Brexit considerations for Australian banking and finance lawyers

By Leonie Chapman and Shirley Logan – LAWyal Solicitors  


On 23 June 2016, an unprecedented majority of 51.9% of voters in a Referendum on the United Kingdom’s (UK) continued membership of the European Union (EU) voted for the UK to leave the EU, while the rest of the world was left wondering, what will happen next?[i] The outcome of the Referendum in favour of what is now being termed ‘Brexit’ shook the world’s financial markets and also provoked political turmoil in the UK and more widely across Europe[ii], including in Scotland and Northern Ireland who both voted to remain.

Given the great uncertainty as to the outcome of future exit negotiations between the UK from the EU, and the fact that the full ramifications of Brexit to the rest of the world will depend largely on what might replace EU membership for the UK, this Article will not give an in depth review of Brexit implications for Australian banking and finance lawyers. However, we can start to explore some of the many significant questions of concern and possible impacts Brexit could raise for Australian banking and finance institutions, who are no doubt already starting to undertake business planning in anticipation of the risks, and the range of alternatives that may result from UK negotiations with the EU.

EU background

The EU Commission first outlined its Action Plan for a single financial market in 1999.[iii]  Since then, the EU has introduced regulation to effect the integration of EU financial markets and to remove legal barriers that hindered the provision of cross border financial services activity across Europe.

The directives introduced create a single market by allowing financial services businesses legally established in one Member State (their home State) to carry on their business in another Member State (the host State), without the need for separate host state authorisation, either by establishing a local branch or on a cross border basis. (called a ‘Passport’). The directives also establish the respective responsibilities of home and state regulators for business with a cross border element and provide a framework for regulators to co-operate with each other[iv].

One of the Passport advantages for Australian banks and the UK, is the UK has become Europe’s major international financial centre and therefore, most Australian banking and finance institutions currently doing business in the EU base their operations in the UK. In doing so, an Australian UK business can then take advantage of the four EU freedoms: (1) freedom of movement of goods; (2) freedom of establishment and services; (3) free movement of capital; and (4) free movement of workers and citizens to create a single European market.

There has also been an increased desire post Global Financial Crisis (GFC) to conduct financial services business on a global level, including through the G20, an international forum for the Governments and Central Bank Governors from 20 major economies formed to study, review and promote high-level discussion on policy issues pertaining to the promotion of international financial stability. Australia has also seen recent initiatives including Basel Committee on Banking Supervision, which relates to the resolution, prudential requirements and centralised clearing in derivatives, and Financial Stability Board (FSB).


Surprising to many, the majority of voters in the UK voted to “Leave the European Union”. However, under the terms of Article 50 of the Treaty on European Union which governs the process, the UK must notify the European Council of its intention to leave the EU and thereby enact ‘Article 50’ as well as trigger the two year period for negotiation of the terms of the UK’s withdrawal. This has not yet occurred, and while there is discussion that Article 50 might be invoked before the next general election in the UK, it is more likely that it will not happen until the new parliament is elected.[v]

In any case, the UK Government is eventually expected to ratify the Referendum decision and invoke Article 50, and for years thereafter will be locked in negotiations with the EU to agree its terms for exit, including immigration and trade arrangements (for example, will the UK join the European Free Trade Association (EFTA) or another free trade agreement[vi]?). The UK will also need to negotiate with countries like the United States and China, which currently have trade agreements with the EU, but not with the UK.

Aside from the political unrest as the UK faces a Prime Minister change, Northern Ireland and Scotland’s contrary vote to remain in the EU, and fears that other countries within the EU like Spain or France might also try to leave the EU, there is also international investment that will be impacted as many international investors may move elsewhere to access a gateway to Europe, including Australia.[vii] This is one of the key negative implications for Australian banking and finance institutions in the face of Brexit.

Brexit uncertainty

While some risks can start to be anticipated, there is still great uncertainty in terms of the full ramifications of Brexit for Australian banking and finance institutions. Firstly, the Referendum is not legally binding. If and when the UK invokes Article 50, negotiating the terms of the exit will take years, and involves establishing new agreements, during which time the UK will continue to be bound by European legislation. However, given the UK will not be a member of the EU, they will be not in a position to influence policy.

Further, some financial markets tend to be volatile in the face of uncertainty, and after Brexit was announced shares suffered an immediate impact throughout UK and Europe as well as globally. This is likely to continue until there is more clarity on Brexit and the next steps. While it may not be all bad for Banking and Finance Institutions in Australia who may see an increase in safer asset classes such as bonds due to the volatility in the share markets, there will be negative impacts as market volatility continues.[viii]

Banking lawyers acting on behalf Australian institutions and in particular, for banks with divisions, dealings or transactions in the UK or EU, will need to keep a close eye on Brexit developments and to make decisions in a way to minimise risks going forward. Where possible, Australian banking lawyers will need to consider the full range of possible risks and outcomes as well as alternative relationships that could arise from negotiations between the UK and EU in order to ensure good business planning.[ix] Below, we touch on some key areas of focus lawyers working in banking and finance should consider as they work through the complex issues Brexit may cause for their businesses.

Key issues for Australian banking lawyers

(a) Passporting

An important question of obvious concern to Australian banks with businesses operating out of the UK for the purposes of accessing EU markets is the continued access to the European single market. That is, whether the Passport system continues. Currently, authorised Australian businesses such as banks, insurance companies and asset managers can operate across the EU into the 28-member bloc as long as they have a base in the UK. Under this arrangement, a British bank can provide services across the UK from its home and an Australian, Swiss or American bank can do the same from a subsidiary based in the UK. London is also a centre for clearing and settling trades involving EU securities.

Goldmann Sachs and JP Morgan both gave evidence to the Parliamentary Commission on Banking Standards, prior to the Referendum, highlighting the importance of the UK’s EU membership.[x] Frances Central Bank Governor Francois Villeroy de Galhau said:

“If tomorrow Britain is not part of the single market, the City [of London] cannot keep its European Passport, and clearing houses cannot be located in London either”.[xi]

After Brexit, businesses that rely on a UK business to do EU business may need to establish a separate subsidiary in a country remaining in the EU. To hold a Passport, it appears that banks would have to create a licensed bank to do business in the relevant EU State. That is, banks cannot simply set up a subsidiary and then send personnel to that Member State to work. Different States have different rules on setting up business, but in any case there would undoubtedly need to be local management and significant staffing. Further, the entity would need its own capital to meet the demands of the EU Bank Recovery and Resolution Directive (BRRD).

Institutions in Australia may already be seeking to put into effect contingency plans to have continued access to the EU single market. It has been reported that some banks, particularly large US banks, are currently setting in place contingency plans.[xii]

Of particular concern for banking services in Australia is the fact that current Capital Requirements Regulation[xiii] (CRD IV), the current EU banking regulatory framework, does not contemplate a framework for third party access. The Markets in Financial Instruments Directive (MiFID), a major piece of European legislation and one which is absolutely fundamental to the ability of banks and investment firms to conduct investment business around the EU, seeks to provide third country access for wholesale business.

Importantly, MiFID allows banks in Member State to carry on business and sell services throughout Europe without obtaining a license in each individual country.[xiv] City experts are however divided as to whether this could be relied upon. The provisions only relate to segments of business that currently benefit from passporting rights, it is uncertain if the UK could take advantage of the provisions as it must meet the guideline for “equivalent” standards of regulation (which could change in the future) and there is currently no precedent.[xv]

On this front, banking and finance lawyers will need to wait to see the nature and extent of incoming rules and in the meantime, should be diligent in preparing for the possibility of regulatory change.

In light of Brexit, Australian institutions will need to undertake their own cost benefit analysis to see if it makes sense to remain in the UK or to leave. In doing so, banks and their lawyers will need to weigh up whether it makes sense to set up in another EU State, and if so where and how. For example, if an Australian bank’s UK presence is predominantly for EU business then it may make sense to relocate, however if not and if a UK presence is predominantly for access to other non EU markets, then relocation may not be necessary. Naturally Australian banking lawyers will also have to consider tariffs, taxation, and differing legal systems when making the decision whether or not to stay.

(b) Legal

In any case, it is anticipated that Brexit will cause a long, expensive and complicated exercise of unravelling over 40 years of legislation. Much of the EU law is comprised of directly effective EU law or UK law implementing EU Directives.[xvi] The unravelling will undoubtedly involve a process of deciding which legislation to keep and how to amend legislation, as well as how to fill any gaps and transitional arrangements. Saving legislation is likely to be enacted initially. Much of the existing EU legislation would need to be retained to allow, for example, the banking industry to continue to function. The UK, unless it becomes member of the European Economic Area (EEA), would become a third party to the EU and therefore, in order to do business, the UK would need to have a regulatory environment which is at least equivalent to the EU. All the while, the UK loses its benefit from being a member of the EU.

Australian banking lawyers working within and for banks operating in the UK will already no doubt be preparing Board briefings on the risks and opportunities raised by Brexit and analysing the exposure. Due diligence should be conducted on UK business lines to determine which areas depend on UK membership for market access and which would be affected by a change to tariffs.[xvii] Stakeholder engagement will be paramount in the legal and risk assessment of Brexit by banking lawyers.

(c) Impact on contracts

Lawyers acting for financial institutions should also review contracts to ascertain if any clauses within them are activated as a result of Brexit, including termination grounds, force majeure, material adverse change in circumstances, or breach of financial ratios in financing agreements. Further questions for lawyers to consider in starting to review potentially impacted contracts might be whether a provision to comply with EU law is still binding in the face of Brexit, and whether EU principles will still apply in the interpretation of contracts. Australian banking and finance lawyers should start to assess the scope counterparties might have for avoiding contractual obligations based on Brexit, arguing material adverse change or force majeure or frustration of contract, which might result in contractual dispute.[xviii]

Australian lawyers should further consider questions of jurisdiction of contracts and how judgments will be enforced. For example, will a judgement in the EU be legally binding in the UK post-Brexit? European Judgments are mutually recognised and enforced by EU Regulation, including Insolvency Regulation, which aims to establish procedural rules on jurisdiction, applicable law and mutual cross-boarder recognition in the EU Member States for insolvency proceedings. As soon as the UK leaves, the regulations will need to be replaced by one or more multilateral treaties.

(d) Intellectual Property

Another matter for consideration by banking and finance lawyers is Intellectual Property (IP) registrations. Lawyers should review all IP registrations to ensure they still comply with UK and European legislation, given the UK had joined the European Unitary Patent System and there were applicable EU patent and design regulations, as well as the imminent introduction of the Unitary Patent (UP) and the Unified Patent Court (UPC).[xix] It is likely that the UK will no longer be a part of the UP and UPC post-Brexit.

(e) Financial services

As mentioned under Passporting, if Australian financial institutions passport their licensing in the UK to other Member States, they will need to obtain new licenses in the relevant Member State or in the UK if arrangements are being passported to the UK. Evidently, post-Brexit, raising capital and marketing financial services on a cross-border basis will be more complicated for Australian businesses operating out of the UK.

(f) Employees

Where Australian based employees are using a European passport, the employing financial institutions will need to review the visas in place. There will be considerable uncertainty from an employment law perspective in the UK because key areas of employment law are derived from EU legislation and so could fall away automatically, be abolished or amended.[xx] We note that in doing so, it will, however, take a significant amount of time for a decision to be made on what happens regarding EU nationals in the UK.

(g) Taxation

Thankfully, taxation remains primarily with the Member States.. The bilateral treaties in place between the EU, Australia and the UK will govern tax. However, if an Australian bank operating out of the UK is considering a move to another Member State, its lawyers should consider the relevant bilateral taxation treaty with that Member State.

(h) Increased red tape

Australian institutions that do business with the UK and the EU will in the future be exposed to two sets of regulatory requirements as opposed to one. However, the UK may decide to make its requirements less onerous, only time will tell. As with Australia, the nature of the banking and financial services industry in the EU is currently highly regulated. Much of the regulation has come from Europe but it is unlikely that the UK will amend or repeal major parts of the financial regulatory law. Where EU law has direct effect through Regulations, the UK will have to consider whether or not these regulations should be adopted. Further, if the UK wants to continue doing business with the remaining EU States it will undoubtedly be required to meet an equivalence assessment. However, it will have lost its negotiating position in the EU.

What happens next and the UKs continued relationship with the EU

The full global impact regarding the Brexit Referendum is still unknown. The UK’s continued relationship with the EU all rests on how future negotiations progress. They may elect to adopt a model like Norway, who is a member of the EEA and has gained access to the single market without becoming a full EU member, or Switzerland who accesses the EU through bilateral agreements – negotiating sector by sector. The downside to the Norwegian option would be that the UK would have to adopt European legislation whilst having no say in it, and would have to accept the free movement of people which is unlikely given that immigration played a key role in the Brexit campaign.

The key impact for Australian banks operating in the UK will be renegotiation of trade deals between the UK with EU Member States, as the UK will cease to benefit from existing EU trade agreements with third parties and will be excluded from those under negotiation. Australia and New Zealand are currently negotiating trade agreements with the EU.[xxi]


While uncertainty prevails in all discussions surrounding Brexit and the possible impacts the decision will have on the UK and globally, one thing is certainly clear – this unprecedented decision by the UK people to exit the EU will result in some negative impacts to Australian banking and finance institutions, the extent of which is yet unknown. All lawyers representing Australian banks with a UK presence are likely to have already considered many of the possible playbooks that will flow from Brexit, while the world waits for Article 50 to be enacted by the UK Parliament and then watches as intense and complex negotiations between the UK and EU follow.

