher standards of conduct. Again, we realise that such an approach might have broader implications, and that there would also need to be additional requirements imposed on brokers in relation to disclosure and other matters.

3.2. Relationship with the UCCC

In the absence of such straightforward regulation, consumer protection can only be achieved through legislative regulation of the finance broking industry. This, unfortunately will require the implementation of a somewhat complex legislative scheme due to the number of parties involved in the consumer obtaining credit, the nature of the relationships between those parties and the preexisting legislation that governs some of those parties.

Such a legislative scheme will also need to consider the current status and application of the UCCC to ensure that consumer protection is achieved.

We do not suggest that the introduction of regulation of finance brokers is delayed by such analysis but that the UCCC is reviewed and considered as part of the overall move to ensure consumer protection in the provision of credit.

3.3. Perpetuating or creating loopholes

Considerable resources have been invested in this reform process to date by all stakeholders and further commitment will be required to

7

see these proposals through to completion. The CFA submits that great care should be taken to ensure that such energy is not wasted by the creation or perpetuation of loopholes that will be exploited by the less scrupulous members of the industry, seriously undermining the effectiveness of the scheme, mocking the commitment of those industry players who have expended resources on the process, and failing those consumers most in need of protection. For this reason the CFA is opposed to any exemption or exception. If the weight of evidence suggests that some exemptions can be justified, the CFA submits that such exemptions should be as limited as possible in scope and that the onus should be on the broker to establish that the relevant exemption applies in any particular case.

Part 4. Proposals Supported by CFA

CFA expresses strong support for the following proposals put forward in the Discussion Paper:

4.1. National Uniform Legislation

CFA strongly supports a uniform legislative regime. Generally, self-regulation is inappropriate in industries with high levels of dysfunction and in which rogue operators and practices are fairly common. Whilst consumer education is an important adjunct for assisting the community in its better use of finance broking products it is completely inadequate to address the persistent market failure as evidenced by the issues covered in the 2003 CCLC Report to ASIC in relation to the mortgage/finance broking industry and the Discussion Paper. Similarly, a mandatory code of conduct would be an inadequate way to deal with the existing problems due to limitations in relation to enforcement. Considerable efforts have been made since 2003 by the appropriate industry bodies, but these are destined to be ineffective unless uncooperative players can be effectively excluded from the market. In the absence of federal government legislation the best alternative for achieving this would seem to be the template model as described at page 59 of the Discussion Paper and as exemplified in the UCCC.

8

4.2. Broad scope

The regulation of brokers should apply to all individual consumers and small businesses, as small businesses are equally vulnerable to unscrupulous practices of brokers. The scope should not be determined with reference to the amount of the credit sought, other than in extreme situations, as this is not a true indicator of a consumer’s vulnerability.

The vulnerability of many small businesses has been recognized in other consumer protection statutes, namely s51AC of the Trade Practices Act 1974 (“the TPA”) and the newly enacted Financial Services Reform Act 2001 which extends consumer protection to all “retail consumers” of financial services. Indeed it seems it is only the area of consumer credit that is anomalous in this respect.

CFA submits that regulatory provisions concerning disclosure, licensing and training and fidelity fund contributions (or insurance requirements) (amongst others) are fundamental in their necessity regardless of the character of the proposed credit transactions to which the broking activity relates. Further, the current distinction between consumer and business/investment transactions has lead to thriving avoidance activity in relation to the UCCC, particularly in transactions facilitated by intermediaries. Opportunities and incentive for such avoidance must be minimised.

4.3. Licensing

We strongly support a positive licensing system for brokers, including all of the requirements identified in the Discussion Paper. Given the nature of the finance brokering industry, licensing is essential to ensure the effectiveness of the proposed regulatory system. We are firmly of the view that positive licensing is essential for consumer protection and that it cannot be diluted in any manner without seriously jeopardising consumer safety. We note again that home finance is likely to be many consumer’s greatest investment. It is somewhat incongruous that, under current requirements, a provider must be licensed to provide advice about a transaction account, but does not require a license to provide advice about a home mortgage. From a consumer protection perspective, positive licensing is not negotiable and must be included in any regulation of the finance broker industry (see below for additional comments regarding licensing).

9

4.4. Competency standards and probity checks

There are currently few barriers to entry for brokers, and there are none at all in some states of Australia, where anyone can become a broker, regardless of their knowledge or understanding of the finance sector, regulatory requirements, or business experience.

