MORTGAGE BROKING

Compliance Requirements
BY PETER ANDREWS, MBA, CPA, B.ECONOMICS, B.ARTS
Former lecturer at Macquarie University

M
ortgage brokers are faced with importance compliance
requirements created by legislation and also arising from case
law. The most overreaching of these were introduced by the
National Consumer Protection Act 2009 that brought in major changes to
the way to the way credit is provided in Australia. Some of these, such as
the licensing requirement and the need to have ISR and ESR schemes in
place have already been discussed. Not touched on so far are the
responsible lending and disclosure provisions.
Other relevant compliance matters introduced by legislation include the
requirements of privacy legislation and the false and misleading conduct
and unconscionable conduct provisions of the Australian consumer law. 1
There are hearsay accounts of banks being prepared to overlook breaches
of these requirements when they deal with mortgage brokers. If that is the
Peter Andrews is a specialist trainer in case, any encouragement not to take a very strict approach must be
Financial Planning. resisted. At law, it is the mortgage broker that is in an agency relationship
with the borrower, not the bank. It is therefore the broker who may be
After an early career in corporate finance
and banking, Peter became a lecturer at
subject to a banning order and, if fraud is involved, imprisoned.
Macquarie University.
CONTENTS
He has also taught in the Graduate
School of Management at the University THE RESPONSIBLE LENDING CONDUCT OBLIGATIONS ..................................2
of Sydney and the School of Banking and
Finance at the University of New South
APPLICATION OF THE NCCP ACT .......................................................................2
Wales. OBLIGATIONS UNDER THE NCCP ACT ............................................................2
THE MORTGAGE BROKER’S OBLIGATIONS ...........................................................2
Peter has a Bachelor of Arts and a
Bachelor of Economics from the THE LENDER’S OBLIGATIONS ............................................................................6
University of Sydney and a Master of DOCUMENTARY REQUIREMENTS ..................................................................7
Business Administration from the
University of Florida. He is also a CREDIT GUIDE ...............................................................................................7
Certified Practicing Accountant. WRITTEN PRELIMINARY / FINAL ASSESSMENT OF UNSUITABILITY .............................7
AUSTRALIAN CONSUMER LAW PROTECTION ................................................7
FALSE AND MISLEADING CONDUCT ....................................................................8
UNCONSCIONABLE CONDUCT ...........................................................................8
OTHER RELEVANT LEGISLATION ....................................................................9
PRIVACY LEGISLATION .....................................................................................9
ANTI-DISCRIMINATION LEGISLATION ..................................................................9
ANTI-MONEY LAUNDERING AND COUNTER-TERRORISM FINANCING ACT 2006
(AML/CTF ACT) ........................................................................................11
CORPORATIONS ACT 2001 ............................................................................11
KEEPING UP TO DATE ..................................................................................12
ESTABLISHING A COMPLIANCE CULTURE ....................................................12
AN AUDIT OF COMPLIANCE .........................................................................12

1 The Australian consumer law is set out in Schedule 2 of the Competition and Consumer Act
2010

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MB4– Compliance requirements PA 010615
 2 4. MORTGAGE BROKING
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THE RESPONSIBLE LENDING
CONDUCT OBLIGATIONS
The responsible lending provisions were introduced into
the National Consumer Credit Protection Act 2009, with
enactment phased in over the following years. From
now on the Act will be referred to in the text by its
usual abbreviation – NCCP Act.
To a large extent, the NCCP Act was a reaction to very
poor lending practices involving a banking product
known as “margin lending”. The problem was not so
much with the product, but rather with the way it was
applied.
Margin loans are a form of investment loan, and they
are commonly applied for the purchase of shares. They
became very popular in years before the GFC, with
borrowers using margin loans to purchase 80%, or even
more, of a share portfolio with their equity making up
the difference. That meant that they were buying a
comparatively large portfolio with only a 20% or lower
equity contribution.
Investing of that kind works very well if the market
continues to rise, but when the market fell in 2007 it
worked the other way. There were two periods in 2007,
one in February and another in November, when
pockets of investors found that their margin lending
debt exceeded the value of their investment portfolios.
That meant that they lost other assets as well, and in
many cases that included the family home.
The banks providing the loan facilities should have been
more careful, and they have largely been forced to pay
compensation. The main drivers of margin lending at
the time, however, were two financial planning firms,
Storm Financial and Opus Prime.
A Senate Committee of Inquiry – the Rippol Inquiry –
met to review the situation in 2008, and their
recommendations were largely introduced in the NCCP
Act in 2009.
Example – Pre-GFC margin lending
Many Storm Financial clients were on low incomes,
such as Tracy Richards, a 46-year old receptionist on an
annual salary of $45,000. She received a $1.48 million
margin loan from Macquarie Bank, including an annual
interest bill of around $115,000.
To qualify for the margin loan she used her entire life
savings as well as the proceeds of the sale of the
Brisbane home she shared with her three children.