Leonie Chapman

Principal Lawyer and Director

LAWYAL Solicitors  



Shirley Logan

Senior Legal Consultant

LAWYAL Solicitors


About the authors

Leonie Chapman’s experience extends to banking and finance, consumer credit and mortgage lending, contract negotiation, trade practices and fair trading legislation, intellectual property and trade marks, corporate and financial services. After completing her Bachelor of Laws and Bachelor of Commerce in 2002, Leonie went on to work both in private practice and as senior in-house lawyer supporting a specialist lender and then for six years, Macquarie Bank Limited. Having achieved a Master of Laws in 2009 specialising in banking and finance law, Leonie’s main focus now as Principal of LAWYAL Solicitors is on regulation and compliance for banking and financial institutions. 

Shirley Logan has experience in commercial, corporate and banking and finance law gained in both private and corporate practice in the UK and Australia. After qualifying in the UK, she worked as corporate lawyer in London and Sydney before moving in house. She now consults with LAWyal Solicitors on a range of corporate, commercial, regulatory and compliance matters predominantly for banking and financial institutions.

[i] WLM Financial Services Pty Limited, Brexit — what this change means to you, 13 July 2016 available at

[ii] J Palmer “Brexit the UK Vote to Leave the EU—Legal Guide” Herbert Smith Freehills 21 July 2016 at 2.

[iii] European Commission Press Release Database, IP/99/329 (11 May 1999).

[iv] K Birch and S Garvey “Brexit — legal consequences for commercial parties” February 2016 Allen & Overy 1 at 1.

[v] P Young “Brexit: Article 50 will be triggered before next general election, Tory chairman says” Independent (online) 24 July 2016

[vi] Above n 2, at 3.

[vii] Above n 1.

[viii] Above n 1.

[ix] Above n 2, at 3.

[x] “Banking standards — written evidence from Goldman Sachs International” UK Parliament Publication 19 June 2013 available at

[xi] I Melander “ECB’s Villeroy: Brexit talks must be quick, City of London at risk of losing ‘EU passport’” Reuters 25 June 2016 available at

[xii] P Ryan “Brexit: Central banks ready ‘extensive contingency plans’ amid fears of further global fallout” ABC News (online) 27 June 2016 available at–06–26/banks-fearful-of-global-fallout-post-brexit/7545100.

[xiii] Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012.

[xiv] R Moulton, J Coiley, J Perry, R Aird and N Ward “Brexit: potential impact on the UK’s banking industry” 2016 Ashurst London

[xv] P Jenkins “Passporting question looms large for banks in the UK” Financial Times (online) 27 June 2016 available at

[xvi] Above n 2, at 3.

[xvii] Above n 2, at 6.

[xviii] Above n 2, at 18.

[xix] HGF Intellectual Property Specialists, Would Brexit mean the end of the Unitary Patent and the Unified Patent Court?, May 2016, available at

[xx] Above n 2, at 19.

[xxi] Above n 2, at 8.




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Responsible Lending and Hardship Variations – Capitalising Interest and Fees

By Leonie Chapman – LAWYAL Solicitors

 First published by LexixNexis Australian Banking & Finance Law Bulletin 2016 Vol. 32


The National Consumer Credit Protection Act[1] (NCCP Act) requires credit providers to fulfil certain responsible lending obligations where there is an increase to the credit limit of a credit contract or where a new credit contract is entered into. The responsible lending obligations[2] include making reasonable inquiries about a customer’s financial situation and requirements and objectives, and conducting reasonable verification of the customer’s financial situation, in order to make an assessment that the loan is not unsuitable for the customer. The purpose of this assessment is to make sure the customer can afford the loan and that it meets the customer’s requirements and objectives. The very interesting and in some ways confusing question is, whether certain variations that are made by credit providers with consumers as a result of hardship requests by the customer, trigger the responsible lending obligations? In particular, this paper explores whether hardship variations to capitalise interest and arrears by customers result in a credit limit increase and therefore must be originated in accordance with the responsible lending provisions.

What do the definitions say

The law is a little uncertain in this area. To understand whether technically the capitalisation of interest and arrears into a customer’s loan is an increase in the credit limit, we need to understand what the definitions say. Under the NCCP Act and National Credit Code (NCC), “Credit Limit” is defined as:

the maximum amount of credit that may be provided under the contract[3]

According to the NCCP Act and NCC, “Credit” is provided by a credit provider under a credit contract where a payment of a debt that is owed to the credit provider is deferred, or the customer incurs a deferred debt to the credit provider.[4] “Amount of credit” is defined in the NCC (only) as:

“For the purposes of this Code, the amount of credit is the amount of the debt actually deferred. The amount of credit does not include:

(a) any interest charge under the contract; or

(b) any fee or charge:

(i)   that is to be or may be debited after credit is first provided under the contract; and

(ii)    that is not payable in connection with the making of the contract or the making of a mortgage or guarantee related to the contract.”[5]

The result of the above NCC provisions is that interest charges and any fees payable by a customer under a loan do not form part of the “amount of credit”. In effect, what this could mean is, where interest charges and fees and charges owed by the customer to a credit provider under the credit contract then fall into arrears, and after applying for and being granted hardship relief by the credit provider, the customer’s arrears (including interest and fees payable), are capitalised into the loan by way of variation, the interest and fees portion from the variation date could in fact amount to an increase in the “credit limit”.

The reason for this appears to be a technicality based on how the definitions are phrased, however there is certainly some debate about whether or not, in light of that definition, under the NCC any deferral of interest or fees that applied under the original loan contract, would be an increase in the amount of credit from the variation. Because the interest and fees are re-categorised from being interest and fees under the original contract (and therefore excluded from the definition of deferred ‘amount of credit’ according to the NCC), to being deferred credit (part of the principal amount, upon which interest accrues) on and from the capitalisation variation, there is an argument that a variation to capitalise fees will increase the credit limit and trigger responsible lending obligations.

Where there is uncertainty, there is risk that a consumer, lawyer or Court might interpret the provisions against a credit provider to require them to undertake responsible lending obligations on a hardship application that involves capitalising interest and arrears over and above the original “credit limit”.

To further add to this confusion, the definition of “amount of credit” is only defined in the NCC and has not been incorporated into the NCCP Act. While it does not entirely make sense that a definition in the NCC is not also to be applied in the same manner as the NCCP Act given the NCC is a Schedule to the NCCP Act, there may be a technical argument that this NCC definition only applies for the purposes of the NCC and therefore does “amount of credit” does not exclude interest and fees from its definition when used in the NCCP Act definition of “Credit Limit”.

If interest and fees are able to be included in the ‘amount of credit’, then deferring interest and fees as part of a hardship variation will not increase the ‘credit limit”, as it will not increase the “the maximum amount of credit that may be provided under the contract[6] given the original credit limit already included those interest and fees.

Does this sound confusing to you too? It should. The definitions do not neatly tie together to clarify the situation, and common sense tells us that, as variations for hardship that involve capitalising interest and fees do not involve additional advances to the customer, why would anyone consider this variation an increase the credit limit of a credit contract for the purposes of section 128 of the NCCP Act? To assist, industry and the banking and finance legal profession would welcome further guidance from ASIC on this particular topic.

Industry and regulator view

Rather than rely on the technicalities of tracing through confusing definitions, many banking and finance institutions and their legal counsel, look to guidance from Australian Securities and Investments Commission (ASIC). ASIC’s Information Sheet 105 says that hardship variations made under section 72 of the National Credit Code (NCC) or clause 28 of the Code of Banking Practice are not exempt from the responsible lending provisions under the NCCP, where the variation involves either an increase to the credit limit under a credit contract or the entry into a credit contract. The question in this paper is, does a credit provider need to undertake a credit assessment where the credit limit is increased beyond “the maximum amount of credit that may be provided under the contract[7] as a result of capitalising interest and fees? Logic tells us that, by virtue of the customer being in hardship it will be difficult for any hardship request to be agreed in these circumstances, as generally hardship involves a level of temporary financial hardship, which would no doubt fail a credit provider’s serviceability test.

While responsible lending provisions will apply to hardship variations if additional credit is provided, it looks like ASIC does not believe that the provision of additional credit would be very likely in the vast majority of cases. In ASIC’s Information Sheet 105 it further explains that many hardship arrangements involve a reduction in the amount of the repayments for a period (including the capitalisation of interest, fees and charges). It therefore appears that ASIC’s view is that capitalisation of interest, fees and charges would not constitute a credit limit increase after all. While this is an ideal position from a credit provider’s point of view, the problem is, the Law is not clear and so the release of further specific guidance from ASIC on this point, with reference to the unclear sections in the NCCP Act and NCC, might be the only way to resolve this issue for industry.

There appears to be some confusion by the banking and finance industry and their advisers about the correct answer, with Financial Ombudsman Services (FOS) and Credit and Investments Ombudsman (CIO) apparently sharing ASIC’s view that capitalising interest and fees should not amount to a credit limit increase and trigger responsible lending provisions under the NCCP Act.


While the question whether some hardship variations technically trigger responsible lending obligations may not have a clear answer under the NCCP Act, NCC and ASIC guidance when it comes to defining an increase to credit limits for the purposes of hardship variations to capitalise arrears, what is clear is that ASIC intends for all credit providers who provide credit limit increases to customers (including those customers who apply for credit limit increases as a result of a hardship application) to conduct unsuitability assessments in accordance with the NCCP Act. The hope from the banking and finance and legal industry is that, this level of uncertainty in areas as important as hardship and responsible lending under the NCCP Act will prompt quick action by ASIC to clarify their position on the topic so that credit providers can be sure that they are applying the correct policy and procedures to hardship applications moving forward.


Leonie Chapman

Principal Lawyer and Director

LAWYAL Solicitors  

About the author

Leonie Chapman’s experience extends to banking and finance, consumer credit and mortgage lending, contract negotiation, trade practices and fair trading legislation, intellectual property and trade marks, corporate and financial services. After completing her Bachelor of Laws and Bachelor of Commerce in 2002, Leonie went on to work both in private practice and as senior in-house lawyer supporting a specialist lender and then for six years, Macquarie Bank Limited. Having achieved a Master of Laws in 2009 specialising in banking and finance law, Leonie’s main focus now as Principal of LAWYAL Solicitors is on regulation and compliance for banking and financial institutions.


[1] National Consumer Credit Protection Act 2010 (Cth)

[2] National Consumer Credit Protection Act 2010 (Cth), sections 128 to 130

[3] National Consumer Credit Protection Act 2010 (Cth) section 5(1), and National Credit Code, section 204

[4] National Credit Code, subsection 3(1)

[5] National Credit Code, subsection 3(2)

[6] National Consumer Credit Protection Act 2010 (Cth) section 5(1), and National Credit Code, section 204

[7] National Consumer Credit Protection Act 2010 (Cth) section 5(1), and National Credit Code, section 204

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NCCP Responsible Lending and Advertising

First published by LexisNexis Banking and Finance Law Bulletin in November 2015 


The National Consumer Credit Protection Act[1] (NCCP Act) prohibits credit providers from making unconditional representations to potential customers that the customer is eligible to enter into a credit contract with them, or that a credit limit of a credit contract will be able to be increased, unless the credit provider has conducted a credit assessment that the new credit is ‘not unsuitable’ for the customer.[2] Banking and finance lawyers should be mindful that this has an real impact on the way a credit providers are able to market credit products to customers upfront, as well as the prohibition under Australian Securities and Investments Commission Act[3] (ASIC Act) from engaging in conduct that is misleading or deceptive, or likely to mislead or deceive customers of financial services (including the provision of credit). These provisions have an impact on the way a credit providers are able to market credit products to customers upfront, and so advertising and promotional material should be reviewed carefully before being published, particularly given is an area were Australian Securities and Investments Commission (ASIC) is currently paying some attention.

Misrepresenting that credit is guaranteed

The practical implication in credit providers not being permitted, under the NCCP Act, to making unconditional representations to potential customers about eligibility to enter into a credit contract or credit limit increase, before conducting a credit assessment[4], is one of timing. Given the credit assessment cannot be made until the credit provider makes reasonable inquiries about the customer’s financial situation and requirements and objectives, and has taken reasonable steps to verify the customer’s financial information[5], and then taking into consideration the findings of those inquiries and objectives, made an assessment that the credit contract or credit limit increase is “not unsuitability” for the customer, then any upfront marketing that suggests a customer can take out credit, must be carefully disclaimed with a statement that any decision to lend is subject to credit assessment. This particularly impacts website and social media advertising, customer borrowing capacity letters and online calculators, indicative approval letters and any verbal statements made by the credit provider.

In these documents, Australian Credit Licensees should be careful not to guarantee approval until the assessment has been made that the loan is “not unsuitable”, given the NCCP Act requires an individualised assessment process for each customer once an application and all supporting documentation is received. Further, in any online quotes, estimates or calculator tools, credit providers should not imply in advertisements that a more individualised assessment has in fact been carried out, when in fact it has not. Credit providers should make it clear to customers that they only ‘may’ qualify or find the product suitable.