In order to bring about a change to a professional and responsible finance brokerage industry it is essential that barriers to entry are created and that those in the industry are appropriately trained to discharge the obligations of their role effectively. Training is also required to ensure that the obligations imposed by the regulatory regime are adhered to.

We support the proposed option contained in the Discussion Paper. We also support flexible arrangements with respect to the transition from an unregulated to a regulated market. Any such transitional arrangements should be for a fixed period of time and should only apply to those brokers that have been in the industry for a certain period of time and who can demonstrate competency in the provision of credit advice. This is to ensure that those brokers who currently do not provide credit advice and would be licensed to provide such advice under the new regime are identified and are required to undertake the necessary training.

4.5. Written Broker Agreement and appropriate disclosure

CFA supports the requirement for a written broker agreement covering the issues outlined in the Discussion Paper and based loosely on the recently introduced model in NSW. CFA emphasises the need to balance comprehensive and meaningful disclosure, with recognition of the limitations of disclosure as a consumer protection mechanism. Many clients will not be assisted by disclosure and will be entirely reliant on the other mechanisms outlined in the Discussion Paper and below. Some additional comments in relation to disclosure are found below at Part 4.8.

10

4.6. Obligation to make reasonable recommendations

CFA supports the proposal that there should be a legislative obligation on brokers to make recommendations that are reasonable in the circumstances. Whether a particular recommendation is “reasonable” is an objective assessment of subjective factors and should include reference to such matters as:

The borrower’s financial position and capacity to pay (both interest and principle)

The borrower’s stated goals (for the finance) – not an extension of the business purposes declaration but a more personal detailed account such as to buy a car and build extensions, take advantage of an offset account to set small business turnover against home loan interest, consolidate debts

The nature of the finance (personal, investment or business purposes)

The loan features preferred by the borrower

The borrower’s credit-worthiness

The price of the product compared to other comparable products on the market

In the case of a refinance – whether the borrower experienced a net gain sufficient to justify the transaction (including as part of “debt reduction” plans).

Further, CFA submits that while requiring the broker to procure or recommend the “best loan” may be setting the benchmark too high, the starting point for considering the reasonableness of any recommendation must be the cheapest loans meeting the consumer’s needs and profile at the relevant time.

4.7. Obligation to assess capacity to pay

As outlined in the Discussion Paper a recommendation is inherently unreasonable if the potential borrower has no capacity to meet their contractual commitments. CFA supports the introduction of a requirement on brokers to provide a statement of reasons for recommending particular credit products. This statement of reasons should be required to include a full and accurate assessment of the

11

consumer’s capacity to repay the loan. There should be a requirement that the broker is obliged to sight all documentary evidence of the applicant’s financial position prior to making a recommendation and providing a statement of reasons.

4.8. Statement of reasons

CFA strongly supports a requirement for a finance broker to provide a consumer with a statement of reasons for their recommendation of a credit product/s. The obligations with respect to the content of the statement of reasons should be prescriptive enough so as to ensure the statement of reasons is meaningful to the consumer, but not so as to create a ‘tick-a-box’ mentality on the part of brokers.

Coupled with the statement of reasons should be an obligation on the finance broker to recommend at least 3 credit products from 3 different credit providers that meet the consumer’s criteria. This will assist to ensure that the broker is not, in practice, acting as a sales agent of one credit provider. (There could be an exemption from this obligation for intermediaries who provide access to only one credit provider’s loan, if they are deemed to be the credit provider’s agent.)

We support the inclusion of all of the information in relation to the contents of the statement of reasons in respect of a recommendation to refinance an existing obligation contained on pages 74 and 75 of the Discussion Paper, including specifically:-

The costs of refinancing any existing loans, including all of the issues raised in the discussion paper at page 74;

All fees and charges associated with the loan;

All commissions or in kind payments that the broker will receive from each of the recommended credit providers, including any trial commissions. This should be stated as a whole dollar amount of the loan sought, rather than as a percentage;

If the loan is an interest only loan, why it is being recommended, the amount of the principal repayment and the date on which it needs to be paid; and

The statement of reasons must include all of the issues raised in the discussion paper, particularly in relation to the refinancing

12

of existing loans and interest only loans.

A consumer is unlikely to be able to assimilate the above information quickly and effectively and therefore the statement of reasons should include a comparison table.

This comparison table should contain the comparison interest rate, including an explanation of what “comparison interest rate” means, the amount payable by the consumer to the broker, any commission or in kind payments the broker is to receive from the credit provider, repayment amounts and frequency of repayments, the term of loan and any special features of the product, such as whether there is an interest free period and the amount of any residual payment at the end of the loan term.

