Welcome to the Financial Rights Legal Centre E-flyer.
In this edition:
- What we do at the Financial Rights Legal Centre: Advocate for clients in relation to insurance disputes
- Improved consumer protections are on their way
- Who is making Australians Bankrupt A report into forced bankruptcy
- Recent Westpac responsible lending decision
- Afterthoughts on the Financial Services Royal Commission and Aboriginal communities
1. What we do at the Financial Rights Legal Centre: Advocate for clients in relation to insurance disputes
In every E-flyer we like to give our colleagues and readers an insight into what we do and how we work at the centre. In previous editions we have explained energy payment plans, and how we can help you advocate for debt waivers. This month we take a look at a case we recently won in insurance.
As part of our Insurance Law Service we sometimes represent clients in their disputes against insurers if the client is vulnerable and needs extra help or we think the case is particularly egregious and might have public interest value. We often lodge cases against insurers in the Australian Financial Complaints Authority (AFCA). There is no risk of legal costs against consumers and insurers are bound by AFCA’s decision. Below is a recent example of the types of cases we run.
Tabatha is a 58 year old widow living rural NSW. Her husband Tony was in construction, but in later life they purchased a bus contract to operate a bus line. One day in 2013, there was a knock on the door. It was a door to door insurance sales man and Tony, who was concerned about his 30 years in the sun doing construction work, signed up on the spot for several types of insurance that he believed would pay for “anything but suicide”.
In 2017, Tabatha contacted Financial Rights on the Insurance Law service. In early 2017 she had lost her husband to skin cancer. She had claimed on the insurance, including income protection when he was sick, and the funeral insurance and death benefits on his death. The insurer had paid substantially less than she expected for income protection, and denied her claim altogether for the funeral and death. It turned out that her husband was not, as he believed, covered by life insurance; rather he had an accidental death benefits policy only.
Tabatha had since been contacted by the insurer who offered a refund of premiums as a result of an ASIC enforceable undertaking against the insurer following an investigation. The insurer had declined her claim of $200,000 and indicated the appropriate remedy was a refund of the $4,764.24 they had paid in premiums.
Financial Rights represented Tabatha in AFCA against the insurer. We argued that the salesman engaged in misleading and deceptive conduct when he sold the policy to Tony. The Insurer was not able to establish providing a copy of the statement of advice to Tony, or the annual renewal statements, showing that Tony was given accidental and not life cover.
Financial Rights and Tabatha were successful in their arguments and Tabatha has been awarded in excess of $220,000 from life and funeral cover as well as some refunded premiums and interest. You can read the decision, by searching 546131 on the AFCA determination page.
Tabatha has now received the money and is very happy. In the course of the dispute she has had to sell land to make ends meet, and has been treated for anxiety and depression. The money will go to paying her joint debts, so that she can be financially stable, which is what Tony had wanted when he purchased the policy.
2. Improved consumer protections are on their way
Following the Financial Service Royal Commission and the Federal election earlier this year there has been a flurry of activity to improve consumer protections in the financial services sector. Financial Rights has been working hard to ensure that the reform goes far enough to deal with the issues we see on a day to day basis. Here are some of the highlights and what they will mean for you and your clients.
Cigno and MyFi short term credit model banned
ASIC has flexed its muscles and used new powers (known as Product Intervention Powers) to effectively ban the short term credit models of Cigno and Myfi.
These two companies designed their product to fall outside of the regulations for pay day loans and in so doing were able to charge exorbitant fees and cause considerable harm to some of the most financial vulnerably Australians. We have regularly seen shocking examples where these companies have demanded between 146% and 952% of the original amount borrowed. This exploitation is outside of the boundaries of acceptable behaviour and Financial Rights has applauded ASIC taking action here. These companies have since sought a review of ASIC’s order in the Court.