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Even after her investments were sold, she was left living
in a rented caravan with debts of $300,000 she was
unable to pay.2
Unfortunately, lending that impoverishes borrowers still
occurs. Now, however, with the availability of EDR
services such as FOS, it is more likely to become
apparent with a greater chance of a remedy being
provided. As well, the responsible lending obligations
standards of lending have been set by the NCCP Act
with ASIC having power to take action when they are
breached.
APPLICATION OF THE NCCP ACT
Not all loans are covered by the NCCP Act. In broad
terms it applies to almost all types of personal
borrowing, with the specific exception of:
 investment loans for shares; and
 short-term loans (under 2 months) with very low
interest and fees as a percentage of the loan (i.e.
“payday” loans).
Loans to “natural persons” for property investment,
however, are included.
Business loans are excluded, although if a loan has a
mixed business and personal purpose, the loan is
regarded as a personal loan, and therefore subject to
the NCCP Act, if more than half the goods and services
purchased by the loan are for personal purposes.
OBLIGATIONS UNDER THE NCCP
ACT
The NCCP Act places separate responsibilities on a
mortgage broker (or other credit provider) and a credit
provider (e.g. a bank, other lending institution,
mortgage manager, etc.).
THE MORTGAGE BROKER’S
OBLIGATIONS
A mortgage broker (or other credit representative) is
required to carry out a preliminary assessment to
determine whether a proposed credit contract is
“unsuitable”. 3 This is known as the “unsuitability test”.
Provision is made in the Act for a consumer to receive a
written copy of their unsuitability test on request.
2 Stuart Washington, ‘A $1.48 million margin loan on a salary of
$45,000’, SMH, 20 June 2009.
3 NCCP Act, s.116 (1)(a)
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In carrying out an unsuitability test, the mortgage
broker must carry out the three required steps set out
in Table 1.
Table 1: Steps required for the unsuitability test 4
Step 1: Make reasonable enquiries about the
borrower’s requirements and objectives
Step 2: Make reasonable enquiries about the
borrower’s financial situation
Step 3: Take reasonable steps to verify that financial
situation
The information obtained through this three-step
process allows the unsuitability test to be applied.
A loan is to be regarded as unsuitable if either or both
the conditions set out in Table 2 are met.
Table 2: Unsuitability test conditions5
Condition 1: The contract will not meet the
borrower’s requirements or objectives.
Condition 2 The borrower will be unable to comply
with the borrower’s financial obligations
under the contract, or could only comply
with substantial hardship
The unsuitability test does not take the place of the
credit decision that must ultimately be performed by
the lender. It does, however, place an obligation on the
mortgage broker to collect suitable information and
verify it, as well as an obligation to weed out
applications that are unsuitable.
Failure to carry out these obligations may be due to
fraud, such as the deliberate misstatement of
information intended to increase the chance of
acceptance by a lender, in which case the most likely
penalty is imprisonment. Alternatively, it may be due to
carelessness in collecting or verifying information, in
which case ASIC may apply a banning order.
The responsibility lending provisions must be taken
seriously.
4 NCCP Act, s.117(1)
5 NCCP Act, s.1189(2)
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Enquiries About Requirements and
Objectives
All loans must meet the borrower’s objectives
Matters that ASIC considers relevant when making
inquiries concerning requirements and objectives
include:
 the amount of credit needed or the maximum
amount sought;
 the timeframe for which it is required;
 the purpose and benefit sought; and
 whether the consumer seeks particular product
features or flexibility, and understands the costs of
these features and any additional risks. 6
Notice that this is substantially more than a simple
description such as “purchase house”. However, the list
does not include such matters as investment risk and
the client’s attitude to risk. A mortgage broker is an
arranger of finance, not an investment adviser.
Enquiries About Financial Position
ASIC suggests that the following matters are relevant
when making inquiries concerning financial position:
 the consumer’s amount and source of income,
including the length and nature of their
employment;
 the consumer’s fixed expenses, such as rent,
repayments to other loans/debts, child support,
insurance;
 the consumer’s variable expenses;
 any existing debts that are to be repaid from the
loan;
 the consumer’s credit history;
 the consumer’s age and number of dependants;
 the consumer’s assets;
 reasonably foreseeable changes, such as the end of
a honeymoon period on a loan, impending
retirement, or the end of seasonal employment;
and
 geographical factors, such as remoteness (which
may increase expenses). 7
6 ASIC Regulatory Guide 209.33
7 ASIC Regulatory Guide 209.32
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Verifying Financial Position
ASIC has not suggested the verification procedures that
might be required. The Financial Ombudsman Service
(FOS), however, has stated that the following should be
considered mandatory8:
 verification of PAYG income by reference to
payslips; or
 verification of self-employed income by reference
to tax returns and bank statements.
In the view of FOS, both the amount and certainty of
the income should be considered.