All of the recommendations contained in the statement of advice should be required to be reasonable in the circumstances.

4.9. Compensation for consumers

CFA supports the proposal to provide for compensation for consumers as outline in the Discussion Paper and makes some additional suggestions at Part 5.5 below. The objective of the compensation provisions of the regimes should be to place consumers as far as practicable in the same position as they would have been had they dealt directly with the credit provider (or conversely, in the same position they would have been had the intermediary been classed as an agent or employee.)

4.10. Penalties for breaches

If the regulation of finance broking is to be effective, penalties must be applied on those rare occasions when illegal activity is prosecuted that are sufficient to provide real disincentives to other industry players. Adequate resources should be allocated to enforcement but such penalties should not be dependant entirely on regulators for investigation and enforcement. As unsatisfactory conduct often comes to light in the context of dispute resolution, penalties should be able to be activated by an action taken by consumers in a court or tribunal

13

of appropriate jurisdiction. In particular, if there is a particular broker acting illegally and unethically then a consumer able to demonstrate that a number of consumers are effected should be able to seek a Court or Tribunal decision on penalties for that class of consumers and be able to order a license to be cancelled by a consumer affairs agency. Consumer Affairs Agencies should not be left as the sole enforcement mechanism as this can lead to serious resource constraints limiting urgently needed enforcement activity.

4.11. Alternative Dispute Resolution

CFA supports the proposal that the legislation must make it mandatory for a finance broker to be a member of an approved alternative dispute resolution (ADR) scheme. We agree with the advantages of ADR as outlined in the discussion papers. ADR has the potential to play a vital role in not only dispute resolution, but also in improving industry standards through improved internal dispute resolution and the publication of practice guidelines.

CFA believes that ASIC is the obvious choice to approve broker ADR schemes. We agree with the advantages listed. We strongly disagree with the proposed “failsafe mechanism.” One of the advantages of mandating ASIC approved schemes only is that this would create one system of standards and oversight for financial services dispute resolution. This is not only a worthwhile goal in itself, but will be resource effective overtime. Not only are ASIC already set up to evaluate and monitor schemes in accordance with the current benchmarks, but any review of standards conducted by ASIC in the future will automatically flow to all relevant schemes.

CFA considers licensing to be the only effective method of mandating membership of approved alternative dispute schemes. As noted in the Discussion Paper at p86, a stand alone requirement that a broker must be a member of an ADR scheme must be enforced, whereas a licensing requirement is self-enforcing in so far as membership must be demonstrated to qualify for a licence and failure to comply with an order of a scheme results in expulsion from the scheme and a straight forward breach of a licence condition that can be acted on administratively (see also additional comments in Part 5.6. below).

14

Part 5. Additional comments

5.1. Who should hold a license?

CFA submits that all individual brokers should be licensed and subject to appropriate character checks for the following reasons:

i) the conduct of individual brokers can have grave consequences for consumers conduct;

ii) in practice, supervision of employed brokers by a licensed principal would often be minimal;

iii) screening of brokers should be left to the appropriate regulatory authority rather than a principle employer. Probity checks should be made by a body with disciplinary powers in relation to non-disclosure of past offences and the resources to conduct appropriate background checks of suspect individuals.

In relation to medium or large businesses there should also be the capacity to take action against the business itself as well as individual licence holders. In many situations the consumer is dealing with a broker because that broker works for a particular business with a certain reputation. The consumer believes that s/he is dealing with “the business” not a person. What a consumer will not know is whether the loan writer is an independent contractor or an employee, or works for a number of brokers. It is absolutely essential that a consumer should not have to worry about this. For this reason, the consumer must have the option of pursuing the loan writer, the brokerage business or both. The legislation should also enable the regulator to take action against the business generally, without having to take action against each individual license holder.

15

5.2. Other issues regarding the broker agreement and appropriate disclosure

We strongly support the introduction of a requirement that a broker enter into a written contract with a consumer before commencing finance broking.

In order to be meaningful to the consumer the way in which the information is presented will need to be carefully considered. We support the essential elements set out in the Discussion Paper (and in the Consumer Credit Administration Amendment (Finance Brokers) Act 2003 (NSW) being set out in a schedule which forms the first 2 pages of the contract of brokerage. We also support this schedule being filled in front of the consumer to ensure that there is no miscommunication as to the consumer’s requirements of finance.

