Regulation Governing the Provision of Credit Assistance and Financial Advice in Australia: A Consumer's Perspective
| Author | Gill North |
| DOI | 10.22145/flr.43.3.2 |
| Published date | 01 September 2015 |
| Date | 01 September 2015 |
| Subject Matter | Article |
ASSISTANCE AND FINANCIAL ADVICE IN AUSTRALIA: A
CONSUMER’S PERSPECTIVE
Gill North*
ABSTRACT
Five years ago the global financial crisis threatened the world’s financial system and its
aftermath wreaked devastation across many parts of the globe. Mis-selling of home
mortgages to consumers unable to repay their loans and global sales of financial
products linked to residential lending were at the heart of the crisis. Financial reforms
governing housing credit frameworks and the selling of complex financial products
have ensued within domestic and international spheres. This article reviews the
regulatory structures in Australia governing the provision of residential housing
mortgages and credit assistance and the provision of financial advice. Its analysis
focuses on customer suitability processes, client duties, and remuneration provisions
because these legal features significantly influence, and can adversely impact, consumer
outcomes. It suggests specific reforms to ensure adequate consumer protection and
enhance the consistency and efficacy of the credit framework. It also calls for renewed
debate on the remuneration structures of mortgage brokers.
INTRODUCTION
Two thirds of Australian households own a residential property that they either occupy
or lease, and approximately half of these households have a residential property
mortgage.1 Most Australian adults also participate in superannuation schemes with
*
Associate Professor and Head of the Finance, Investment and Taxation Group, Commercial
Law and Regulatory Studies Centre, Faculty of Law, Monash University; Adjunct Associate
Professor, Law School, University of Western Australia. The author thanks Stephanie Babic,
Andrew Godwin and Martin North for their valuable feedback on prior drafts of the article.
1 Australian Bureau of Statistics (ABS), ‘6416.0 Residential Property Price Indexes: Eight
Capital Cities, September 2014’ (Media Release, 11 November 2014); ABS, ‘6523.0 Household
Income and Income Distribution, Australia, 2011–12’ (16 August 2013) Table 16; Australian
Prudential Regulation Authority (APRA), Prudential Practice Guide APG 223 — Residential
Mortgage Lending (5 November 2014) 7. The APRA document indicates that ‘[l]ending
secured by mortgages over residential property … constitutes the largest credit exposure in
the Australian banking system, and for many authorised deposit institutions constitutes over
half of their credit exposures.’ See also Jonathan Shapiro, ‘Exploring Australia’s “Wealth
Effect”’, Sydney Morning Herald (Sydney), 19 November 2014. The Shapiro article notes that
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retirement portfolios dominated by shares.2 It is imperative that all Australians
understand the risks associated with ownership of these significant assets, particularly
when credit is secured on property or shares for investment purposes. When expert
assistance or advice is provided, it should be trustworthy and competitive, with
appropriate consumer protection afforded, because these areas encompass the most
significant financial decisions that are made by individuals during their lifetimes.
Regulatory frameworks around the provision of credit assistance and financial advice
have developed along separate pathways within international and Australian forums.
Nonetheless, the comparative legal standards, processes, and outcomes should be
examined because credit assistance and financial advice are often closely interconnected
from a consumer’s perspective.
Part I of this article provides international context because Australia is a significant
net importer of foreign capital,3 and the frameworks around bank capital and
minimisation of financial risks and instability are increasingly being led by international
bodies. Regulation with respect to residential lending has been a key focus of global
leaders and regulators since the global financial crisis (GFC) because defaults on home
loans in the United States (US) and declines in the value of securitised products tied to
these home loans were the initial triggers of the crisis. In 2009, international bodies
reviewed the underwriting and origination of residential mortgages and related
consumer protection, and subsequently published global principles for individual
countries to consider and implement within their national frameworks. Other global
forums simultaneously considered principles and issues concerning the provision of
financial advice to consumers.