When Substantial Hardship Exists
The NCCP Act leaves “substantial hardship” largely
undefined. In another context ASIC has suggested that
substantial hardship exists when “the person is unable
to meet reasonable and immediate family living
expenses”.9
The Act does, however, say that financial hardship
would be presumed to exist if the consumer can only
repay the loan by selling his or her principal place of
residence “unless the contrary is proved”.10
ASIC takes the view that this means that borrowers
should generally be able to meet their repayment
obligations from income and liquid assets rather than
the sale of assets, although there are exceptions where
this is not a reasonable position, for example in the case
of reverse mortgages or bridging loans.11
Scalability of the Unsuitability Test
ASIC has advised that the enquiries a lender must do to
carry out an unsuitability assessment will vary
depending upon the type of consumer and the type of
product. Relevant factors include:
 the potential impact upon the consumer of
entering into an unsuitable credit contract;
 the complexity of the loan arrangement;
 the ability of the consumer to understand the
credit contract; and
 whether the consumer is an existing customer of a
8 Financial Ombudsman Service circular, March 2011
9
Superannuation Industry (Supervision) Regulations,
reg.601(5)(a)(ii).
10 NCCP Act, s.118(3), 131(3), 142(3) & 156(3)
11 ASIC Regulatory Guide 209.102
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lender or a new customer.12
Generally, ASIC’s scalability requirement refers to
different types of product rather than individual
consumers with the same product type. The same
factors relevant for considering scalability are also
relevant for determining the appropriate mode of
inquiry – for instance, whether the inquiries should be
made one-on-one with the consumer (either face-to-
face or by ‘phone) or whether it is sufficient to make
inquiries via questions on the application form. For
example, a housing loan for $500,000 would involve a
greater scale of inquiries, including face-to-face contact,
ASIC, however, also expects more intense inquiries to
be made in other situations, for instance where:
 the consumer has limited capacity to understand
the credit contract or their payment obligations
under the contract – for example, where the
consumer has limited English-speaking skills;
 the consumer has conflicting objectives;
 the consumer is confused about their objectives (or
has difficulty articulating them); or
 there is an apparent mismatch between the
consumer’s objectives and the product being
considered by the consumer.13
ASIC further recognises that fewer inquiries would need
to be made in the case of an existing client. This is
reasonable because much of the required information
would be on file anyway.
Where Mortgage Brokers May Fail to Comply
In its annual reviews ASIC has expressed satisfaction
that mortgage brokers and other credit providers are
for the most part making reasonable enquiries about
the purpose of the loan and the financial position of the
applicant, as well as reviewing the documentation
required for verifying the applicant’s financial position.
There have, nevertheless, been a number of instances
of failure to comply.
12 ASIC Regulatory Guide 209.
13 ASIC Regulatory Guide 209, TABLE 3.
 5 4. MORTGAGE BROKING
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The most serious ones have involved deliberate
falsification of the incomes of borrowers in order to
have a loan approved by a lender. This is an also a form
of fraud regarded as “false and misleading conduct”
under Australian Consumer Law (discussed later). In
such a situation there may also be more fraudulent
activity such as providing a false occupation and forging
documentation. The most likely penalty with such
offences is a jail term under criminal law provisions.
Example – Finance broker jailed for serious
fraud
In 2012, a highly regarded and award-winning finance
broker from Western Australia, Kate Thompson, was
jailed for five years on several charges of fraud. She had
been earning up to $5,000,000 a year, but it appears
most of her business involved providing credit to people
with little to no expectation they will be able to repay
the entirety of the loan. This fraud was achieved by
fudging the income and assets of clients, making them
appear much wealthier on paper than was the case.
Ms Thompson obtained most of her clients from the
Mormon Church, of which she was a member.
Admitting her guilt, she described her clients as “just
old people who didn't do much more in their day than
cook their dinner and do a bit of gardening”, and yet
she admitted describing them as a “professional
something, anything” in loan documentations.
Her clients had also been encouraged to invest in a
property scheme that in the end was little more than a
Ponzi scheme, with incoming client investment money
being used to fund promised 17.5% returns. 14
Ms Thompson was jailed. ASIC banned her for life once
the sentence was announced.
Other instances of failure to comply with the
responsible lending provisions involve failure to
properly obtain required information or failure to verify
it.
There is a presumption in the Act that the “reasonable
inquiries” would be made to the applicant. Certainly
asking a third person for the information would not
normally be a suitable approach.
14 Michael West, A costly six degrees of separation’, SMH, 14 April
2012; Stephen Long, ‘Broker blows whistle on sub-prime scandal’,
ABC News, 14 April, 2012.
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Example – Relying on a third party source
On 7 November 2013, ASIC announced that it had
banned Melbourne mortgage broker Mr Tony Quach for
five years and cancelled the Australian credit licence of
his company TQ Smartchoice Pty Ltd after an
investigation found failure to comply with credit laws.