We support the inclusion of a list of credit providers to whom the broker has access. In addition, brokers should be required to include in the schedule information about the minimum number of products or credit providers that they will in fact compare.

We also support the inclusion of the details of the type of credit and the parameters of that credit that the consumer requires as set out in the discussion paper. There should be a provision in the schedule for the consumer or broker to insert an amount of any balloon payment, or principal amount, that the consumer would be willing to pay. If the amount is nil then $0 must be inserted. This will aid in ensuring the consumer understands the nature of the credit offered, including whether it is a principal and interest loan or an interest only loan, and their obligation to repay the principal amount at the end of the finance term.

5.3. Disclosure

It is becoming increasing well documented that in order for disclosure to be effective it needs to be given at the appropriate time and in the appropriate manner. Rather requiring disclosure as such we propose that the contract be set out in plain English and contain a schedule such as the REIQ residential sale contracts, which includes the relevant information. This schedule could form the function of

16

disclosure without requiring additional pieces of paper to be included as part of the contract, and at the front of the contract. This schedule should containing the “essentials” that must be contained in the contract such as those set out in this submission, and would be similar to a ‘Key features statement’ required in other contexts.

We are the view that this will be more meaningful to consumers than generic warning statements or disclosure as it is relevant as it applies to their transaction and is being provided at the relevant time, being immediately prior to signing the brokerage contract.

It should be a requirement that this schedule be no longer than two A4 pages, be set out in plain English and only contain specific information. A suggested template could be incorporated into the regulations or be developed by the MIAA.

CFA has raised concerns that there are instances where financially excluded consumers will seek and accept an offer of credit regardless of the suitability of that credit for their purposes. These may be those that require credit in order to meet payments on an existing loan or loans. This makes then particularly vulnerable to suggestions of debt consolidation and refinancing, which has in some instances has resulted in the consumer being left in a significantly worse financial position than when they sought advice from a broker.

In some situations of financial desperation, it is true that disclosure may have little impact on the consumer’s decision to accept finance. This reinforces the need for mainstream lenders to offer finance products for low income consumers so as to create competition to the fringe or micro lenders. The issue of inaccessible credit for low-income consumers in the mainstream credit market is of concern to many consumer advocates, and further work on exploring and encouraging credit providers to take up such social obligations.

In addition, as we discuss later, credit providers must be required to assess the consumer’s capacity to pay thoroughly prior to making an offer of finance.

5.4. Stay of Proceedings

17

A stay of enforcement proceedings may be necessary in the current framework where there is an artificial separation between the broker and the credit provider and the credit provider and the consumer. This serves to highlight the need for a reconsideration of the relationship as it seems unwieldy to require a consumer to apply for a stay of enforcement proceedings whilst similar facts are litigated separately against the broker.

This issue could be reasonably easily resolved if industry and government were prepared to consent to an arrangement whereby the broker is deemed to be the agent of the credit provider.

This shift in rights and obligations is not necessarily abhorrent to the rights of the credit provider as the credit provider has chosen to do business with the broker and therefore must accept some of the risks associated with that decision. It is the consumer in this instance who is the least able to guard against the risk of questionable broker conduct.

A far superior system to the stay procedure alone would appear to be the establishment of a specialist tribunal in each State and Territory in Australia empowered to hear issues in relation to the provision of consumer credit (where no such tribunal exists) and a right of transfer for consumers from other relevant courts where proceedings have been commenced elsewhere by either the credit provider or a relevant intermediary. In such a tribunal both the credit provider and the broker could be required to be parties to the dispute, with the tribunal having the power to join a party at its discretion.

Further in situations where a stay is necessary, the stay should be available regardless of jurisdiction (including superior courts) and should be able to be applied for at any stage in the proceedings. The application for a stay should not amount to a preliminary hearing of all the issues to be raised in the case against the broker, including an estimate of likely compensation. Instead the ability to look at maintaining reduced repayments for example should be used to balance the credit provider’s interest (and prevent the debtor’s obligation from spiraling beyond repair) or the stay will remain a theoretical proposition that is useless in practice.

5.5. Compensation

18

The CFA endorses the list of matters for consideration provided at p79 and would submit the following additions:

Other financial loss suffered as a consequence of the broker’s contravention

Pain and suffering in cases of serious detriment such as loss of principal residence

5.6. Alternative Dispute Resolution – disputes across more than one scheme

It is important to ensure consumer access to justice that EDR schemes are in place. We therefore support the introduction of a licensing obligation for brokers to belong to an ASIC approved EDR scheme.