In Regulatory Guide 209[6] ASIC provides an example of an advertisement representation about ‘guaranteed’ finance that should be avoided. The example describes advertisements for personal finance that stated that finance was ‘guaranteed’ and said ‘no application refused’, which in ASIC’s view were either incorrect and misleading claims, because responsible lending obligations would prevent credit from being provided if it was unsuitable, or, if correct, demonstrated poor and potentially unlawful lending practices.[7]

Misrepresenting speed and ease of credit assessment

Banking and finance lawyers should also carefully consider certain promotional claims about the speed or ease of the credit assessment process in credit provider advertising claims, where such claims are either misleading or reflect practices that do not comply with the NCCP Act responsible lending obligations. This is not to say that in the current FinTech space, with the use of technology and carefully designed and compliant processes, a credit assessment cannot currently be achieved quickly. It can, however where a business makes such a claim it must ensure that it can be substantiated by fact. This risk is not limited to credit providers, and extends to white label credit assistance providers who represent themselves as offering a branded home loan or other credit product, who must be careful both from an NCCP Act perspective and contractually with their funders, that they do not falsely represent that credit can be provided without a credit assessment being conducted.

False claims that a credit assistance provider or credit provider’s credit assessment process can be achieved without the necessary steps being take, including verification by the credit assistance provider and credit provider of the customer’s financial situation, may attract negative attention from ASIC and dispute by customers. In particular the new FinTechs currently disrupting the consumer credit market with new technology, are being watched carefully by ASIC to ensure their marketing claims can be substantiated in relation to exactly how fast and how easy the assessment process really is, and should be.

As a credit provider’s unsuitability assessment must be based on inquiries about a consumer’s requirements and objectives and financial situation, and verification of the customer’s financial situation, it is ASIC’s view that this process takes time (including often conducting credit checks and valuations), and ASIC has therefore given guidance[8] that credit providers should carefully consider whether promoting ‘instant’ or ‘very fast approvals’ are misleading or reflect practices that do not comply with the responsible lending obligations.[9] In general, advertisements should not state or imply that a credit product is suitable for a particular class of consumers unless a credit provider has actually assessed the suitability of the product for the particular consumers targeted by the advertisement. The terms ‘guaranteed acceptance’ or ‘pre-approved’ might not be appropriate in promotions, given the need to conduct an individualised assessment process when an application is received from a customer.

Misrepresenting products, benefits and distribution

In preparing any advertising, marketing or promotional material that mentions the possibility of refinancing existing debts or debt consolidation, banks and their in-house teams should be mindful that the advertising does not mislead customers into any overall cost savings given generally over the extended loan period the overall cost could be higher. Further, for products that may result in possible tax deductions (for example, investment loans) credit providers should be careful not to misrepresent the benefits and must particularly avoid providing any taxation benefits advice to customers. ASIC has also provided guidance that Australian Credit Licensees should carefully consider whether promotional claims about ‘no-doc’ type products given the need for them to verify financial situation, as well as claims that approval can be given with ‘no credit checks’. To ASIC, these could be either misleading, or they could reflect practices that do not comply with responsible lending obligations.

It is advisable to take care when publishing advertisements for products that can be acquired directly from the credit provider when in fact it can only be acquired through an adviser, broker or intermediary. ASIC states in Regulatory Guide 209 on this point, that “advertisements should not rely on a third party to fill in any gaps to correct a misleading impression created in the advertisement itself.”[10] Further, where a product is overly complex, an advertisement should be drafted simplistically enough that it is capable of explaining sufficiently what that product is about.[11] If a product is particularly complex in terms of structure and the ability for customers to understand the product risks, then care must be taken by banking and finance legal teams to ensure the advertisement is written in Plain English and to avoid creating misleading impressions about the product. What is also relevant to in-house teams is the limited space sometimes available in credit advertising, where it might be inappropriate and misleading to advertise a complex product on, for example, an internet banner advertisement, sign in a public venues or on a 30-second television or radio commercial.

Reliance on disclaimers

Often credit providers will add a disclaimer to the following effect: ‘Our provision of credit is subject to the credit provider being satisfied with the suitability of the [credit product] in light of your financial situation and requirements’. While this may help explain to customers (and ASIC) that any representation is subject to a credit assessment, the usefulness of the disclaimer depends on its size, positioning and the representation being made in the content being disclaimed. When relying on disclaimers, banking and finance lawyers should be mindful about ASIC’s guidance in Regulatory Guide 234 that “[t]he headline claim must not itself be misleading”[12]. The use of terms such as ‘conditions apply’ or ‘find out if you qualify’ may not always be sufficient to warn consumers that the advertised product may not be suitable for, or made available to them.


Consumer credit advertising laws can often be frustrating for banking and financial institution, including their marketing and in-house teams, who frequently have to navigate around multiple regulations including the NCCP Act and ASIC Act when it comes to advertising credit products. With the constantly evolving credit assessment process and the arrival of new FinTechs in the consumer credit market, the credit assessment processes are now being challenged in terms of how quickly and easily responsible lending can be complied with, and in turn, now a credit product and credit approval process can be advertised. As each advertisement, credit provider and process of approval will be unique, it is important that banking and finance in-house teams carefully scrutinise each publication to ensure that statements are not misleading and do not make false claims about credit being guaranteed, immediate or without credit assessment. This approach to marketing approvals may help mitigate a credit provider’s risk of negative attention from ASIC, something that is definitely worth avoiding.


Leonie Chapman

Principal Lawyer and Director

LAWYAL Solicitors  


About the author

Leonie Chapman’s experience extends to banking and finance, consumer credit and mortgage lending, contract negotiation, trade practices and fair trading legislation, intellectual property and trade marks, corporate and financial services. After completing her Bachelor of Laws and Bachelor of Commerce in 2002, Leonie went on to work both in private practice and as senior in-house lawyer supporting a specialist lender and then for six years, Macquarie Bank Limited. Having achieved a Master of Laws in 2009 specialising in banking and finance law, Leonie’s main focus now as Principal of LAWyal Solicitors is on regulation and compliance for banking and financial institutions.


[1] National Consumer Credit Protection Act 2010 (Cth)

[2] Above, n 1, at s 128

[3] Australian Securities and Investments Commission Act 2001 (Cth), s 12DF

[4] Above, n 1, at s 128

[5] Above, n 1, at s 130

[6] Regulatory Guide 209, at Example 45

[7] Regulatory Guide 209, at Example 45

[8] Regulatory Guide 209

[9] Regulatory Guide 234, at s234.110 to 234.114

[10] Regulatory Guide 234, at 234.115

[11] Regulatory Guide 234, at 234.116

[12] Regulatory Guide 234, at s234.47

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Financial System Inquiry: Part 2 – A lending industry perspective on SMSF lending

By Leonie Chapman – LAWyal Solicitors, and Tim Brown – President of MFAA
(first published by LexisNexis in Banking & Finance Bulletin – May/June 2015


This is the second article in our two part series covering a lending industry perspective on the Financial System Inquiry (FSI). In Part One , we explored the findings by the FSI panel as they apply to the mortgage broking and lending industry and in particular, heard the views of Tim Brown, Chairman of the Mortgage and Finance Association of Australia (“MFAA”) on the Final Report’s findings in relation to competition in the banking sector. In this second article, we explore the FSI’s recommendations to prohibit self-managed superannuation fund (“SMSF”) lending, and the lending industry’s response as expressed by MFAA.

To recap, in late 2013 the Treasurer released draft terms of reference for the FSI, charged with examining how the financial system could be positioned to best meet Australia’s evolving needs and support Australia’s economic growth. The intension of the FSI is to establish a direction for the future of Australia’s financial system. In July 2014 the Committee produced its Interim Report (“Interim Report”), dealing with issues relevant to Credit Advisers such as the substantial regulatory reform agenda, and relevant to this article, the restoration of a ban on SMSF lending. In November 2014 the FSI Final Report was published (“Final Report”) taking into account industry and expert responses, including from the MFAA. In this article we explore the Final Report recommendation for a prohibition on SMSF lending through Limited Recourse Borrowing Arrangements (“LRBAs”), which MFAA and other industry participants challenge for the reasons outlined below.

Interim Report on SMSF leverage risk

The Interim Report documented findings that the number of SMSFs has grown rapidly, now making up the largest segment of the superannuation system in terms of number of entities and size of funds under management, which are expected to continue to grow. The use of leverage in SMSFs to finance asset purchases is also growing, with the proportion of SMSFs, while still small, increasing from 1.1 per cent in 2008 to 3.7 per cent in 2012. The Interim Report observes that, allowing the use of leverage in SMSFs to finance assets to grow “may create vulnerabilities for the superannuation and financial systems”, as leverage magnifies risk “both on the upside and downside.” While leverage was originally prohibited in superannuation in most situations, in 2007 the Superannuation Industry (Supervision) 1993 (SIS Act) was amended to allow all SMSFs to borrow.

The key policy option put forward by the FSI’s Interim Report was to restore the general prohibition on direct leveraging of superannuation funds on a prospective basis. It argues the general prohibition was put in place for sound reasons, including one highlighted during the Global Financial Crisis (GFC) where it demonstrated the benefits of Australia’s almost entirely unleveraged superannuation sector, which the Interim Report claims resulted in minimal losses in the superannuation sector. This had a stabling influence on the financial system according to the Interim Report , one of the key objectives of the FSI.

MFAA Submission in response to FSI’s Interim Report

While Mr Brown and the MFAA acknowledge the Interim Report’s comments that borrowing in SMSFs are often associated with poor advice by Credit and Financial Advisers and Accountants related to establishing an SMSF as part of a geared investment strategy , in its submissions to the Interim Report MFAA expresses a view that rather than prohibit direct SMSF leveraging, training and education of Advisers and Accountants is a better alternative, including continuing initiatives such as the MFAA SMSF Lending Accreditation. This would help ensure consumers are better protected by qualified advice from all the professionals in the SMSF process, including SMSF lending. The introduction of MFAA’s new SMSF Lending Accreditation program was motivated in 2012 after it recognised the gap in understanding of SMSF lending by quality Advisers, and a desire to ensure they were properly educated in understanding its risks and pitfalls. Mr Brown describes one of the key outcomes of the program is to develop Credit Advisors to be competent in relation to LRBAs, to better be able to advise on the appropriateness and suitability of this type of lending from a credit perspective.

Mr Brown describes how at an institutional level, Lenders have also been diligent in creating SMSF lending products that will protect SMSF trustees and beneficiaries, while at the same time providing the flexibility to achieve SMSF objectives. For example, most major lenders require a Financial Advice Certificate by Financial Advisers or Accountants to certify that the lending is appropriate for the trustee, and have started to introduce a minimum fund balance. Lending criteria is also tightening, with lenders mortgage insurers requiring properties to be funded with LRBA’s to be at least 12 to 18 months old, which reduces the risk of off-the-plan property sales from property developers and therefore reduces asset value. All lenders require property valuations and many a maximum Loan to Value Ratio of 80% for residential property, to help improve the SMSF cash flows and improve liquidity within the fund. Finally, responsible lending guidelines are followed by Lenders, when assessing suitability of SMSF lending products.

Final Report recommendations on direct borrowing for LRBAs

In the Final Report , despite submissions from industry arguing against it, including the above arguments from MFAA, the FSI recommended the removal of the exception to the general prohibition in direct borrowing by SMSF from LRBAs under the SIS Act . The section the FSI seeks to remove, currently allows SMSFs to borrower to purchase assets directly into the SMSF using LRBAs. The Final Report lists objectives including preventing the “unnecessary build-up of risk in the superannuation system and financial system more broadly” and to fulfil the “objective for superannuation to be a savings vehicle for retirement income, rather than a broader wealth management vehicle.”

In essence, the Final Report is concerned that borrowing even with LRBAs will magnify gains and losses from fluctuations in the price of assets held within SMSFs, and particularly so soon after the GFC. This could increase the risk of large losses in funds, where lenders can charge higher interest rates and require more personal guarantees from trustees. In this particular example, with a significant reduction in value of the asset and personal guarantees, the Final Report describes a likely outcome that the trustee would sell other assets in the fund to repay a lender, which could mean ineffective limiting of losses flowing from one asset to others, either inside or outside the SMSF.

In many cases, SMSFs were set up to achieve a diversity of assets, mostly in the form of shares, money and real estate. As such, the Final Report believes that selling other assets to pay a loan might concentrate the asset mix of a small fund, which reduces the benefits of diversification and increases risk to the SMSF. The ultimate end result of a failure of superannuation like this, the Final Report believes, will be a transfer of downside to taxpayers, through the provision of the Age Pension. Finally, the FSI is not keen on borrowing by SMSF where it allows members to circumvent contribution caps and accrue large assets in the superannuation system in the long run.

Industries views on banning SMSF lending

Predictably the recommendation to ban SMSF LRBAs has been attacked from many sectors, with some pointing to the current low volumes, and others, like MFAA, stating that lending standards should be tightened and advice requirements toughened. Many Accountants and Financial Advisers join the voice of MFAA in disagreeing with the FSI’s recommendation to ban direct borrowing in SMSFs, predicting intense lobbying for and against LRBAs in 2015 and strong resistance to the recommended ban. In a joint submission to the Final Report by MFAA, Association of Financial Advisers, Financial Planning Association of Australia and Commercial Asset Finance Brokers Association of Australia, MFAA reminds the FSI of the heavy Government regulation and self regulation over the SMSF industry and outlines that the sector has been assessed favourably by ASIC and the ATO, with no hint of any systemic risk having been raised in relation to SMSF lending.