ASIC found that between December 2010 and
December 2011, Mr Quach, through TQ Smartchoice
Pty Ltd, submitted six home-loan applications to two
lenders that contained false or misleading information.
In all instances, Mr Quach obtained information and
documents from a source other than the applicants and
failed to verify that information with the applicants.
ASIC has dealt with a number of cases where the
mortgage broker has failed to verify an applicant’s
income details.
Example – Failing to verify information
On 16 April 2013, ASIC announced that it had banned
Mr Arthur Sperling, a Sydney-based mortgage broker,
from engaging in credit activities for 5 years and
cancelled his Australian credit licence after an ASIC
investigation found that between October 2010 and
November 2011, Mr Sperling submitted 10 home loan
applications to four lenders without independently
verifying the income and employment details of the
borrowers before submitting the loan applications to
the lenders.
In doing so, ASIC regarded him as being reckless as to
whether the income and employment details supplied
to the lenders were false or misleading.
Sometimes falsification of income is accompanied by
the misuse of “low doc” loans. Since the falsification of
income involves fraud, criminal penalties are likely to
apply.
Example – Fraudulent use of “low doc” loans
On 10 October 2008, a former Canberra mortgage
broker pleaded guilty in the ACT Magistrates’ Court to
seven charges following an investigation by ASIC.
He was charged with one charge under s126(2) of
the Crimes Act 1900 (ACT) and six charges under s347
of the Criminal Code 2002 (ACT) after an investigation
into his conduct between December 2003 and
September 2005.
 6 4. MORTGAGE BROKING
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The charges related to knowingly using false
accountants’ letters with the intention of inducing a
lender to approve low-documentation (low-doc) loans
for seven borrowers. Without this false documentation,
these borrowers may not have successfully secured the
necessary finance.15
The Law Relating to Principal and Agent
Under the law relating to principal and agent credit
licensees who are acting within the knowledge and
authority of an Australian credit licensee cannot be
separately sued. This, however, is not the case if they
act outside the authority of the licensee and in their
own interest.
Depending on the circumstances, therefore, ASIC may
take action against a licensee or a broker who is an
agent of the licensee.
THE LENDER’S OBLIGATIONS
Once the mortgage broker has carried out a preliminary
assessment and forwarded the loan application to the
lender, the lender is responsible for a separate final
unsuitability assessment, which is generally referred to
as the ‘final assessment’.
Final Assessment
At the stage of the final assessment, the lender has all
of the information collected by the mortgage broker,
including the documentary evidence that has been
collected.
ASIC expects that the lender will look for such matters
as omissions and inconsistencies, consider any other
information that might be available, and then make its
own unsuitability review based on its internal
assessment procedures. In other words, ASIC expects
judgment to be exercised without ‘rubber stamping’ the
preliminary assessment made by the credit mortgage
broker.
Where Lenders May Fail to Comply
Lenders can quite clearly fail to carry out a final
assessment properly, and there have been plenty of
examples of that. In fact, in some cases failure to
comply has been so endemic that suggestions have
been made that banks were actively encouraging non-
compliance.
15 Source: ASIC
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In the Kate Thompson case referred to earlier all of the
major banks were involved and they must have been
providing credit for many years to her “old people” who
spent most of their time “cooking” and “gardening”.
Certainly, there does not appear to have been any
evidence of the banks using documentary evidence
such as bank statements and tax returns to verify the
occupation status and financial circumstances of Ms
Thomson’s clients.
Where there has been a broker involved, there is little
ASIC can do if a lender has failed to comply with the
NCCP Act provisions because it is the broker who is
directly involved with the client. For the same reason,
the contract cannot be set aside. However, if the
borrower takes the matter to external disputes
resolution (EDR), the EDR body can persuade the lender
to lessen, and sometimes substantially lessen, the
borrower’s repayment obligation. The justification for
the approach is that, in failing to carry out proper
checks, the lender failed to act prudently as required by
its industry code of practice.16
Lenders usually follow the persuaded approach to avoid
the matter being taken to court where case law may be
used against them.
Example – Lender fails to check details
Julia Eastland, a 71-year-old pensioner from Perth, who
was one of Kate Thompson’s clients, took out a loan of
$248,500 on Ms Thompson’s advice, using her family
home as collateral. Her income and asset details were
falsely stated and she was written down as being self-
employed. The lender, a leading bank, did not check
these details.
The Financial Ombudsman Service (FOS) found that Ms
Thompson had completed the loan application
fraudulently. Because the NCCP Act does not provide
criminal penalties for negligence of this kind on the part
of a lender, it referred to the bank’s actions as
“maladministration” and recommended that the
borrower’s liability should be reduced to 25% of the
outstanding principal.17
16 Either the Code of Banking Practice (CBP) or the Mutual Banking
Code of Practice (MBCP). The latter applies to credit unions and
building societies.