However in the brokerage industry this could raise some difficulties given the nature of the relationships and the length of the chain between the consumer and the credit provider. For example, if the credit provider and the broker were members of two different ADR/EDR schemes it is conceivable that the consumer would be required to be a participant in dispute resolution proceedings in both schemes. The effect of this would be a doubling of the stress and workload of the consumer and a risk of two different and possibly contradictory outcomes in the different schemes.

There is therefore a need to EDR schemes and policy makers to identify ways that will reduce the risks of these difficulties. Again, the issues in respect of EDR schemes would need to be considered. Cooperation agreements between the different schemes are likely to be needed.

Part 6. Proposals Opposed by CFA

6.1. Non-uniform obligations – particularly licensing and access to alternative dispute resolution

19

CFA submits that licensing and ADR are so central to the proposed regime that they cannot be the subject of non-uniform arrangements as suggested in the Discussion Paper. Any state with lower barrier to entry standards risks becoming the state to which the segments of the industry which cannot meet compliance standards will migrate. Our member organisations are strongly opposed to this outcome. Further, without licensing, the effectiveness of the other aspects of the regulatory framework will be seriously undermined, as ‘rogues’ continue to operate undetected. Similarly, non-uniform requirements in relation to membership of alternative despite resolution schemes will be unworkable, with small state-based organisations being able to escape this requirement in some states (to the potential detriment of all other stakeholders) while any firm operating across states will be required to hold current membership and abide by decisions of the ADR scheme. Further, this will have costs implications for schemes, possibly interfering with their ability to provide an adequate service in the states in which they have some members, but no uniform obligation to join.

6.2. Definition of Broker

It is not unusual for a number of intermediaries to be involved in obtaining a loan. Some intermediaries receive referrals from other intermediaries. Members of CFA regularly see clients who have entered transactions involving not one but two, three or more intermediaries between themselves (the borrowers) and the credit provider. Often these clients were oblivious to the existence of all parties but the one with whom they dealt with directly. We are concerned that it may be possible to evade the provisions of any broker-related legislation by fragmenting a finance transaction.

A typical situation seen by CFA members is where a consumer becomes involved in a transaction where there is a finance “consultant” who formulates a debt reduction plan for a fee, then merely introduces the consumer to the lender indirectly through a downstream broker. In this case, the consultant is ostensibly responsible for the transaction, but may fall outside the proposed definition of broker, and thus would be excluded from the provisions of the broker legislation.

The essence of our submission is that we believe that all parties that stand between the credit provider and the consumer in a particular

20

credit transaction or who in some way have a role in influencing its nature, extent, or existence, should be considered responsible for that transaction, and subject to regulatory controls.

6.3. Exemption of second-tier intermediaries, document handlers or commercial leases.

In the experience of CFA’s membership, exceptions and exclusions are invariably manipulated to exclude transactions that the proposed regulation was clearly intended to cover. Cases in point include business purpose declarations under the UCCC1 and bills of exchange, which are exempted from the UCCC.2 Further, for many years clients seeking consumer motor vehicle loans were inappropriately steered into commercial leases by car dealers, resulting again in avoidance of the UCCC.3 For this reason we are strongly opposed to any such exception or exemption.

Even if compelling reasons for the proposed exemption in relation to some aspects of the proposed regulatory scheme, there is no reason why the exemption need relate to the legislation as a whole. For example, essential requirements such as fidelity fund and licensing/training requirements should be uniformly applied.

This would meet the dual objectives of ensuring uniform access to broader scheme objectives such as disclosure and alternative dispute resolution for all potential borrowers (including co-borrowers and guarantors) and minimising the advantage to be gained by the broker as a result of falsifying the nature of the transaction.

Further, if “commercial lease” transactions are exempted from any part of the regulatory regime, the onus must be on the broker to prove that the lease was for genuine business purposes. Such onus must not be capable of discharge by provision of a statement of declaration by the borrower to this effect, but must be based on evidence of the actual purpose of the transaction.

In a similar vein, if second tier intermediaries are exempt from regulation (which we do not support), the proposed legislation must provide that “first tier” brokers are:1 See Part 7.3. of this submission.2 Consumer Credit Legal Centre (NSW) Inc. has acted in two matters where small consumer loans were documented as Bills of Exchange in order to avoid the UCCC.3 It appears that practice may now be less common because leases attract GST whereas loans do not.