Regarding personal guarantee risk:

Regarding the Final Report’s comments that there is a frequent use of personal guarantees to protect Lenders against the possibility of large losses and this could potentially reduce the effectiveness of the SIS Act restrictions, this is unlikely to be the case in many scenarios involving LRBAs, according to Mr Brown. The SIS Act prohibits any legal right of recourse against the assets of the fund should the trustees default on the loan. The rights of the lender against the fund as a result of default on the borrowing are limited to rights relating to the acquirable asset. Some industry submissions even call for a ban on personal guarantees, however MFAA’s joint submission highlights that the removal of personal guarantees will result in Lenders lowering LVRs for LRBAs, meaning that SMSFs will need to contribute more of the purchase price for the property, impacting the ability of SMSF to diversify its asset mix and restricting the availability and cost of finance. Given the very low default rate of LRBAs, MFAA does not believe that the removal of member personal guarantees is justified.

Regarding diversification:

To the Final Reports comments on diversification, most in the industry, including Mr Brown and the MFAA, agree that there are some dangers of SMSF lending, and in particular if the weighting of property in SMSFs is too heavy then this could reduce the diversification benefit of leveraging . An SMSF is essentially about having liquid assets to fund retirement, and therefore having assets tied up in property could result in SMSF portfolios that are predominantly based in real estate rather than cash or some other form of greater. However, MFAA also believes that a restriction in maximum LVR to 80% will help address the diversification risk the FSI has raised. In fact, without gearing, a lot of SMSFs may be forced to access real estate exposure through managed funds and their portfolios could be restricted only to shares and money. Some submissions describe a key differences between “traditional style” leveraged investments and LRBAs, claiming a lower level of systemic risk posed by direct SMSF leverage compared with direct leverage outside of superannuation.

Many in the industry, including Mr Brown, believe that the use of LRBAs is likely to result in higher, and not lower, levels of asset diversification and lower, and not higher, levels of investment risk, as they enable SMSF investors to reduce their exposure to asset classes which historically SMSFs have held over exposed positions, such as listed securities and cash. For example, according to MFAA’s joint submission in response to the Final Report, due to the long term performance and stability of property, if SMSF borrowing is banned, SMSFs with moderate balances will still invest in direct property using cash and such investments will be at the expense of fund diversification.

Further, banning LRBAs, according to MFAA’s joint submission, will simply channel SMSFs into less regulated, riskier structures that also use leverage, such as unit trusts, warrant products and derivatives. To the contrarily, LRBAs are within the oversight of the ATO and must comply with strict rules set out in the SIS Act. Despite any ban, SMSFs would also still be able to invest in management investment funds holding direct property. As superannuation is compulsory in Australia, individual should have the discretion regarding where and how to invest those savings and SMSF lending is essential to consumer choice and competition, to allow people to build their retirement savings in a manner that suits their needs and preferences. Finally, banning SMSF lending could also have a significant impact on small businesses that use leverage to assist their SMSF to purchase their business property, which is then leased to a related trading entity.

Possible alternative solutions suggested by industry:

As demonstrated, Mr Brown believes the impact on banning SMSF lending will be significantly felt, and he and the MFAA believes that better education and training for those involved in the SMSF lending industry, measures to protect and license LRBA advice, and the continue restriction of lending parameters for SMSF lending, are better alternatives to prohibiting SMSF lending completely. He also believes that in order to give Australians confidence in superannuation it is important that regulation in the industry is stable. Many trustees enter into long-term investments, and making regular changes to the superannuation laws means that trustees lack the necessary certainty to make such long term, stable investments. At the very least, Mr Brown believes, the LRBA provisions should not be repealed without first implementing proposed regulations and protection measures, and after some time, assessing their effectiveness. MFAA also believes banning borrowing from related parties could assist reduce the risk, and require borrowing to be from a licenced lender, with sound credit policies and a requirement for independent financial and legal advice for the trustee.

Unfortunately for industry, however, there is a risk that it may face a difficult task lobbying to retain SMSF lending against the FSI’s recommendations to ban it. Many submissions put forward by industry wish to improve the superannuation system and seek to weigh up the costs versus benefit of SMSF funding, however according to some, very few have responded directly to the actual concern of the FSI. The terms of reference of the FSI are to promote a competitive and stable financial system that contributes to Australia’s productivity growth, and to consider the threats to stability of the Australian financial system, including superannuation. The review did not consider the potential benefits to superannuation leverage or the inappropriateness of advice. It was set up to ensure the prevention of unnecessary build-up of risk in the superannuation and financial system and to fulfil the objective for superannuation to be a savings vehicle for retirement income. The Final Report noted some of these alternatives to address the risk surrounding SMSF borrowing and the industry goal to provide funds with more flexibility to pursue alternative investment strategies, however found that some alternatives would impose additional regulation, complexity and compliance costs on the superannuation system.

Despite this, according to MFAAs joint submission to the Final Report, the FSI has not provided any evidence of risk, damage or loss arising from LRBAs. The evidence cited in support of the ban is anecdotal at best, according to Mr Brown. In any case, as mentioned above the MFAA believes that a ban on SMSF lending to avoid leveraging will be ineffective because SMSFs will still be able to invest in derivatives and other traded products with built in leverage, and if the underlying company or investment scheme fails, there is no residual value on the asset. This, however, is not the case with real property, which is the primary asset acquired through the use of LRBAs. Even if property values fall, the asset itself is still a residual value and it is often hard for yields to be materially adversely affected, even during the GFC. MFAA’s joint submission explains how real property has an added benefit of providing capital growth as well as an income stream during retirement (for example, rental income on investment properties), where dividends are not and therefore shareholdings may need to be sold when the fund moves into pension mode.


The Government is currently considering the recommendations of the FSI and is accepting consultations, with plans to respond sometime during 2015. In summary, the FSI panel was mostly concerned that leverage in the superannuation system, combined with leverage in the banking sector, will weaken the financial system and limit the ability to respond to the next GFC. As leverage cannot be removed from the banking sector, the only response is to ban it in the superannuation system. In making its recommendation, the FSI believes that the ability for SMSFs to borrower funds may, over time, erode the strength of the Australian superannuation industry, and could contribute to systemic risks to the financial system if allowed to grow at high rates. According to FSI, prohibiting direct borrowing by SMSF would be consistent with the objectives of superannuation being a savings vehicle for retirement income, and would in the views of the FSI, preserve the strengths and benefits of the superannuation system for individuals, the system and the economy. In particular, they expressed concern that if SMSFs do not meet the retirement objectives the Government hopes for, they will then have to fall back on the public purse to fund retirement through taxes.

So far many of the banking and advisory industries appears to disagree with the ban and it will be interesting to see how hard MFAA and other industry bodies will lobby for LRBAs in 2015. Mr Brown and the MFAA believe that Credit Advisers and Lenders are acutely aware of the potential negative implications of LRBAs and have introduced policies to substantially reduce the risk presented to clients, and ensure that trustees have success with SMSF lending. With the work being undertaken by the MFAA to up skill members on LRBAs, and the proactive initiatives undertaken by Lenders to ensure responsible Lending, the restoration of the general prohibition on direct leverage of superannuation funds in the views of the MFAA, is inappropriate. Given the broad number of stakeholders who would be impacted by a ban on SMSF lending, the potential risks to the financial system if it is not banned according to the Final Report, and the currently very low default rate of LRBAs according to MFAA, it will be interesting to see if the Government pursues the prohibition, and if it does, the flow on consequences to the banking, advisory and superannuation industries.


Leonie Chapman
Principal Lawyer and Director
LAWYAL Solicitors

Tim Brown
President of Mortgage Finance Association of Australia (MFAA)


1. L Chapman and T Brown, Financial System Inquiry: Part 1 – A lending industry perspective on competition, LexisNexis Australian Banking & Finance Law Bulletin, 2015 Vol 31 No 1, at p 4
2. Submission by Mortgage Finance Association of Australia in response to Financial System Inquiry, dated March 2014
3. Financial System Inquiry, Final Report, Treasury, November 2014
4. Submission by Mortgage Finance Association of Australia in response to Financial System Inquiry, Interim Report, dated August 2014
5. Financial System Inquiry, Interim Report, Treasury, July 2014, at p 2-116
6. Above, n 5, at p 2-117
7. Australian Securities and Investments Commission (ASIC) 2013, SMSFs: Improving the quality of advice given to investors, Report 337, ASIC, Sydney.
8. Submission by Mortgage Finance Association of Australia in response to Financial System Inquiry, dated August 2014
9. Above, n 3, at p 86
10. Superannuation Industry (Supervision) Act 1993, s 67A
11. Above, n 3, at p 86
12. Above, n 3, at p 86
13. N Bendel, Finance broking associations at odds over SMSF borrowing, SMSF Adviser, 8 January 2015
14. Above, n 3, at p 86
15. M Masterman, Accountants reject ban on SMSF borrowing: poll, SMSF Adviser, January 2015
16. Joint Submission by Mortgage Finance Association of Australia, Association of Financial Advisers, Financial Planning Association of Australia and Commercial Asset Finance Broker Association of Australia in response to Financial System Inquiry Final Report, dated March 2015
17. Above, n 10, s 67A
18. Above, n 10, s 67A
19. K Taurian, Cavendish disputes FSI stance on borrowing, SMSF Adviser, 9 April 2015
20. Above, n 16
21. Above, n 13
22. Above, n 13
23. Above, n 19
24. Above, n 19
25. Above, n 16
26. Above, n 16
27. Above, n 16
28. L Smith, Have people got the FSI SMSF LRBA recommendation wrong?, SolePurposeTest, 2 April 2015
29. Financial System Inquiry’s terms of reference dated 20 December 2013
30. Above, n 5, at p 2-116
31. Above, n 16
32. Above, n 28
33. Above, n 29
34. Above, n 5, at p 2-116
35. Above, n 3, at p 88
36. Minter Ellison Lawyers, FSI must focus on SMSF risks, News, accessed in April 2015
37. Above, n 16

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Financial System Inquiry: Part 1 – A lending industry perspective on Competition

By Leonie Chapman – LAWYAL Solicitors, and Tim Brown – Chairman of MFAA

First published by LexisNexis Banking and Finance Law Bulletin 2015 Vol 31 No 1 


In late 2013 the Treasurer released draft terms of reference for the Financial System Inquiry. After consultation with interested stakeholders, the Treasurer appointed an independent Committee charged with examining how the financial system could be positioned to best meet Australia’s evolving needs and support Australia’s economic growth.[i] The intension of the Financial System Inquiry is to establish a direction for the future of Australia’s financial system, given it has been sixteen years since the last financial system inquiry. In July 2014 the Committee produced its Interim Report (“Interim Report”), which tackled issues relevant to credit advisers such as the substantial regulatory reform agenda, new competitive dynamics in the banking sector and the impact of the global financial crisis (“GFC”). As part of consultation with the banking and finance industry, the Mortgage and Finance Association of Australia (“MFAA”) responded[ii] specifically to express, among other matters, its disagreement with the Interim Report’s observation that the banking sector is competitive, albeit concentrated.

In November 2014 the Financial System Inquiry Final Report[iii] was published (“Final Report”) taking into account industry and expert responses, including from the MFAA[iv]. In this article, we explore the findings in the Financial System Inquiry as they apply to the mortgage broking and lending industry and in particular, hear the views of Tim Brown, Chairman of the MFAA on the Final Report’s findings in relation to competition in the banking sector.


The Interim Report observes that competition can still be strong between players in a concentrated market, stating “market concentration can be a by-product of competition, if more efficient firms grow at the expense of their less efficient competitors.”[v] The Final Report concluded that that competition is generally adequate in the market, although the high concentration and increasing vertical integration in some parts of the financial system has the potential to limit the benefits of competition in the future and should be proactively monitored over time.[vi] Generally, Tim Brown and the MFAA disagree with the Final Report findings that the banking sector is competitive, albeit concentrated, and we provide below a lending market perspective on competition in the Australian financial system, that may be of interest to banking and finance lawyers.

GFC and competition

Firstly, Mr Brown explains how the Interim Report and Final Report both seem to incorrectly and narrowly focus on the ‘banking sector’ rather than reference to the wider ‘lending sector’. In 2007, 85% of the residential lending market was made up of banking sector institutions (including mutual communities), with the remainder of the share going to non-bank and specialist lenders. Up until the GFC the specialist-lending sector successfully competed with the banks and stole significant market share from banks, resulting in overall lower margins in favour of customers.

While to a certain extent the Final Report’s statement that competition can still exist in a concentrated market, may be true, Mr Brown describes how this does not in any way reflect the dynamics of the lending market since 2007. In the MFAA response[vii] to the Interim Report, it submitted that larger banks have grown in market share since 2007 resulting in a more concentrated lending market, not because the larger banks have been ‘more efficient’, as the Interim Report suggests, or as a by-product of competition. Rather, the MFAA believes there are a number of other factors that explain why larger banks have grown, including: (a) the GFC; (b) the allowing mid-tier banks and lenders to be acquired by larger lenders without regulatory intervention; (c) over regulation, including the Government’s ill-considered decision to ban exit fees; (d) Government intervention with wholesale funding and savings guarantees; and (e) the reduction (or elimination) of securitised funding to smaller lenders.