17 Michael West, ‘Low-doc house of cards testing articles of faith’,
SMH, 14 April 2012.
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DOCUMENTARY REQUIREMENTS
The NCCP Act also requires a number of documents to
be provided to the borrowers at different stages of the
credit process. The aim is that these documents will
help the consumer make informed decisions to prevent
them from entering into an unsuitable credit contract.
Most of the documentary requirements are placed on
the lender, but there are two that the mortgage broker
is responsible for.
CREDIT GUIDE
Mortgage brokers must provide a credit guide to the
consumer as soon as practicable after it becomes
apparent that they are likely to provide credit
assistance to the consumer.18 As a practical matter, the
clearest way to meet this requirement is to hand out
the credit guide at the beginning of an interview
intended to gain information for a loan application.
The credit guide must be in writing and include:
 the licensee’s name, contact details and Australian
credit licence number;
 details on any fees and charges payable by the
consumer
 details of any commissions likely to be received
from the lender;
 the names of the licensee’s six main lenders;
 details regarding complaint handling, including
contact details of internal and external dispute
resolution processes; and
 information about the licensee’s obligation to
provide a written copy of an unsuitability
assessment upon request.
Presenting a credit guide may seem a formal
requirement, but it represents an opportunity to
present the business to the client and describe what it
can do in a positive manner. It also represents an
opportunity to describe other features of the business,
such as the range of services provided and the
complaints handling procedures that the firm is
required to have available.
18 NCCP Act, s.113
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WRITTEN PRELIMINARY / FINAL
ASSESSMENT OF UNSUITABILITY
A written preliminary / final assessment that a credit
contract is unsuitable must be provided by the
mortgage broker free of charge when requested by the
consumer.19 In practice, this means that the broker must
keep a record of its final assessment in a form that
allows the assessment to be provided to an applicant
promptly and in writing.
ASIC expects that the written assessment will be
concise and easy for consumers to understand, and
include reference to the relevant factual information
provided by the consumer that was used to assess the
credit contract as “not unsuitable”.20 This means that
the written assessment should include a record of the
financial information obtained, and the requirements
and objectives communicated by the consumer.
The importance of providing the factual basis on which
the broker made the assessment is that if it is
inaccurate the consumer can then raise it with the
broker.
AUSTRALIAN CONSUMER LAW
PROTECTION
As well as the responsible lending provisions of the
NCCP Act, mortgage brokers have to consider two key
provisions of the Australian Consumer Law (ACL). The
ACL is found in Schedule 2 of the Competition and
Consumer Act 2010.21 The two provisions relate to:
 false and misleading conduct; and
 unconscionable conduct.
Something to bear in mind about these provisions is
that they are not limited by restrictions that apply to
the application of the NCCP Act. In particular, in
contrast to the NCCP Act, they apply to:
 business loans; and
 investment loan for shares.
19 NCCP ACT s.120
20 ASIC Regulatory Guide 209.136
21 Formerly known as the Trade Practices Act.
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FALSE AND MISLEADING CONDUCT
Misleading and deceptive conduct and false and
misleading representations by corporations in trade or
commerce are prohibited under the Australian
Consumer Law (ACL). A court may impose monetary
penalties, grant injunctions to prevent the prohibited
conduct continuing or being repeated or to require that
some action be taken such as cancellation of contracts
and an award of damages.
The offence also overlaps with fraud under criminal law,
so fines and jail sentences may also be imposed.
UNCONSCIONABLE CONDUCT
Unconscionable conduct is also prohibited under the
Australian Consumer Law. This occurs where a stronger
party attempts to take advantage over a weaker party
in a manner that clearly goes against the conscience
because it goes against the norms of society.
Unconscionable conduct is more than simply unfair or
harsh – it must have an element of bad conscience.
Where there has been unconscionable conduct, the
offending may be required to pay compensation for any
financial losses as well as ASIC’s costs. However, the
contract may only be put aside if the offending party
was the lender.
Examples of unconscionable conduct provided by the
Office of Fair Trading include businesses taking
advantage of:
 consumers who don’t speak English or have English
as a second language;
 consumers with learning, emotional or behavioural
disabilities;
 low-income earners (such as by making false
statements about the full cost of a loan).
Other examples of unconscionable conduct include:
 not giving the applicant enough time to, read an
agreement, ask questions or seek advice; and
 not disclosing or explaining the key terms of a
contract
Example – Unconscionable conduct
ASIC brought proceedings in relation to five clients of
Australian Lending Centre Pty Ltd and Sydney Lending
Centre Pty Ltd, owned and controlled by Mr Christopher
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John Riotto, who was formerly the NSW President of
the Finance Brokers Association of Australia.22
The court found that in four of the five cases, Australian
Lending Centre or Sydney Lending Centre (the brokers)
engaged in unconscionable conduct by having its clients
sign broking contracts for business loans when they
knew the clients wanted personal loans. The court
found that the practical effect of this conduct was to
remove important consumer protections provided by
the National Credit Code.