New requirements for financial services
At the same time that ASIC received new powers to intervene to stop harmful products – the Government introduced new requirements for all financial services products to meet so-called design and distribution obligations. The new laws are designed to assist consumers to understand and select suitable products by requiring companies and their sales people to appropriately market and distribute their products to consumers.
Companies will need to develop what is known as a ‘target market determination’, which means they will have to identify target markets for their products, having regard to the features of products and consumers in those markets and they will have to select appropriate distribution channels.
Companies have two years to meet these new obligations but when they do – consumers should hopefully be better served.
The Consumer Data Right established
Open Banking is on its way with the passing of Consumer Data Right legislation in August. Open Banking and the Consumer Data Right will give control to consumers over their financial data held by their banks.
Open banking allows customers to ask that that their data be sent to other banks, financial institutions and authorised organisations when they want to. While this will be great for many people who will receive better deals, lower interest rates and more suitable accounts – for other people this it will lead to higher-priced credit – what is known as price discrimination and further exposure to exploitative debt and money management services.
Financial Rights has worked closely with Treasury and the ACCC to ensure that there are consumer protections built in to the design of Open Banking from the start to protect people from the worst excesses of the financial services industry and provide greater security and privacy protections. Financial Rights managed to argue for and ensure that officially accredited open banking companies can’t use your data for direct marketing purposes nor can they ‘on-sell’ your data to third parties.
At the last minute, Financial Rights working with the Consumer Policy Research Centre, managed to obtain consumers the right to delete – that is ask open banking companies to delete the data they hold on you. This is an important victory for consumers and will act as the basis for broader reforms in the future.
ABA improve their Code of Practice
The New Banking Code of Practice (https://www.ausbanking.org.au/wp-content/uploads/2019/06/Banking-Code-of-Practice-2019-web.pdf ) came into effect in July 2019 with a raft of new protections for consumers, including more proactive assistance for customers experiencing financial difficulty, a three-day pause before signing a guarantee to prevent hasty decisions and provide people with time to absorb information about the loan and get advice, a commitment to no longer bundle the sale of consumer credit insurance with a loan and a new small business section.
The ABA have recently also applied for authorization from the ACCC for new changes arising out of the Financial Services Royal Commission recommendations including defining the minimum features of a basic bank account, including not allowing informal overdrafts, dishonor or overdrawn fees on such accounts and not charging farmers default interest on loans during droughts and natural disasters. The ACCC has just released a final draft authorization that supported points raised by our joint consumer submission. The draft authorization requires the ABA to include in its Code commitments:
- to not charge interest on informal overdrafts (and where that can’t be avoided to refund the interest at the end of the month);
- to ensure that those banks who currently offer a basic banking product continue to do so; and
- require subscribers to use data analysis and take other proactive steps to identify and contact potentially eligible customers to provide information about basic banking products and inviting them to apply if eligible.
These changes will not commence until 2020.
Unfair Contract Terms in insurance to be removed
For over a decade now consumer groups, including Financial Rights, have been arguing for the removal of an exemption that allowed insurance companies to include unfair terms in their contracts with you.
This has led to some appalling outcomes for consumers – think: out of date medical definitions that enable insurers to welch out of their agreement to cover you when you’re ill. After three attempts to rid the law of this exemption – we are getting close with the Government releasing an exposure draft of legislation as part of their implementation plan for the royal commission. When passed insurers will have to go through their contract with you and remove anything that could be considered unfair. This is an important win for consumers insurance and will improve the functioning of insurance and bring better outcomes for consumers at claims time.
Still to come…
With the Government releasing its road map for implementing the Financial Services Royal Commission recommendations, we expect that there will be a lot of change in the sector for the next few years. Some of the expected changes will include:
- the imposition of a best interests duty on mortgage brokers (leading to better outcomes for home buyers);
- a prohibition on the unsolicited selling of insurance products;
- improved regulation of funeral expenses polices such as those promoted by ACBF and Youpla;
- deferred sales models for add-on insurance products; and
- an improved duty of disclosure regime that will better serve the consumer’s interest.