In particular, regarding the influence the government guarantees had on competition, the Final Report noted simply that “perceptions of implicit guarantees in the banking system can distort competition by providing a funding advantage to those banks”[viii], however went on to say that any recommendations that increase resilience of the largest banks, will reduce these perceptions over time and help contribute to restoring a more competitive environment. So far, the perceptions of the MFAA have not changed. It believes that these advantages to the larger banks and lenders throughout the GFC, to the clear disadvantage of the smaller banks and specialist lenders, played a large part in creating the lack of competition in the lending sector we see today. On this basis, Mr Brown and the MFAA continue to contend the Financial System Inquiry’s findings that the current concentration of the lending market is a by-product of competition and that the reason for banks taking a larger share is their efficiency. It is Mr Brown’s view that the lending sector in particular is not as competitive as it should be, and the ultimate disadvantage is to consumers.

Vertical integration of credit advisers and competition

An imbalance of regulatory cost versus share of market, coupled with the GFC, which saw large banks swallow some mortgage aggregators and brokers. The Financial System Inquiry asks whether this vertical integration is distorting the way in which credit advisers direct borrowers to lenders?[ix] Mr Brown explains how the MFAA would be concerned if the response to this question was ‘yes’. While MFAA believes large banks and lenders swallowing smaller banks and lenders has created less competition in the banking sector, it strongly disagrees with the Financial System Inquiry findings that vertical integration of credit advisers into larger aggregators and lenders has had the unintended effect of reducing competition. There is a big difference, according to Mr Brown. There is no evidence that bank ownership of some mortgage broking groups is influencing individual brokers to act anti competitively and against the consumers’ interest. To the contrary, Mr Brown explains that the evidence shows that credit advisers have been influential in diffusing the concentration in the market and has assisted with facilitating competition, in particular in the mortgage lending market.

The heart of the question by the Financial System Inquiry, according to Mr Brown, is the assumption that ownership of a mortgage aggregation or broking group may influence the conduct of an individual credit adviser, being a member of one of those groups, to the disadvantage of consumers. As the conduct of credit advisers is robustly governed by the provisions of the National Consumer Credit Protection Act, 2009 (NCCP Act), MFAA argues against this assumption. Credit advisers are required to be licenced, disclose commissions and the lenders on their panel, conduct responsible lending assessments and in particular, are required to ensure there is no disadvantage to clients as the result of any conflicts of interest that may arise. Of particular interest to banking and finance lawyers like myself, Mr Brown explains how, unlike other legislation such as Corporations Act 2001 (Cth), which requires an AFSL holder to ”have in place adequate arrangements for management of conflicts of interest”[x], credit advisers cannot simply manage a conflict through disclosure. Credit advisers under the NCCP Act are required to take individual responsibility to ensure there is no consumer disadvantage as a result of a conflict.[xi]

Further, MFAA statistics[xii] documented in their response to the Interim Report, demonstrate that currently a consumer is less likely to be recommended a product with one of the big four lenders by a broker (at 74%), than if they sourced the product directly with the big four banks (at 82%). This should be considered in light of the fact that aggregators and broking groups which are now wholly owned by the big four lenders, comprise an estimated 40%[1] of all credit advisers. If credit advisers were directing borrowers to their bank holding companies in conflict with their duties to customers, according to the MFAA it should be expected that the percentage of loans transacted by brokers into the top four banks would be much higher. The MFAA continues to believe that credit advisers play a role in diffusing the concentration in the market, rather than adding to it, by recommending products from smaller lenders and ensuring genuine suitability of loan product for their customers.

Financial System Inquiry did comment that stakeholders provided little evidence of differences in quality of advice from independent, aligned or vertically integrated mortgage broking firms, however it still sees value to the customer in making ownership and alignment more transparent.[xiii] The Financial System Inquiry has recommended that brokers should disclose their ownership structures more broadly than the current Credit Guide rules apply, and disclosure should extend to branded documents and materials.[xiv]We think it is highly doubtful that the benefits to consumers in adding further disclosure requirements on brokers will outweigh the already high transitional costs to the industry of effective branding changes.

Regulation and competition

This brings us to the question of regulation and its impact on competition. In MFAA’s submission[xv] in response to the Interim Report, it stated that regulation must either be competition enhancing or, at least, competitively neutral in its impact on the various players in the lending market. The consumer credit and other regulations introduced to the mortgages industry over the last five years with its many requirements and high compliance cost, apply equally to a small credit adviser as it does to a large bank. Further, banning exit fees may have even had the unintended impact of reducing competition between the larger and smaller lending players. This has resulted in an inequity across the sector, with smaller credit advisers and non-bank lenders struggling to keep up with the regulatory costs that can be better absorbed by the big banks. In our view, this does not mean small credit advisers are less efficient.

Mr Brown and the MFAA submission[xvi] express a desire for any new regulation to enhance competition, rather than decrease. Mr Brown explains the MFAA’s view that, before Treasury considers introducing any further regulatory reform that may impact credit advisers, it should first examine the proposed reforms to ensure that they are competitively neutral across all players in the market. The Final Report addressed this point by suggesting a review of the state of competition should occur every three years, that reporting on how regulators balance competition against their core objectives should be improved, and that competition should be made part of the regulators’ mandate.[xvii] Thankfully, the Financial System Inquiry is very conscious that unnecessary and inappropriate regulation has the potential to reduce the financial system’s efficiency.

As an immediate first step, the Financial System Inquiry states that regulators should examine their rules and procedures to assess whether those that create inappropriate barriers to competition can be modified or removed, or whether alternative and more pro-competitive approaches can be identified. Mr Brown and the MFAA agrees that this would be a good first step. In the absence of change, there is a risk that regulators and policy makers will not place sufficient emphasis on competition when making decisions, and this could have a flow on effect of disrupting innovation. The extent of market concentration in some parts of the system, and its potential to limit competition in the future is a significant issue, according to Mr Brown.

Securitisation and competition

Finally and importantly to the MFAA, is the need for a stronger securitisation market to enhance competition and enable a vibrant and innovative non-bank, specialist and small lender sector. This is something Mr Brown as Head of Sales & Distribution, and I, senior as in-house lawyer, both experienced first hand at Macquarie Bank just as the GFC began. Tim Brown explains his experience at Macquarie Mortgages when Lehman’s Brothers Collapsed, which caused the systematic collapse of the securitisation market and the closure of warehouses facilities that many of the financial institutions were using to fund mortgages growth. The flow on affect was the inability for many smaller institutions, including Macquarie, to fund mortgages. Had Australia had a similar system to Canada at the time, Macquarie may not have had to withdraw from the lending market, St George Bank would not currently be owned by Westpac, Bankwest may not have had to sell to Commonwealth Bank of Australia (“CBA”), and the founder of Aussie Home Loans, John Symond, may not have seen the need to sell to CBA to secure Aussie’s future in the mortgages industry.

The substantial negative effects of having to wind back origination where funding options decreased or were completely eradicated, enabled large balance sheet lenders to regain the market share they had previously forfeited to the innovative lenders. In MFAA’s submission[xviii] in response to the Interim Report it strongly expressed that competition in the lending sector needed to be enhanced by a strong securitisation market, and the importance of Government intervention in the residential mortgage backed securities (“RMBS”) market on an ongoing basis. It argues that Canada has proven that this type of system can be managed without risk to taxpayers and without the creation of ‘moral hazard’. Australian Office of Financial Management (“AOFM”) has also provided this proof in the past few years. MFAA believes the AOFM’s involvement in the market should be re-ignited on an ongoing basis to ensure a more competitive lending market.

There is no doubt that prior to the GFC, the availability of competitively priced securitised funds enabled non-bank lenders to aggressively attack the margins of the major retail banks. It also enabled non-bank lenders to start competing on service levels, and as a result of both improved margins and service to customers, the non-bank lending market share rapidly grew. The fact that the specialist lender market share went from nil to over 15% in a decade is evidence in itself of the inefficiencies and lack of competitiveness in the banking sector since the GFC.

Mr Brown submits that since 2007 the only significant changes to the lending market have been: (1) the pause in the securitisation market; and (2) major government intervention in the form of regulation. The competitive drive from larger banks and financial institutions has not changed; rather “their aggressive and successful smaller competitors have been hamstrung”, says Mr Brown. I most definitely agree, particularly having had an inside perspective on the impact these factors have had on securitised lenders, even the most efficient. It is crucial that non-bank lenders and smaller lenders have access to securitised funding, to enhance competition and innovation in the lending market.

As the Interim Report observes, the RMBS market has started to recover, however the markets still have a long way to go before bouncing back to the pre-GFC level. While the Reserve Bank of Australia does not expect the market will return to pre-GFC levels in the near future[xix], we believe there is still a need to ensure that it is fostered and continues to grow.

Unfortunately, the MFAA’s submissions regarding the successful impact of the Canadian approach in driving the non-bank sector and providing more competition was largely disregarded by the Financial System Inquiry, which according to the MFAA incorrectly grouped the Canadian model with the USA model approach as though they were one and the same. This ignored the reality that the Canadian system has operated since the 1940s and never once has there been a liability for taxpayers, and in each year a profit has been returned to the Canadian consolidated revenue. We believe that the infrastructure should be created in Australia now, not as a crisis strategy, but as a long-term solution. It seems that the Financial System Inquiry would require a “clear market or regulatory failure in the RMBS market”[xx] before it could consider intervening. MFAA, Mr Brown and I (along with many others in the banking and finance industry) believe that this would be too late.

MFAA acknowledges that the Australian Government did move fairly quickly (albeit after the event) by directing AOFM to purchase RMBS securities to support the market. Through the rigour of its operations it caused no liability to the taxpayer and, like the Canadian program, produced a profit for the Government. We believe that had it been operating before the GFC, it would have saved many non-bank lenders from reducing their lending or changing their business models.[2] For these reasons the MFAA believes it is important that the Government intervenes in the RMBS market by reigniting the involvement of AOFM on an ongoing basis to ensure a more competitive lending market.

Summary comments

The MFAA expressed disappointment at many of the findings and recommendations of the Financial System Inquiry specific to the question of competition in the banking sector. In particular and relevant mostly to the lending sector, MFAA does not believe the major banks have been ‘more efficient’ than their smaller counterparts causing a more concentrated and less competitive market. In contrast, Mr Brown and the MFAA maintain that the major banks have received advantage over the smaller lenders since the GFC, including Government bank guarantees, over-regulation causing an imbalance, and lack of steady securitisation funding. While many of the MFAA’s suggestions to the Financial System Inquiry regarding competition were dismissed, we hope that at the very least, some of the recommendations of the Financial System Inquiry, including an assessment of the impact that over-regulation has had on competition, may result in the return of innovation and enhanced competition in the lending market in the future.

Leonie Chapman, Principal Lawyer and Director, LAWYAL Solicitors,  

Tim Brown, Chairman of Mortgage Finance Association of Australia (MFAA)


[i] Financial System Inquiry, Interim Report, Treasury, July 2014, at p xi

[ii] Submission by Mortgage Finance Association of Australia in response to Financial System Inquiry, dated March 2014

[iii] Financial System Inquiry, Final Report, Treasury, November 2014

[iv] Above, n 2

[v] Financial System Inquiry, Interim Report, Treasury, July 2014, at page 2 – 3

[vi] Financial System Inquiry, Final Report, Treasury, November 2014, at p xvi

[vii] Interim Report Response by Mortgage Finance Association of Australia, August 2014

[viii] Financial System Inquiry, Final Report, Treasury, November 2014, at p 19

[ix] Financial System Inquiry, Final Report, Treasury, November 2014, at p 255

[x] Corporations Act 2001 (Cth), at s 912(1)(aa)

[xi] National Consumer Credit Protection Act 2009 (Cth), at s 47(1)(b)

[xii] Source: MFAA calculations based on comparator – Broker Market Share statistics, June Qtr 2014; APRA Monthly Banking Statistics – June 2014; ABS Housing Finance 5609.0 – June 2014.

[xiii] Financial System Inquiry, Final Report, Treasury, November 2014, at p 272

[xiv] Financial System Inquiry, Final Report, Treasury, November 2014, Recommendation 40 at p 271

[xv] Above, n 2

[xvi] Above, n 2

[xvii] Financial System Inquiry, Final Report, Treasury, November 2014, Recommendation 40, at p 254

[xviii] Above, n 2

[xix] Financial System Inquiry, Interim Report, Treasury, July 2014, at p xviii

[xx] Financial System Inquiry, Interim Report, Treasury, July 2014, at p 2-15

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National consumer credit regulatory reform — the impact on credit advisers

First published by LexisNexis Banking and Finance Law Bulletin

By Leonie Chapman LAWYAL Solicitors and Tim Brown Mortgage Finance Association of Australia


On 1 July 2010, a new national regulation over the credit industry commenced — the National Consumer Credit Protection Act 2010 (Cth) (NCCP Act), which regulates lenders, credit advisers and everyone in between. In response to the Financial Services and Credit Reform green paper,1 released in June 2008, Treasury introduced this uniform licensing and responsible lending regime under the NCCP Act to address — specific to credit advisers — the apparent differentiation of broker regulation from jurisdiction to jurisdiction in Australia, which it said allowed dishonest practices by some brokers in lower regulated jurisdictions.