Parts II and III discuss the regulatory schemes in Australia that apply to the provision
of mortgages and related assistance, and the provision of financial advice.4 There is a
particular focus on consumers making decisions involving residential housing and share
investment supported by credit. Part IV considers the rationales for the independent
regulatory pathways governing the provision of credit assistance and financial advice
and highlights important differences from a consumer’s perspective. This discussion
focuses on customer suitability obligations, client duties, and permitted remuneration
provisions because these factors influence, and can adversely impact, consumer
outcomes.
55 per cent of gross household assets in Australia are invested in housing while 27 per cent
are in shares.
2 APRA, Insight Issue One 2014, 9. More than half of the APRA supervised default fund assets
in 2013 were shares, with 26 per cent of the portfolios allocated to Australian shares and 25
per cent to international shares. Many Australians also hold shares outside of
superannuation schemes: see Australian Securities Exchange, 2012 Australian Share
Ownership Study (21 May 2013); Tim Boreham, ‘Wealthy Investors Still Like Shares’, Sydney
Morning Herald (Sydney), 1 June 2013.
3 See, eg, Commonwealth of Australia, ‘Commonwealth Budget 2012–2013’ (Budget Paper No
1, Statement 2, 8 May 2012) 2.26–38
4 Bill Shorten, Minister for Financial Services and Superannuation, Commonwealth
Government, ‘New Consumer Credit Protections Introduced into Parliament’ (Media
Release, No 133, 21 September 2011)
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Part V suggests that consumer regulation in Australia governing the following areas
should be effective, coherent and broadly consistent: (i) the acquisition of residential
properties funded by a mortgage for residential or leasing purposes, and (ii) share
investment funded by a margin loan or a mortgage secured on a residential property. It
discusses the nature and scope of the risks associated with residential property
investment and suggests these risks are poorly understood by much of the Australian
population.5 It concludes that reforms are needed to provide essential protection for
consumers making important credit, saving and investment decisions. It also calls for
reconsideration of the remuneration structure of mortgage intermediaries to ensure fair
conduct and appropriate incentives relating to the provision of mortgages.
I INTERNATIONAL ENVIRONMENT
During what is generally acknowledged as ‘the easy credit decades’ leading up to the
GFC, many people were offered, and accepted, levels of credit that were not affordable
or sustainable. The initial triggers of the GFC in the US were defaults on home mortgages
and payments to investors in securitised products linked to housing finance.6 The
issuance and sale of securitised products across the globe, particularly those linked to
subprime mortgages, grew at exponential levels during the 1990s and 2000s.7 The
emerging vulnerability of some financial institutions and individual countries, and of
the broader global financial system, was exposed during a spiraling cycle of losses that
followed a series of connected events, including:
•
a significant decline in property prices, initially in the US and later in other
countries;
5 Mortgage credit secured on residential property is at record levels in Australia, raising
concerns at many levels. See APRA, ‘APRA Outlines Further Steps to Reinforce Sound
Residential Mortgage Lending Practices’ (Media Release, 9 December 2014); Australian
Securities and Investment Commission (ASIC), ‘ASIC to Investigate Interest-Only Loans’
(Media Release, 14-329MR, 9 December 2014); Financial System Inquiry, FSI Final Report
(November 2014) 34, 35, 42, 47, 51; International Monetary Fund, ‘Financial Sector
Assessment Program Update: Australia Basel Core Principles for Effective Banking
Supervision — Detailed Assessment of Observance’ (Country Report No 12/313, Monetary
and Capital Markets Department,
November 2012) 7
Wilkins, ‘House Price Boom Must End, Says David Gonski’, Sydney Morning Herald (Sydney),
3 September 2014; Gareth Hutchens and James Eyers, ‘Reserve Bank Sends Mortgage-
Pressure Warning to Home Owners, Sydney Morning Herald (Sydney), 7 November 2014;
Jonathan Shapiro and Clancy Yeates, ‘Fears Australian Banks Ill-Prepared for Housing-
Induced Crisis’, Sydney Morning Herald (Sydney), 24 November 2014.
6
International Monetary Fund, ‘Financial Stress
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