21

ultimately responsible for the proscribed disclosure requirements (and cannot delegate such responsibilities to second tier intermediaries); and

liable for any misrepresentations made by second tier intermediaries both:

to the consumer (about the proposed credit products or the broker); and

to the broker or credit provider (in relation to the consumer’s credit application).

6.4. Reliance on Professional Indemnity Insurance

The CFA submits that the regulatory regime should require brokers to take specified measures to ensure that claims from consumers can be met. CFA has grave concerns however about the Professional Indemnity Insurance Model proposed:

(a)As mentioned in the Discussion Paper, insurance may become unavailable because of the volatility of the insurance market;

(b)CFA has concerns about whether it would be practicable to force brokers to maintain cover for a suitable period (say 6 years) after ceasing business. If there is no effective mechanism to achieve this and the nature of coverage continues to be “claims made” consumers will often be left without recourse to any insurance policy;

(c) Brokers policies may not be renewed following claims made, leaving consumers who have been affected but not yet claimed without cover.

The CFA submits that consideration should be given to other models, including a fidelity fund.

22

Part 7. Additional Matters

7.1. Unlicensed brokers and single credit provider intermediaries should be agents

It should not be incumbent on consumers to deal with licensed brokers. Credit providers, who have greater information and power in the market, can perform this screening role far more effectively. Further unlike some consumers, credit providers can make an effective choice whether or not to deal with certain intermediaries. The legislation must compel credit providers to deal exclusively with licensed brokers. Where a credit provider fails to do so an affected consumer should have the same rights against the credit provider as he or she would have had against the broker. In the absence of such a provision:

i) the licensing regime would be seriously undermined by the proliferation of unlicensed brokers who would continue to receive business from financial institutions; and

ii) consumers would be left without a remedy when affected by the misconduct of uninsured and unlicensed entities.

This is the only way that illicit operators can be effectively excluded from the market and redress for consumers guaranteed in appropriate circumstances.

Similarly, where a broker acts for a single credit provider (and therefore has a common interest and close commercial links with that provider), the legislation should confirm that such intermediaries act as the agent of the credit provider. This will allow consumers a remedy against the credit provider (which they may not otherwise have) in circumstances where the broker has acted against the consumer’s interest or otherwise contributed to the execution of an unjust contract.

23

7.2. Cost of Services

CFA is unconvinced by the scant observations in relation to broker fees. The experience of our membership is that those that can least afford brokerage pay very dearly. We submit that robust measures must be considered in relation to fee regulation, including a possible fee cap. Competition is failing consumers in this market and there is nothing in the proposed regulation that will address this issue directly.

7.3. Urgent Reform of UCCC required in relation to business purposes declarations.

This is a serious loophole in the coverage of the UCCC. It is our members’ experience that these declarations are routinely abused and that, although it is the use of brokers that facilitates the behaviour, there are a number of credit providers that wilfully turn a blind eye to the true purpose of many consumer loans (deliberately structuring the loan so that there is always a solicitor and an intermediary between the borrower and the lender, and the true purpose is never revealed to the lender). As these are often the same credit providers that participate in expensive and exploitative lending practices, their continued avoidance of the UCCC must be circumvented. The UCCC must be urgently amended to deal with this issue.

7.4. Specific offences and remedies for avoidance of the UCCC

However, regardless of any amendment to the UCCC, the broker specific legislation must compel brokers to undertake sufficient enquiry to determine the true purposes of the loan, and provide real penalties for brokers who intentionally misrepresent the purpose of the loan to the credit provider, fail to enquire about the true purpose of the loan, or who incite consumers to misstate the true purposes of the loan (whether this is conveyed by a declaration or any other means). Situations where borrower have signed false declarations and/or provided false information should not protect the broker from penalty unless the broker has made sufficient enquiry, has been actively misled and has not been in possession of contradictory information without adequate explanation.

24

Further, the broker legislation should apply not just to brokers but to any third party who obtains or witnesses the declaration. The use of

solicitors to execute loan documents must not be allowed to exonerate brokers for arranging inappropriate loans, nor should solicitors and other intermediaries be allowed to contravene the provisions without penalty. This would have the effect of extending the application of the proposed legislation beyond finance brokers, but this is essential if it is to effectively discourage brokers and third parties from continuing to falsely document loans as being for business or investment purposes. In a sense this remedy would be analogous to section 144 of the UCCC, which creates an offence and penalties, including a civil penalty, against any person who makes a misrepresentation to a borrower.

25