For the mortgage broking industry, Treasury’s key objective was to remove unscrupulous and rogue brokers (brokers are referred to as credit advisers), and more closely regulate and monitor the rest. Now regulated by the Australian Securities and Investments Commission (ASIC), many of Treasury’s objectives under the NCCP Act have been successful. However, the NCCP Act has also had far-reaching implications for the mortgage broking industry, with some unintended negative consequences. In this article, we explore how the introduction of the NCCP Act has changed the face of the mortgage broking industry, and hear the views of Tim Brown of the Mortgage Finance Association of Australia (MFAA) regarding the true impacts on credit advisers.

Introduction of the NCCP Act

Before the NCCP Act regime was introduced, credit advisers had very little regulation.Western Australia had the most robust system in Australia, followed by New South Wales, Victoria and the Australian Capital Territory — all required a finance broking contract to be entered into between the customer and broker, but little more. South Australia, the Northern Territory, Tasmania and Queensland, on the other hand, had no government regulation. In introducing the NCCP Act, Treasury sought to address this gap in consumer credit regulation and bring consistency across the country.2 The NCCP Act now requires licensing of credit advisers with relevant disclosure, conduct and responsible lending in place, as well as coverage of dispute resolution schemes and compensation methods for customers. The Act regulates any dealings relating to the provision of credit to natural persons or strata corporations for:

  1. personal, domestic or household purposes; or
  2. to purchase, renovate or improve residential property for investment purposes; or
  3. to refinance credit that has been provided wholly or predominantly to purchase, renovate or improve residential property for investment purposes.3

For credit advisers, this now means that they must hold an Australian credit licence4 (ACL) in order to conduct credit assistance (also called credit advice), which is the act of suggesting or assisting a customer into a particular credit or lease product with a particular credit or lease provider5 (Credit Assistance). Along with licensing also came new responsible lending obligations, requiring both lenders and credit advisers to conduct reasonable enquiries into the financial health of the customer to ensure that the customer can repay the loan without hardship, as well as to assess that the requirements and objectives in applying for consumer credit are met. Before providing Credit Assistance, the mortgage broker must conduct this preliminary assessment to ensure that the credit product is not “unsuitable”6 for the customer.

Before and at the time of providing a customer with Credit Assistance, credit advisers must also provide certain prescribed disclosure documents7 to make customers aware of who the broker is, what the broker will be paid and by whom, how the customer can complain about them, and details of the credit product for which the customer is applying. Finally, a credit adviser now has extensive general conduct obligations8 to comply with in order to keep their ACL current, such as having appropriate compensation methods and being a member of an external dispute resolution body, as well as onerous ongoing training requirement each year — particularly for credit advisers providing Credit Assistance into third-party credit providers.9

Positive impacts on credit advisers

When asked about the positive impacts that the NCCP Act has had on credit advisers, Tim Brown believes that the most significant benefit has been a better reputation for the mortgage broking industry in general. Now that brokers must hold licences and be vetted by ASIC before being granted their ACL, the industry is attracting the “right kind of people” as credit advisers and consumers are placing more trust on their brokers. With the NCCP Act now firmly in place, Mr Brown believes that consumers in every state in Australia now have a better understanding of whom they are dealing with and that their broker is a reputable, well informed, appropriately educated, ethical and highly regulated credit adviser.

In stark contrast to pre-NCCP Act days, credit advisers now have compliance frameworks in place with supporting policies and procedures, as well as appropriate compensation methods for customers and internal dispute resolution processes. These have all had a very positive impact on the mortgage broking industry, says Mr Brown. Rogue brokers are being squeezed out.

Mr Brown explains how credit advisers are now the number one choice for consumers who are seeking a home loan or to refinance their existing loan. Credit advisers work with customers to determine their borrowing needs and ability and select a loan that is suitable to the customer, given their circumstances, and then work with the customers to assist with the management of their application through to the settlement of their loan.

This distribution method for lenders is now highly established and is an integral part of a lender’s sales model. Credit advisers now make up to 50% of the current distribution of all new home loans lent in Australia, making them a key asset to the mortgage finance industry generally.

Along with directing more attention on credit advisers, the NCCP Act has also resulted in more support to brokers from ASIC and from industry bodies such as the MFAA. Mr Brown explains how, since the introduction of the NCCP Act, the MFAA has developed a system called “Pathways” to assist credit advisers with further education, business development and ongoing communication regarding the continuous changes to legislation.

Given that all credit advisers must complete 30 hours of relevant industry training annually, Pathways has become a central point of reference for a range of courses and events from providers vetted by the MFAA, as well as options offered by the MFAA itself. It allows credit advisers to select from webinars and interactive learn ing, or simply ordering CDs and books, or registering for a seminar or workshop. Credit advisers who are MFAA members also have online access to many legal and compliance resources. Extensive and easily accessible resources and support are a direct and positive response to the overly regulated industry.

Negative impacts on credit advisers

Mr Brown explains how the MFAA was one of the strongest supporters of the introduction of the NCCPAct in the lead-up to enactment. The idea that customers would only be exposed to “responsible lending” was definitely worthy of being enshrined in legislation. However, the resultant NCCP Act and NCCP regulations, plus various subsequent ASIC Regulatory Guides released by ASIC, have produced literally hundreds of pages of details, which effectively seek to micro-manage each business in the consumer credit sector. For the mortgage broking industry,Mr Brown believes that this creates overly onerous compliance obligations and concerns, and unreasonably high costs and time pressure for many credit advisers — most of which are small-to-medium enterprises. For example, the requirement for credit advisers to produce three disclosure documents to consumers (a Credit Guide, a Credit Quote and a Credit Proposal) is time consuming if done manually and costly to automate from a systems perspective, and creates timing and cost issues for brokers. The MFAA is of the view that the previous requirement for a Finance Broking Contract, which combined all essential elements in the current NCCP Act disclosure regime, worked well.

Mr Brown also describes the requirement for credit advisers to conduct a preliminary assessment for all potential borrowers before recommending finance, when the lender then has to carry out their own assessment before deciding to lend, is duplication and is onerous for credit advisers. In particular, credit advisers do not have access to all the information that lenders have access to, and do not (and should not) carry out their own credit reports or verification checks. It is therefore difficult for a mortgage broker to determine that a loan might be suitable for a client in those preliminary stages of the client engagement process. In relation to the preliminary assessment requirement on brokers, Mr Brown questions whether the NCCP Act demonstrates any benefit to the consumer, or whether it simply adds compliance time and cost for credit advisers, and added documentation and frustration for customers.

A further negative impact that the NCCP Act has had on credit advisers is the ban on the use of the word “independent”, which has had the unintended negative impact on restricting brokers from advertising themselves as being “independently owned”. In the current day, an independently owned mortgage broker is a rare and positive message, given the numerous takeovers and mergers of banks, non-bank lenders, aggregators, mortgage managers and brokers during and after the global financial crisis (GFC). While using the words “independently owned” in the context of a privately owned corporation does not mislead customers as to the broker’s independence from other lenders and aggregators, the use of this word in advertising by brokers has strictly been banned in all instances.

Finally and not surprisingly, the ban on lenders charging exit fees has negatively impacted credit advisers as well as non-bank lenders. According to Mr Brown, the moment lenders could not recover upfront and trail commissions paid to credit advisers out of deferred establishment fees paid by customers on early termination of their home loan, the lenders reduced mortgage broker commissions to make up for some of those lost upfront costs. Clawback of commissions on early discharge of a customer’s home loan is also now currently prominent in the market. Non-bank lenders with higher upfront cost, higher borrower churn and more reliance on third-party distribution than the major four Australian banks could not adequately recover those costs to remain competitive.

Financial System Inquiry

The Financial System Inquiry is currently in consultation with the banking and finance industry, after an interim report10 was released by Treasury in July 2014. The intension of the Financial System Inquiry is to establish a direction for the future of Australia’s financial system, given that it has been 16 years since the last financial system inquiry. The interim report tackles issues relevant to credit advisers, such as the substantial regulatory reform agenda, new competitive dynamics in the banking sector, and the impact of the GFC.

It is the view of Mr Brown and the MFAA that the mortgage broking industry could certainly have a break from new regulatory reform, with the MFAA contributing a submission11 that competition in the lending sector needs to be enhanced by a strong securitisation market to enable a vibrant and innovative non-bank and small lender sector. The MFAA also put forward its view that regulation must be either competition enhancing or, at least, competitively neutral in its impact on the various players in the lending market.

The NCCP regulations introduced over the last five years, with their many requirements and high compliance cost, apply equally to a small mortgage broker as to a large bank. This has resulted in an inequity across the sector, with smaller credit advisers and non-bank lenders struggling to keep up with the regulatory costs that can be better absorbed by the big banks.

This imbalance of cost versus share of market, coupled with the GFC, which saw large banks swallow non-bank lenders and mortgage aggregators, has had the unintended effect of reducing competition in the lending sector. Mr Brown and the MFAA submission12 express a desire for any new regulation to enhance competition, rather than decrease it. Mr Brown explains the MFAA’s view that, before Treasury considers introducing any further regulatory reform that impacts credit advisers, it should first examine the proposed reforms to ensure that they are competitively neutral across all players in the market.


While the introduction of the NCCP Act has had many positive impacts on the mortgage broking industry — most important of which has been the intended weeding out of rogue and unscrupulous credit advisers — it is the unintended negative impacts that see the brokers struggling to keep up with the constant reform and compliance obligations. The NCCP Act itself saw subsequent extensive National Consumer Credit Protection Regulations 2010 (Cth) released, and thereafter iterations and variations to the laws, as well as regulatory guides, information sheets and regulatory impact statements. In essence, Mr Brown believes that regulation should be principles based rather than an attempt to micro-manage business. Credit advisers could do with a breather from new regulation or, at the very least, from regulation that detracts from rather than enhances competition in the lending market.

About the authors

Leonie Chapman – LAWYAL Solicitors

Leonie Chapman’s experience extends to banking and finance, consumer credit and mortgage lending, contract negotiation, trade practices and fair trading legislation, intellectual property and trade marks, and corporate and financial services. After completing her Bachelor of Laws and Bachelor of Commerce in 2002, Leonie went on to work both in private practice and as senior in-house lawyer supporting a specialist lender, and then for six years with Macquarie Bank Ltd. Having achieved a Master of Laws in 2009 specialising in banking and finance law, Leonie’s main focus now as Principal of LAWYAL Solicitors is on regulation and compliance for banking and financial institutions.

Tim Brown – MFAA

Tim Brown is the President of the Mortgage Finance Association of Australia. He has worked in the banking and finance industry for over 30 years and has held senior management positions in organisations such as Macquarie Bank, LJ Hooker, Suncorp, Aussie Home Loans and AVCO Finance (now GE Capital). Tim’s industry experience has seen him successfully establish and own LJ Hooker Home Loans as a master franchise which was acquired by LJ Hooker in 2003. Tim is currently the CEO of Vow Financial, Australia’s sixth largest mortgage aggregator. He has an MBA and also completed a Diploma in Mortgage Lending and Business Management and a Diploma in Financial Planning.


1. Treasury Financial Services and Credit Reform: Improving, Simplifying and Standardising Financial Services and Credit Regulation — Green Paper Australian Government, June 2008, available at

2. Above, n 1.

3. NCCP Act, Sch 1 (National Credit Code), s 5.

4. Above, n 3, s 29(1).

5. Above, n 3, s 8.

6. Above, n 3, s 116.

7. Above, n 3, s 113 (Credit Guide), s 114 (Quote) and s 121 (Credit Proposal).

8. Above, n 3, s 47.

9. ASIC Regulatory Guide 206: Credit licensing: Competence and training July 2014 and ASIC Regulatory Guide 207: Credit licensing: Financial requirements June 2010 at [207.77], available at

10. Treasury Financial System Inquiry: Interim Report Australian Government, July 2014, available at

11. Submission by the Mortgage Finance Association of Australia in response to Financial System Inquiry, March 2014.

12. Above, n 11.

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Enhancing user experience –

At LAWYAL, we’re always looking at ways we can improve user experience on our site, both for our clients, and our lawyers. Today, we rolled out some changes that will make accessing your matters much simpler.

Let’s first take a look at a screenshot of the new dashboard, the page at which you land after logging in:


On the right, under “active matters”, matters are now displayed in a more readable list format. Clicking on the zoom icon on each row will display the content of that matter. Up to 20 matters are displayed per page.

On the left sidebar, there are now quick links to retrieve both active and closed matters with a count of each type displayed in parentheses. These counts are self-updating i.e. a page refresh is not required to update the count values.

We have also introduced a “navigation” panel to the left sidebar, mirroring the navigation also available on the main navigation bar.

Beneath the navigation panel is a new “actions” panel. Currently, you can create a new matter (i.e. instruct LAWYAL from here) and we anticipate more features being accessible here in the future.

When you select a matter to view, you are taken to the matter details page:


Here, you can:

  1. Subscribe to or unsubscribe from the matter. Subscribing will allow you to receive email notifications when the matter is updated, e.g. when a document is uploaded, a comment posted or an advice given. Unsubscribing stops email notifications for the selected matter;
  2. View the content of the matter;
  3. View and post comments;
  4. Upload and download supporting documentation;
  5. Download any quote, advice or invoice documents;
  6. Search for other matters. Search results are displayed above the selected matter.