Stop the Debt trap!
One area that unfortunately has yet to see any action is the broader pay day loan and consumer lease sector. It has been over 1000 days since the Government accepted the recommendations of its own review into these harmful products and developed legislation to rein in the sector.
Financial Rights is part of the Stop the Debt Trap! coalition calling on the Government to pass the findings of this review into law.
To help the Stop the
Debt Trap coalition get these laws introduced– sign your name to the statement
here https://consumeraction.org.au/policy-campaigns/stop-the-debt-trap/ and stay up to date with news about the
3. Who is making Australians Bankrupt A report into forced bankruptcy
Sometimes in the course of our daily work assisting people in financial hardship systemic issues emerge that warrant – even demand –extra research and investigation. In recent years our financial counsellors and community lawyers noticed the same creditors were applying much more often than others to make some people bankrupt – often for relatively small amounts. One name we kept hearing in case work was debt collection company Lion Finance.
This year Financial Rights worked with Financial Counselling Australia and the Consumer Action Law Centre in Melbourne to review four years of applications to the Federal Court to force people into bankruptcy. This research confirmed much of what we had observed – that aside from the Australian Tax Office, Lion Finance was the most active organisation in attempting to force people into bankruptcy. The data, examples in the form of de-identified case studies, discussion of different types of bankruptcy and a series of recommendations were compiled into a 28-page report in July, titled Who is making Australians bankrupt?
The ATO’s applications for creditor’s petitions fell sharply over the four years we examined, from 1215 applications in 2015-16 to 543 in 2018-19. Even with this fall the ATO was still the no.1 applicant for bankruptcy in 2018-19, but only marginally ahead of Lion Finance.
The report found that in the 2018-19 financial year, Lion Finance applied for 512 creditor’s petitions, almost doubling its efforts from 2017-18. Aside from Lion, all debt collectors had reduced their applications for bankruptcy. The next most frequent applicant in 2018-19 was CCC Financial Solutions, which applied 28 times. Bankruptcy applications made by the big four banks were also in decline, although they often sell their debts to debt collectors, including Lion Finance. Lion Finance’s disproportionate use of the bankruptcy process is a matter of serious concern.
One key finding in the report is that the minimum debt required to trigger the bankruptcy process is far too low and does not meet community expectations. It is $5000 but we believe it should be raised to $50,000. Bankruptcy has serious consequences, including in many cases the loss of the family home and tens of thousands of dollars in costs above and beyond the original debt claimed.
Financial Rights also believes courts should refuse a sequestration order (the legal declaration of bankruptcy) should be refused if a debtor has reasonable prospects to repay the debt in less than three years, the person’s only asset is their home, and other enforcement options – such as a garnishee of wages, or instalment order – have not been used. We firmly believe bankruptcy should be a ‘last resort’ option, because of the severe restrictions it places on people and because of the potential to make families needlessly homeless.
Following the report’s release, we gave interviews to the ABC, which wrote a comprehensive online article and presented a key segment in a recent episode of current affairs television program 7:30, called Bankruptcy hunters.
As well as syndication of the ABC television program across several states, over a dozen articles were published online. Since then, SBS radio interviewed one of our solicitors for an article which would be translated into 70 languages to help recent immigrants understand bankruptcy.
The effect of bankruptcy is one of many issues that is an ongoing concern for Financial Rights and we will continue to help clients in this area and to advocate for change.
4. Recent Westpac responsible lending decision
On 13 August 2019 ASIC lost a landmark responsible lending case against Westpac, potentially opening the door to a new flood of unaffordable loans being issued by the big banks. The ASIC case alleged that Westpac was potentially lending hundreds of thousands of home loans to people who couldn’t afford them by relying on a controversial benchmark to underestimate borrowers’ household expenses. Financial Rights believes the ruling is incredibly disappointing and suggests that banks do not have to have regard to people’s actual expenses when they lend. This in turn could allow lenders to continue to extend unsustainable loans which effectively set people up to fail.