The court also found that on two occasions the brokers
also contravened Australian Consumer Law in
misleading or deceptive conduct by representing to
lenders that the loans were for business purposes, and
thereby avoiding the responsible lending requirements
of the NCCP Act. The conduct took place between 2005
and 2008.
The court also found the loan brokered for one of the
clients was unconscionable because it was secured over
his house and the broker knew that the client could not
afford the repayments.
In relation to the fifth client, the court found that the
loan was for a business purpose. However, the court
found that the broker engaged in unconscionable
conduct because the client, a pensioner, suffered from
a clearly identifiable disability which the brokers
exploited to have him sign a broking contract and loan
with an interest rate of 5% a month secured over his
only asset. The court also found that the company that
made the loan, AMR Investments Pty Ltd (AMR) – a
company also owned and controlled by Mr Riotto – also
engaged in unconscionable conduct and that Mr Riotto
was knowingly involved in the broker and AMR”s
contraventions.
The court granted an injunction restraining future
similar conduct and awarded compensation to one of
the borrowers who had suffered significant loss. The
defendants were required to pay ASIC’s costs.
ASIC Commissioner, Peter Kell commented:
“The outcome sends a clear message that ASIC will act
against finance brokers and lenders who unconscionably
place borrowers in inappropriate and unserviceable
loans.”
The court granted an injunction restraining future
similar conduct and awarded compensation to one of
the borrowers who had suffered significant loss. The
defendants were also required to pay ASIC’s costs.
22 ASIC Media Release, 8 December 2012.
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OTHER RELEVANT LEGISLATION
Other legislation also affects lending practices.
PRIVACY LEGISLATION
The Privacy Act 1988 introduced the practice of more
closely honouring the privacy of clients. Privacy
protection was later significantly extended by the
Privacy Amendments (Private Sector) Act 2000. The
basic requirement is that client information should not
be used for any purposes other than the purpose for
which the information was originally collected, without
the client’s express approval.
The privacy legislation also covers storing and accessing
client information. Clients’ records must be maintained
in good order on a day-to-day basis. They must also be
securely filed in a locked secure area in fireproof
structures
Only the mortgage broker or lender, associated support
staff, and compliance personnel (the latter for review
and audit purposes) are allowed internal access to
client files. External access is available only to
regulatory bodies (primarily ASIC), and to the client
upon request.
Movement of records must be monitored and recorded.
Removal of records can only occur for audit purposes or
by court order.
Another important requirement of the privacy
legislation is that each organisation must set out its
policies on its management of personal information in a
document that must be made available to anyone who
asks for it. Typically, a privacy statement addresses
matters such as what an organisation intends to do with
personal information it collects, how it is to be stored
and who might have access to it.
The access requirement might be satisfied by publishing
the privacy statement on the business website,
although a safer approach is to provide a copy to all
clients at the beginning of the business relationship.
Schedule 3 of the Privacy Act 1988 contains ten
National Privacy Principles (NPPs) that regulate how
individuals’ personal information may be handled.
These are listed in Table 3.
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Table 3: The National Privacy Principles
NPP Principle Summary
1 Collection Collection is limited to what is necessary, and
it must be fair, lawful and non-intrusive. The
organisation must collect personal
information directly from the individual if it is
reasonable and practicable to do so.
2 Use and The information can only be used for the
disclosure purpose for which it was collected, unless
the person has consented to secondary use
such as direct marketing or the disclosure is
in the public interest.
3 Data quality An organisation must take reasonable steps
to make sure that the personal information it
collects, uses or discloses is accurate,
complete and up-to date.
4 Data security An organisation must take reasonable steps
to protect the personal information it holds
from misuse and loss and from unauthorised
access, modification or disclosure.
5 Openness An organisation must have a policy
document outlining its information handling
practices and make this available to anyone
who requests it.
6 Access and Generally speaking, an organisation must
correction give an individual access to personal
information it holds about that individual on
request.
7 Identifiers Generally speaking an organisation must not
adopt, use or disclose an identifier that has
been assigned by a Commonwealth
government “agency”. For example, a tax file
number or Medicare number.
8 Anonymity Individuals must be given the option of
interacting with the collecting organisation
anonymously whenever it is lawful and
practical to do so (for example, a general
inquiry).
9 Transborder The transfer of personal information to a
data flows foreign country is restricted to those
countries with substantially similar privacy
guidelines, where consent has been obtained
or the transfer is necessary to complete an
agreement with a person.
10 Sensitive An organisation must not collect sensitive
information information (for example, details of a
person’s race, religion, sexual preferences or
health) unless the individual’s consent has
been givenand it is required by law or, in
special circumstances, related to public
interest.