We think that this is a much cleaner layout than before and expect that navigating around your matters will be far more intuitive. As always, we welcome feedback from our users.

We have many more features in the pipeline and will keep you updated on our progress.

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Paciocco v Australia and New Zealand Banking Group Ltd


First published by LexisNexis Banking and Finance Law Bulletin (BLB 30.4, June 2014)

On 5 February 2014, the Federal Court of Australia gave detailed consideration to the issue of fees as penalties in the representative proceeding1 Paciocco v Australia and New Zealand Banking Group Ltd.2 Justice Gordon handed down her decision concerning whether bank fees charged by Australia and New Zealand Banking Group Ltd (ANZ), including credit card late payment fees (Late Payment Fees) and honour fees, dishonour fees, non-payment fees and over-limit fees (together, Other Fees), were penalties or otherwise unconscionable under relevant legislation.3 While Gordon J held that the Late Payment Fees charged by banks were penalties at both common law and equity, the decision was not the overwhelming consumer victory it may seem. The Other Fees imposed by ANZ were not found to be penalties or otherwise charged in contravention of the various statutory unconscionable conduct provisions. Therefore, both sides claimed victory, and both sides are still contemplating whether to appeal. While this much- anticipated clarity around the doctrine of penalties in Paciocco may be short lived, companies and banks are still closely analysing the implications for them.


There is a lot of history in the recent representative actions regarding bank fees, starting on 22 September 2010 when the first class action was commenced in the Federal Court against ANZ by a group of customers in respect of fees as penalties, in Andrews v Australia and New Zealand Banking Group Ltd4 (Andrews FCR). In this case, Gordon J held that the majority of those fees could not be penalties as they were not payable on breach of contract — with the exception of the late payment fees, which were capable of being penalties. This question was then removed to the High Court for consideration, and in late December 2012 the High Court delivered a decision in Andrews v Australia and New Zealand Banking Group Ltd5 (Andrews HC) that overturned recent case law on penalties that dictated that breach was an essential element in determining whether a fee is a penalty. Rather, Andrews HC found that the correct approach is to ask whether the purpose of the fee is to secure performance of a primary obligation by the party subject to the fee, or whether the fee is truly a fee for further services or accommodation. If it is a fee for further services or accommodation, it will not be a penalty even where it is significant. Andrews HC held that if the fee is payable to secure performance of the party subject to the fee, it will only be enforceable if it is a genuine pre-estimate of the damage suffered as a result of that party’s non-performance.6 The accepted understanding of the law of penalties in Australia significantly changed as a result of Andrews HC. However, judicial guidance has been sparse since then, with no real practical application of the Andrews HC judgment — until Paciocco. In 2013, a representative action was commenced against ANZ with lead applicant Mr Paciocco in order to test the Andrews HC decision.

Paciocco — the facts

The applicants, Mr Paciocco and one of his companies, Speedy Development Group Pty Ltd (SDG), held a consumer deposit account and two consumer credit card accounts (in Mr Paciocco’s name) and a business deposit account (in SDG’s name).7 Like most — if not all — Australian banks, ANZ imposed a variety of fees on its customers, including for Mr Paciocco a Late Payment Fee of $35 (which was reduced to $20 after December 2009), and Other Fees consisting of honour fees, over-limit fees, dishonour fees, outward dishonour fees and overdraft fees of between $20 and $37.50. Mr Paciocco and SDG alleged that the contractual terms entitling ANZ to charge these fees constituted penalties at common law and in equity.8 Alternatively, if the fees did not constitute penalties, then the applicants contended first that ANZ engaged in unconscionable conduct;9 second that the consumer credit card accounts were unjust;10 and third that the exception fee provisions in Mr Paciocco’s consumer deposit account and con- sumer credit card were unfair contract terms.11 For the reasons outlined below, in February 2014 Gordon J handed down her findings that Late Payment Fees are penalties both at common law and in equity, and should be repaid by ANZ with no retrospective time limitation on claims. Justice Gordon found in favour of ANZ on the Other Fees, deciding that they were of a different character and none constituted a penalty at common law or in equity.12 This decision provides the first major application of the principles outlined in the somewhat controversial Andrews HC decision.

Paciocco — the decision and reasoning

Late Payment Fees

On 5 February 2014, there seemed little doubt that Gordon J would again find that the Late Payment Fees were penalties both at common law and in equity, as she had in Andrews HC. Her Honour considered that under the relevant contracts with ANZ, Mr Paciocco was obliged to pay a minimum amount by a certain time each month and therefore Late Payment Fees were levied upon either a breach of this obligation, or as a collateral fee to be regarded as security for, or in terrorem of, performance of this obligation.13 A failure to do so by Mr Paciocco was a breach of contract and would attract a Late Payment Fee. This was because the obligation to pay the fee (the collateral stipulation) arose upon a breach or failure to comply with an obligation to pay on time (the primary stipulation). Further, the fee or collateral stipulation imposed on Mr Paciocco an additional detriment in the nature of a security for the satisfaction of the primary stipulation, which was extravagant, exorbitant and unconscionable.14 By “additional detriment”, the court meant a detriment that exceeded the prejudice to the bank caused by the customer’s failure to pay by the due date.15

Significant in its findings, the court noted that the Late Payment Fees were the same fees payable regard- less of whether Mr Paciocco was one day late, one week late or longer, and regardless of whether the overdue amount was 1 cent or $1000, or more.16 The court held that this disregard as to whether or not the failure was serious gave rise to a presumption that the Late Payment Fees were penal.17 The fact that the Late Payment Fees were provided for in a non-negotiable standard form of contract was also a relevant factor.18

Notwithstanding the difficulties in ascertaining what an appropriate fee would be, Gordon J estimated that the maximum loss that might be suffered by ANZ in respect of each fee charged was only between $0.50 and $5.50 (depending on the specific fee), in contrast to the fees of $35 or $20 charged by ANZ.19 As a result, Gordon J held that Mr Paciocco was entitled to receive the difference between the credit card late payment fees paid to ANZ and ANZ’s actual loss, adjusted to take into account interest.

As Mr Paciocco’s claim comprised 72 fees, of which he was successful on 26, the total award was a relatively insignificant $640, less an amount representing a reasonable fee, plus interest. However, banks should be aware that the quantum of this judgment could run into the tens of millions of dollars when losses of all group members are quantified.

Other Fees

In contrast, the Other Fees were deemed to be of a character different from the Late Payment Fees, and were held not to be penalties because these were imposed as consideration for the provision of further services. When exceeding a credit card limit, a customer is not breaching the contract.20 Rather, an attempt by a customer to overdraw an account should be considered as a request by the customer for further credit. This request is then considered and either accepted or declined by the bank (even if automatically or electronically). The making of such a request was entirely within the customer’s control (subject to credit limit) and required the consensual conduct of both the customer and ANZ.21 As a consequence of the further accommodation (or benefit) provided by the bank in the above circumstances, the Other Fees were held to be in contrast to the Late Payment Fees and were not penal in nature.22

Unconscionable conduct

Justice Gordon was also asked to consider whether ANZ engaged in unconscionable conduct in respect of its accounts under the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act),23 whether the transactions were unjust transactions under the applicable Consumer Credit Codes,24 and whether the contract terms were unfair terms under the Victorian Fair Trading Act 1999 (Vic)25 or the ASIC Act.26 In short, her Honour rejected each of these arguments, holding that circumstances indicative of unconscionability, unjust- ness or unfairness had not been made out.27

Limitation period

Another interesting issue for banks that arose was whether some of Mr Paciocco’s claims were barred under the Victorian Limitation of Actions Act 1958 (Vic),28 which provided for a six-year limitation period29 from the event giving rise to the claim. Mr Paciocco argued that he was entitled to rely on s 27 of the Limitation of Actions Act, which extended limitation periods in the case of mistake. He claimed that he operated under the belief that ANZ was entitled to charge the exception fees and that the limitation period did not begin to run until he discovered his mistake. Worryingly for banks, the court held that s 27 of the Limitation of Actions Act applied in the applicants’ favour,30 holding that “mistake” applies to mistake of law as well as fact.31 Therefore, the relevant time for bringing an action against ANZ only started running from the first proceeding of the Andrews FCR on 22 September 2010.32

Consequences of the Paciocco decision for banks

In light of the Andrews HC and Paciocco authorities, it is critical for companies and banks to turn their mind to the question of whether certain types of fees payable under commercial contracts (for example, break fees or non-performance fees) are capable of constituting penalties and therefore unenforceable.

Consideration for services or genuine pre-estimate of costs

This was the first case brought against a financial institution challenging the lawfulness of the fees imposed in the course of providing financial services. Although the finding was not completely in the applicants’ favour, this decision certainly causes concern for banks and companies that routinely impose break fees, default fees or late payment fees. Paciocco means that such companies and banks will need to be able to demonstrate that the fees they charge are justified on the basis that the fee is consideration for providing an additional service, or a genuine pre-estimate of the cost to the business of an event. All banks should review their fees, especially if they apply without any grace period. In particular, a fee imposed for late payment (without any additional service, such as extended credit) may be subject to the law of penalties. If a flat rate is charged regardless of the period or amount overdue, this will give rise to the presumption that the fee is penal in nature.

Debit bank default fees only after default

Payment default fees debited to the account right after the default and before the financier has incurred loss or cost may be difficult to justify. Ideally, banks should debit default fees after the financier has incurred the cost and after the payment default has remained unremedied for a certain period. Examples of costs may include relevant system and staff costs and the cost of contacting the borrower about the arrears by phone, email or post.

Class action and regulatory risk

It is essential that banks which collect fees under- stand that, should those fees subsequently be found to be penalties, they are not only unable to recover that fee, but may be obliged by a class action or the Australian Securities and Investments Commission to refund similar fees charged to other customers for the amount by which the fee exceeds the reasonable cost.

Carefully drafted contracts

Paciocco is also likely to also have an impact upon commercial arrangements and the drafting of commercial contracts by companies and banks. The “operative distinction” is a fine one, but an important one for banks to understand. Although Andrews HC33 purports to draw focus on the substance of the collateral stipulation rather than the form, the Paciocco decision confirms that the operative distinction leaves room for contractual drafters to avoid the doctrine of penalties. Accordingly, banks and companies utilising standard form contracts should take some comfort that their contracts can be carefully drafted to avoid the penalty doctrine by providing some form of further accommodation or benefit in exchange for what might otherwise be a penal stipulation.

Concluding comments

The Paciocco decision is significant because it pro- vides a concise statement of the principles provided in Andrews HC, and confirms how the redefined doctrine of penalties now applies in the context of widely charged bank exception fees. It will also have an immediate effect on a number of other fee class actions that have commenced against other major Australian banks, where the Paciocco principles and findings may expedite any potential settlement of these class actions and largely confine the scope of any further hearings. The future of the Paciocco litigation, however, remains unknown. ANZ may appeal Gordon J’s decision, most likely on the grounds that the fees were not extravagant or unconscionable. Mr Paciocco may also appeal, on the grounds that the Other Fees come within the High Court’s expansion of the penalty doctrine and, of course, were extravagant and unconscionable. Solicitors for the other banks defending similar class actions by their customer will be carefully scrutinising Gordon J’s decision and, like all other banking and finance institutions, will be keenly watching for any appeal from that decision.


1. Federal Court of Australia Act 1976 (Cth), Pt IVA.

2. Paciocco v Australia and New Zealand Banking Group Ltd [2014] FCA 35; BC201400298.

3. Australian Securities and Investments Commission Act 2001 (Cth); Fair Trading Act 1999 (Vic); National Credit Code (Sch 1 to the National Consumer Credit Protection Act 2009 (Cth)).

4. Andrews v Australia and New Zealand Banking Group Ltd (2011) 211 FCR 53; 288 ALR 611; [2011] FCA 1376; BC201109353.

5. Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; 290 ALR 595; [2012] HCA 30; BC201206622.

6. Above, n 5.

7. Above, n 2, at [1].

8. Above, n 2, at [2].

9. Australian Securities and Investments Commission Act 2001 (Cth), ss 12CB, 12CC; Fair Trading Act 1999 (Vic), ss 8, 8A.

10. National Credit Code.

11. Fair Trading Act 1999 (Vic), s 32; Australian Securities and Investments Commission Act 2001 (Cth), s 12BG.

12. Above, n 2, at [4] and [5].

13. Above, n 2, at [4].

14. Above, n 2, at [4].

15. Above, n 2, at [46].

16. Above, n 2, at [119].

17. Applying the principles in Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79 at 87; [1914] All ER Rep 739; (1914) 83 LJKB 1574; 111 LT 862.

18. Above, n 2, at [95].

19. Above, n 2, at Annexure 1.

20. Above, n 2, at [4].

21. Above, n 2, at [307].

22. Above, n 2, at [271].

23. Australian Securities and Investments Commission Act 2001 (Cth), ss 12CB, 12CC.

24. Consumer Credit (Victoria) Code, s 70; National Credit Code, s 76.

25. Fair Trading Act 1999 (Vic), s 32W.

26. Australian Securities and Investments Commission Act 2001 (Cth), s 12BG.

27. Above, n 2, at [310].

28. Limitation of Actions Act 1958 (Vic), s 27.

29. Above, n 28, s 5.

30. Above, n 2, at [366].

31. Above, n 2, at [365].

32. Above, n 2, at [368].

33. Above, n 5. 

Posted in Banking and Finance, Contract law, LAWYAL Solicitors | 1 Comment

Copyright and the digital economy — the fair use model: what does this mean for Australian banks?