ASIC had alleged Westpac failed to consider any of the actual living expenses declared by customers between December 2011 and March 2015 and instead relied solely on a widely used spending benchmark — known as a Household Expenditure Measure (HEM).
The Judge’s decision included the following points:
- It was not true that Westpac disregarded the information about borrower’s living expenses altogether. It plugged this information into a formula which would trigger a manual review of a loan application in a relatively narrow set of circumstances.
- There is nothing in the Act that specifies how the lender must use the financial information it is required to obtain. “A credit provider may do what it wants in the assessment process, so far as I can see; what it cannot do is make unsuitable loans.”
The Judge also observed that a person’s actual living expenses are a poor indicator of the minimum living standard they would be prepared to accept in order to meet their loan repayments.
The HEM was widely criticised during the banking Royal Commission last year as the scale of banks’ reliance on the tool came to light. One large investment bank estimated that 80 per cent of all Australian home loans were approved using the HEM. The tool was by definition set at a lower level than the actual expenses of the majority of Australians, as it used the average of the lowest 50% of people for essential expenses, and the lowest 25% for discretionary expenses. As a result of the Royal Commission many lenders adjusted the parameters of the benchmarks used and adjusted their processes to take better account of declared living expenses.
Financial Rights and other consumer groups are concerned that this ruling could result in these changes being wound back and more individuals and families being given loans they can’t afford. We know from our experience operating the National Debt Helpline that many people have no room to cut their expenses. There are many reasons why a family might have expenses higher than the benchmark including medical conditions or a disability, high child care costs or private school fees. Families also have very different priorities in relation to which expenses are considered essential. Automated assumptions about average expenditure do not take any of these factors into account.
Financial Rights believes that if lenders were to be responsible, they would want applicants to demonstrate that they have reduced their expenditure — at least for a period — before being granted a loan. We can’t assume that people will be able to tighten their belts — that’s simply not the reality of most of our clients.
One of the problems for ASIC in running this case was that very few of the relevant loans were in significant arrears. However, it is important to note that we are in a particularly low interest rate environment, meaning these loans have not really been stress tested. Since the case was decided Westpac has reported an increase in mortgage delinquencies although this is not necessarily confined to the loans which were the subject of the ASIC case.
The Judge also rejected ASICs arguments in relation to the Westpac’s assessment of the suitability of loans with an interest-free period. This is also worrying given the reports of people now struggling with the increase to interest and principle repayments as large numbers of interest-only periods expire. The case did not examine whether these loans met the particular consumer’s requirements and objectives, only whether they were correctly assessed in relation to affordability. The fact that borrowers pay considerably more interest over the life of a loan with an interest only period, compared to one that is interest and principle from the start, coupled with the extra risk of ending up in a situation of negative equity in the early years of the loan, suggests that these loans may have been quite unsuitable for many people who took them out.
ASIC has since filed an appeal with the Full Federal Court of Australia against the decision of the Honourable Justice Perram. ASIC Commissioner Sean Hughes said ‘the Credit Act imposes a number of legal obligations on credit providers, including the need to make reasonable inquiries about a borrower’s financial circumstances, verifying information obtained from borrowers and making an assessment of whether a loan is unsuitable for the borrower. ASIC considers that the Federal Court’s decision creates uncertainty as to what is required for a lender to comply with its assessment obligation, nor does ASIC regard the decision as consistent with the legislative intention of the responsible lending regime.’
5. Afterthoughts on the Financial Services Royal Commission and Aboriginal communities
Our solicitor Mark Holden wrote an article for CLCNSW’s Law Reform Bulletin: Social change through strategic litigation + child protection funding cut. It was all about what the recent banking Royal Commission meant for Aboriginal communities.