ANTI-DISCRIMINATION LEGISLATION
Over the past 30 years the Commonwealth Government
and the state and territory governments have
introduced anti-discrimination law to help protect
people from discrimination and harassment.
These laws include a range of grounds on which
individuals may lodge a complaint including
discrimination because of race, sex, disability and age.
 10 4. MORTGAGE BROKING
10
Complaints about discrimination can be made in
relation to a range of areas including employment,
education, the provision of goods, services and
facilities, accommodation, sport and the administration
of either Commonwealth or State and Territory laws
and services.
The privacy legislation also places limits to the use of
information that may lead to discrimination. For
example, The Privacy Act 1988 prohibits a credit
reporting agency from including information any of the
following in a credit report:
(a) political, social or religious beliefs or affiliations; or
(b) criminal record; or
(c) medical history or physical handicaps; or
(d) race, ethnic origins or national origins; or
(e) sexual preferences or practices; or
(f) lifestyle, character or reputation. 23
Lending to Older People
It has been suggested that the responsible lending
provisions discriminate against older people because
they are not likely to have sufficient income to repay a
loan. This issue has been considered carefully by ASIC,
which has suggested that in the case of older people
there may be other acceptable ways of repaying a loan.
Example – Lending to older people
For example, consider the following account from a
mortgage broker:
“I had a couple come in where the bank had done the
wrong thing. They were both retired and they wanted to
buy a block of land and build a house. So they put all of
their assets into that and they bought this block of land.
But the people who had financed the block of land
didn’t tell them that they can’t finance the house
because of their age. So they’ve got a caravan parked
on that land now. It’s just not fair.”
23 Privacy Act 1988, s.18(E)2.
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A spokesperson from ASIC rebutted the suggestion that
the responsible lending provisions discriminate against
older people. He claimed that although they might not
have the income to continue to pay the loan in the
future, e.g. due to retirement, there may be other
acceptable ways to repay it, e.g. through using
superannuation payout monies or by selling the home
and downsizing. He pointed out, however, that if
downsizing is required to repay the home loan, it is
important that the borrower know and understand that
at the time they are taking the loan out.24
ASIC has set out its approach to such lending in
Regulatory Guide 209, where it has also included two
case studies to indicate that loans can be made in the
circumstances described.
Example - Repayment from superannuation25
A male consumer aged 65 applies for a fixed-term loan
to purchase a boat.
Although currently working full time, he intends to
retire within a year. Without further inquiry, it may
appear prudent to refuse the application on the basis
that his financial circumstances will be very different
once he ceases work.
The preliminary inquiries undertaken by the finance
broker he has approached reveal, however, that his
superannuation will be more than sufficient to meet his
ongoing financial needs as well as repayments under
the loan.
Example - Future plans to sell the principal
residence and downsize26
A female consumer applying for a 25-year principal and
interest home loan to purchase a new home is currently
employed and can demonstrate capacity to meet
repayments under the proposed loan however, she is
55 years old and intends to retire at age 65, with a post-
retirement income insufficient to meet repayment
obligations without substantial hardship. As it is likely
the consumer could only meet her financial obligations
post retirement by selling the home, it appears at first
view that the presumption in s118(3) applies and, as a
result, the loan would be unsuitable.
24
Amy Rosenfeld, Mackenzie McCarty, ‘Age discrimination in
broking: Has ASIC gotten it wrong with over-50's?’, Australian
Broker Online, 28 May 2013.
26 From ASIC Regulatory Guide 209.105
 11 4. MORTGAGE BROKING
11
The lender’s inquiries about her requirements and Table 4: Identifying an Individual – Verifying
objectives, however, reveal that she has planned for her Documents
future change in financial circumstances and, at the
Primary documents Secondary documents
point that she can no longer comfortably afford
repayments, intends to sell the home and downsize.  a current Australian or  a bank statement issued
She does not wish to purchase a smaller home until this foreign passport by an Australian bank
time, however, and also considers the home she is  a current Australian within the last 12 months
currently purchasing has greater potential to appreciate driver’s licence or  an Australian Taxation
in value in the years before she has to sell it. learner’s or 18+ proof of Office (ATO) notice issued
age card within the last 12 months.
Given her expressed intent, if her likely equity position  foreign national identity  a government benefits
will be such that she can readily pay the outstanding card notice issued within the
balance of the loan at the time of the planned sale, ASIC  an Australian birth last 12 months (e.g. a
believes that it would be reasonable to assess the loan certificate or birth notice from Centrelink)
as “not unsuitable”. extract  an utilities notice issued
 an Australian citizenship within the last 3 months.

ANTI-MONEY LAUNDERING AND certificate  a Medicare card

COUNTER-TERRORISM FINANCING ACT
2006 (AML/CTF ACT)
In principal, the obligations of the AML/CTF Act fall on
lenders and not brokers. One of the requirements of
the Act, however, is identity verification, and brokers
often undertake this on behalf of lenders. To facilitate
broker compliance with the AML/CTF Act, lenders will
generally:
 supply compliance procedures to brokers and
mortgage managers; and
 appoint brokers as agents or sub-agents to carry
out the identification on the lender’s behalf.