First published in LexisNexis’ Australian Banking and Finance Law Bulletin (2014) 30(1)


Australian copyright laws were last reviewed in 2006,1  to catch up with technologies such as digital music players and video recorders. However, the review left a lot of unanswered questions, particularly with the emergence of social media for both private and commercial use. Australian banks have embraced the idea of using social media to engage customers, as a way to communicate with customers, for customer-focused marketing strategy, and even for banking.2  Clearly, banks in Australia want to be innovative and current, but unfortunately copyright laws tend to discourage investment in new technologies. Given the fast and continuous progression of new technology, Australian copyright laws have always struggled to keep up, but this may finally change – and banks should take note.

In June 2012, the Australian Law Reform Commission (ALRC) was asked to consider the adequacy and appropriateness of current exceptions and statutory licences under the Copyright Act 1968 (Cth) in light of internet use. In an issues paper3  and latera discussion paper4  released to the public by the ALRC, one exception discussed as a possible new defence to copyright infringement was the more flexible US-style fair use exception.

An overwhelming 860 submissions were received from the public in response to the discussion paper. All were considered in the ALRC’s final report, Copyright and the Digital Economy (Report), which was delivered to the Attorney-General on 2 December 2013. The Report, which has not yet been released to the public, will help the federal government to form policy in a wide range of intellectual property matters, including the potential introduction of fair use provisions to the Copyright Act.

This article explores the limitations with current copyright laws in light of internet and social media use of copyright material, and whether the introduction of a fair use exception can help banks overcome some of those limitations.

Current copyright laws

Unlike in the US, Australia does not currently have a fair use defence to copyright infringement, but rather has a set of “fair dealing” defences allowing banks a very limited range of uses of copyright material. The Copyright Act does not define a fair dealing, but provides specific fair dealing exceptions for the purposes of research or study,5  criticism or review,6  parody or satire7  and reporting news,8  and for use by a legal practitioner, patent attorney or trade marks attorney.9

The Copyright Act then provides that fair dealings for these specified purposes may be made with the following copyright material: literary, dramatic, musical or artistic works;10  adaptations of literary, dramatic or musical works;11  or audio-visual items.12  Unfortunately, there are currently very few technology exceptions that may assist banks.

Determining whether a use comes within any of thefair dealing exceptions is a two-step process. First, the use must be one of those specified above and, second, it must be fair. Whether a use is fair will depend on the circumstances of each case.

Limitations with copyright laws – internet and social media use

Unfortunately, the above fair dealing provisions do not adequately address copyright material used through the internet. If use of copyright material does not amount to fair dealing within the meaning of the Copyright Act, then it is not permitted. If read strictly, this could mean that a bank sharing an article from the newspaper on its social media page is in breach of copyright laws. This is common behaviour in the banking sector in Australia, given that most if not all banks in the banking and finance industry have copyright material and use social media marketing (LinkedIn, Twitter and Facebook).13  New technology makes it easy to “time-shift, place-shift and format-shift almost any content”,14  making the current debate about copyright more around what banks may do with content.

It is evident that not only were Australian copyright laws not designed with banks in mind, they were also not designed with the internet and social media in mind. Currently, the reuse of copyright material via the internet requires explicit advanced permission from the owner, who could be difficult to track or, if found, could charge a high price for the use of their material or, worse, refuse to give a licence.

Given these obstacles, it will not be surprising that banks may simply not seek the consent of the copyright owner and may continue to reuse the materials via the internet regardless. A continuation of this attitude to copyright could encourage contempt for the law, which would not be the intention of any bank. It is evident in today’s society that most people believe it is acceptable to disobey copyright laws, given that it is the norm and breach is unlikely to carry serious consequence. There is little point in having a law that is not followed, is rarely enforced and does not fit in with Australian culture in the current digital age.

The sharing of copyright material, such as “user-generated” material, using social media may have been an inevitable, and possibly even desirable, feature of a new digital world. User-generated material generally features on commercial platforms and is unlicensed and non-transformative (“transformative” loosely meaning the creation of new works that draw upon pre-existing works).15  It is, arguably, less harmful to copyright owners and is now common place. In any case, it is virtually impossible to attribute the rights to all images, text and sound clips that an individual or bank shares, for example, with followers on Facebook or on Twitter.

Fair use model

With internet and social media use of copyright material in mind, essentially the fair use provisions will ask of any particular use of material, “is this fair?” It is proposed that what is “fair” will not be defined by the Copyright Act. It will instead be determined on the circumstances of each case and will focus more on what banks are trying to do with the content than on the specific technologies involved in sharing the content. This will help the new laws stay current, even when new technologies are developed.

The ALRC’s Report proposes that any fair use model will incorporate a list of purposes and fairness factors to be considered in an assessment as to whether any use of copyright material is fair. These fairness factors, which would be set out in the Copyright Act, aim to be a more flexible and adaptive method of regulation than previous prescriptive methods.16

Under the proposed model, some social uses of copyright material would be fair use. However, importantly for banks, sharing content outside the domestic sphere is less likely to be fair. In any case, with this flexible fair use exception allowing certain social uses of copyright material, it is hoped that copyright laws will be brought more in line with social media and internet use.

The ALRC also considered whether a separate stand-alone “transformative use” exception should be introduced. However, given difficulties in defining what transformative actually means (among other reasons), the Report recommended that the fair use exception should apply when determining whether a transformative use infringes copyright. It is anticipated that the fair use exception would allow individuals to socially use copyright materials more freely in transformative uses. However, one difficulty lies in determining what is social use and what is commercial use.

Social v commercial use

Many submissions in response to the Report emphasised that some “social” uses of copyright material must not be confused with true private and domestic uses. A distinction must be drawn between, for example, burning music onto a disc to play at home, on the one hand, and disseminating it to 300 Facebook friends, on the other hand. The latter may not be social use where it is non-transformative and could harm a market that copyright holders have the right to exploit. For banks, it would be difficult to argue that distribution of copyright material to its customers was social use. Many current non-transformative online uses of copyright material are clearly not fair to copyright owners, including file-sharing networks, digital lockers and other technologies that exchange whole e-books, movies, television shows and music.17

One example of current social use is uploading and sharing non-commercial user-generated content via the internet, which reflects some creative effort. Changes in technology have increased the opportunity for user-generated contentto be created, and any fair use exemption may apply to its non-commercial use.

However, distinguishing between commercial and non-commercial use has become increasingly complex. While technology to splice a video is cheaper and more widely available to consumers, facilitating more productions for private use, the distribution of these productions may involve commercial entities. For example, while Facebook users share copyright material for non-commercial purposes, Facebook is an advertising-funded business, dependent on its members producing user-generated content. Therefore, while some copyright material may be created or reused by banks without an intention to commercialise the work, digital platforms provide an opportunity for creators subsequently to commercialise it.18

Arguments for and against the fair use model

The potential commercialisation of user-generated content is one of the arguments against social uses of copyright material being exempt under the fair use model. Once user-generated content is released to the public online, it enters the commercial arena and should therefore not be permitted. Social media platforms such as Facebook and YouTube cannot be described as commercial-free zones, particularly now that businesses such as banking and financial institutions use social media as an important marketing and communication tool. Any fair use provisions could prejudice copyright holders by withholding their ability to participate in this new digital economy, while still allowing software companies, online social platforms and commercial users to benefit.19

Others20  argue that the Australian government had already considered and rejected the fair use model proposed as recently as 2006, after it found in public consultation that “no significant interest supported fully adopting the US approach”.21

However, at the very least,the introduction of a fair use model might clarify how copyright laws interact with internet use for banks. It is argued that fair use provisions will enable things to be done with copyright works that are in the public interest, creating a balance by using copyright materials in ways that are valuable to society and not too harmful to the owner.22

The Australian Digital Alliance believes the current copyright law is broken and wants the fair use provisions introduced to allow others, such as banks, to share, copy or recreate works so long as they don’t harm or take revenue from copyright owners.23  Further, the fair use model may provide flexibility to respond to changing conditions as a principles-based and technology-neutral system and it could increase innovation. The intention is that the fair use will restore balance to the copyright system and will assist with meeting consumer expectations where there is currently a culture of contempt for copyright laws.24

In the ALRC’s view, a fair use regime will employ technology-neutral legislative drafting to enable the laws to keep up with ever-changing technology. The ALRC believes that this exemption will assist with predictability in application of the laws, could minimise unnecessary obstacles to an efficient market, and will reduce transaction costs.


One can only hope that this copyright law review and the introduction of the fair use model will see Australia’s new copyright laws looking forward and being as technology-agnostic as possible. If not, there is risk that we will need to go through this all again whenever new technology is developed. The Report’s proposal to introduce a fair use model is a highly significant recommendation that could, in the opinion of the ALRC and others, assist innovation for the likes of banks and provide flexibility to respond to changing technological conditions.

In itself, the Report is a critical document that will help shape copyright legislation and policy in the future. Given the large degree of public and corporate response to the Report, and the importance and relevance to the business, banking and technology sectors, there is hope that the Report will be released by the end of February 2014. The government is currently considering the recommendations of the Report and no final decisions will be made until after consideration of the Report and consultation with all stakeholders. Will the fair use provisions be introduced? We will just have to wait and see.


1 Copyright Amendment Act 2006 (Cth).

2 A Bender “Social media adds spice to financial services, say banks” Computer World 19 June 2013.

3 ALRC Copyright and the Digital Economy Issues Paper 49 (IP 49), August 2012.

4 ALRC Copyright and the Digital Economy Discussion Paper 79 (DP79), May 2013.

5 Copyright Act, ss 40(1), 103C(1).

6 Above, n 5, ss 41, 103A.

7 Above, n 5, ss 41A, 103AA.

8 Above, n 5, ss 42, 103B.

9 Above, n 5, s 43(2).

10 Above, n 5, s 40(1) (research or study), s 41 (criticism or review), s 41A (parody or satire), s 42 (reporting news), s 43(2) (the giving of professional advice by certain individuals).

11 Above, n 5, s 40(1) (research or study), s 41 (criticism or review), s 41A (parody or satire), s 42 (reporting news).

12 Above, n 5, s 103C(1) (research or study), s 103A (criticism or review), s 103AA (parody or satire), s 103B (reporting news).

13 See Canstar Blue “How banks use social media” 26 March 2013, available at

14 A Turner “Can Australia’s old-hat copyright laws work on the web?” Sydney Morning Herald, 17 November 2013, available at

15 Above, n 4, Ch 10.

16 Above, n 4, p 61.

17 Above, n 4, p 188.

18 Above, n 4, p 47.

19 Above, n 4, p 206.

20 Australian Film/TV Bodies, Joint Submission in response to Copyright Legislation Amendment (Fair Go for Fair Use) Bill 2013, August 2013.

21 Explanatory Memorandum to the Copyright Amendment Act 2006 (Cth), p 10.

22 N Suzor “Australia’s current copyright law stifles innovation” Business Spectator 18 November 2013.

23 C Porter “Why creating memes is illegal in Australia”Daily Telegraph 13 November 2013, available at

24 Above, n 4, p 61.

About the author

Leonie ChapmanPrincipal Lawyer & Director, LAWYAL Solicitors 

Leonie’s experience extends to banking and finance, consumer credit and mortgage lending, contract negotiation, trade practices and fair trading legislation, intellectual property and trade marks, and corporate and financial services. After completing her Bachelor of Laws and Bachelor of Commerce in 2002, Leonie went on to work both in private practice and as senior in-house lawyer supporting a specialist lender, and then for six years at Macquarie Bank Ltd. Having achieved a Master of Laws in 2009 specialising in banking and finance law, Leonie’s main focus now as Principal of LAWYAL Solicitors is on regulation and compliance for banking and financial institutions.

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NEW FEATURE: Add users to your LAWYAL account

Until now, only a single user per client account was able to manage and contribute to legal matters in the LAWYAL system. This week, we released a new version that enables clients to add users to their client account. This new feature will encourage greater collaboration between LAWYAL and our clients.

Follow these instructions to give other users access to your online LAWYAL account:

  1. Once logged in, look for the new menu item – “Account Users” – on the top right, below your email address:Screen Shot 2014-02-19 at 8.18.50 PM
  2. On the “Account Users” page, you will see the option to add a user to your account:Screen Shot 2014-02-19 at 8.32.43 PM
  3. Click the “Add User” button to start adding a user to your account:

Screen Shot 2014-02-19 at 8.37.58 PM

Note: You can create a user with a role of Account User or Account Admin. Only Account Admin users can create and manage users for the client account.

4. After the user has been created, close the window and the new user will be present in the the account users table:

Screen Shot 2014-02-19 at 8.42.55 PM

5. The user that has just been added will receive an email inviting them to complete their user account by creating a password. Once set, they can log in and contribute to all matters for their client account.

You may have noticed that you have the ability to change the role of the new user and disable the user account entirely. Note that users may not change their own role or disable/enable their own account, but an Account Admin may change the role or disable/enable other user accounts.

We are currently working on more fine-grained permissions around legal matter access to cater for confidential matters where open access to all users is inappropriate.

Stay tuned…

Posted in LAWYAL Solicitors, Technology | Leave a comment