Both the Mortgage and Finance Association of Australia
(MFAA) and the Finance Brokers Association of
Australia (FBAA) have prepared AML/CTF Act training
and compliance packages.
Loan applications should not be submitted for clients
whose identity the broker has not personally verified
except in specific situations approved by the lender,
such as a client living in a very remote area. Standard
identification verification procedures for individuals
include ascertaining the client’s full name, residential
address and date of birth.
Documentary identification will normally require at
least two original documents, at least two from a list of
government-issued primary documents and at least one
from a list of a list of secondary documents. The
required documents are summarised in Table 4.
 a Commonwealth Seniors
health card/State seniors
card
 a Health Care card
(Centrelink/Department
of Veterans’ Affairs)
 an Australian Marriage
certificate
CORPORATIONS ACT 2001
Since mortgage brokers are licensed under the NCCP
Act, the Corporations Act has little bearing on the
business or mortgage broking. However, all businesses
that are public companies are subject to the general
provisions of the Corporations Act, including the
financial reporting requirements.
As such they must prepare annual financial reports that
are:
 prepared in accordance with Chapter 2M of the
Corporations Act;
 audited;
 lodged with ASIC within 4 months of financial year
end;
 sent to shareholders by the earlier of 4 months
after year end or 21 days before the next AGM.
Preparation of the annual financial reports requires
internal administration systems such as accounting
systems and databases that are designed to collect and
process the required information.

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MB4 Compliance Requirements 010615
 12 4. MORTGAGE BROKING
12
KEEPING UP TO DATE
Keeping up to date with compliance requirements may
seem burdensome, but this really should not be the
case. Professional associations such as The Mortgage
and Finance Association of Australia (MFAA) and The
Finance Brokers Association of Australia (FBAA) inform
their members of changes to requirements before they
happen. The professional associations’ code of practice
can also be used as a sound guidance to compliance
requirements. Also, larger mortgage broking
organisations usually have compliance officers who
assist practitioners to meet compliance standards.
It is also a good idea to have an up-to-date procedures
manual. Larger organisations should have them as a
matter of course, while smaller organisations can
purchase sound procedures manuals that are kept up to
date through the internet.
When new compliance requirements are being
reviewed, any words or phrases that are not
understood should be identified, with the necessary
research to understand their meaning being
undertaken. This may involve approaching supervisors
and colleagues. The meaning and significance of all
documents relating to compliance should be properly
understood.
ESTABLISHING A COMPLIANCE
CULTURE
ASIC requires a business’s compliance measures to be
documented although it acknowledges that the level of
documentation will vary from detailed policy and
procedures manuals in larger organisations to checklists
in smaller organisations. 27
Once a compliance system has been established, it is
implemented and maintained. Training has an
important function in this process, but it is not enough
on its own. Compliance and ethical behaviour must
become a dominant value of the business.
In the United States, after a series of scandals involving
defence contracts, the Boeing Company found that it
had to “open up” the company’s culture to compliance
and ethical issues. For them this began with “talking
about ethics and compliance at every opportunity”.
Whenever he moved around the company the CEO held
discussion groups at which compliance and ethical
issues were central points of discussion, and line
27 RG 104.44 & RG 104.45.
managers were encouraged to take the same
approach.28
At Boeing it was also found that employees must be
made aware of the consequences of ethical misconduct
and be prepared to report on the ethical misconduct of
others:
“People should be aware of their obligation to maintain
and promote ethical behaviour . . . and they should be
aware of the adverse consequences that follow from a
failure to do so. People mustn't be allowed to think that
they can hide in the corporate bureaucracy or wink at
the misconduct of fellow workers, or even their leaders
– especially their leaders.” 29
Notice that this requires:
 not accepting elements of the corporate culture
that re not consistent with ethical conduct; and
 Reporting instances of ethical conduct by other
employees.
AN AUDIT OF COMPLIANCE
It is also important for a firm to audit and monitor the
staff in order to know they are adhering to the
measures and controls put into place to ensure
compliance and mitigate associated risks.
Carrying out audits and monitoring on compliance areas
and procedures is both an essential business function
and an ASIC regulatory requirement. The only way to
ensure that processes work is to audit them and assess
the results, carrying out gap analysis and reviews on a
frequent and rolling basis.
It is also important for a business to have regular,
perhaps annual, compliance reviews. Essential
components of a compliance review include a review of
the licensee’s policies and procedures and a check of
client files to make sure that the policies and
procedures are being followed.
28
McNerney, J., “Turning Ethics and Compliance into a Competitive
Advantage”, The 2006 Ethics and Compliance Conference, La
Jolla, California, 27 April 2006.
29 McNerney (2006).

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