Keynote address at the Australian Institute of Credit Management (AICM) 2019 National Conference by ASIC Commissioner John Price, Gold Coast, 17 October 2019.
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Good morning everyone. It’s a pleasure to be here and speak to you about topics of interest to the credit management industry.
Today I will:
- First – outline important Government initiatives to introduce a Director Identification Number and modernise Australian business registers, and explain the relevance of these changes for you
- Secondly – encourage you, as credit managers, to participate actively in the external administration of insolvent companies
- Thirdly – update you on ASIC’s review of our responsible lending guidance, and other recent and upcoming home-lending related work by ASIC, and
- Finally – conclude by referring you to ASIC’s Corporate Plan for more detail on our priorities this year and across the four years to 2023.
Important registry initiatives
Turning first to the proposed changes to introduce a Director Identification Number (DIN, for short) and to modernise Australian business registers.
First, what is a DIN? In short, it is a unique identifier for each person who consents to be a company director. It is underpinned by an online identity verification process. Once a person obtains a DIN it can then be linked to a director role on the companies register.
To explain the background to DIN, I should trace a few key developments. Illegal phoenixing activity was a significant issue explored in a 2015 inquiry into Insolvency in the Australian construction industry by the Senate Economics Reference Committee. Then, in December 2016, to combat the so-called ‘black economy’ the Government established a taskforce to develop an innovative and Whole-of-Government strategy. In September 2017, the Government announced a package of reforms to both deter and penalise illegal phoenix activity, which included the introduction of a DIN.
ASIC is strongly supportive of the DIN proposals. We think it will greatly benefit both regulators and people doing business.
Today our legislation and technology do not cater for director identification. As a result, currently:
- ASIC does not verify the identity of directors, we generally take information given to us at face value.
- Directors may have multiple records within ASIC systems, for instance 'John Price' could have multiple unlinked records with slight variations of name, address and personal details.
- There is limited transparency of relationships between directors and multiple companies.
- There is little interaction between ASIC and individual directors. Rather, our key relationship is with the company, and
- Our Companies Register is hosted on ageing legacy technology some of which is approaching 30 years of age. This seriously limits our ability to implement reforms and new services that are increasingly expected.
Importantly, the DIN can provide traceability of a director’s relationships across companies enabling better tracking of directors of failed companies and preventing the use of fictitious identities. The DIN will also be able to interface with other government agencies and databases to allow regulators to map the relationships between individuals, entities, and other people. This means the introduction of a DIN will assist ASIC and other regulators in the vital work of detecting, deterring and disrupting phoenix activity.
There are also other anticipated benefits. For example, the DIN regime creates a simpler more effective tracking of directors and their corporate history. This will reduce time and cost for administrators and liquidators, improving the efficiency of the insolvency process.
The new regime will also improve data integrity and security, such as allowing directors to be identified by a number rather than by other more personally identifiable information such as their name and/or address.
We see a desirable future state as one where DINs are issued to every director and linked to the Companies register. As part of this:
- We can increase confidence in our companies register which is searched over 140 million times each year.
- Both director and company data will be stored together, increasing the accuracy and currency of the data, and allowing us new insights.
- We will be able to identify which companies a director is linked to and changes to directorships over time, increasing transparency.
- There will be flexibility and an integrated user experience with both authorised directors and companies able to interact with the registrar online in a more modern system.
Modernising the business registers
Now I’d like to comment on how we are planning to make the journey towards a DIN, which is likely to be delivered as part of the modernisation of business registers proposals also now before Government.
Business registers are a critical piece of Australia’s economic infrastructure. They allow businesses and companies to be established and enable a better way to understand and engage in commercial activities within Australia and internationally. Registers provide legitimacy and protection to businesses and support regulators to undertake compliance activities.
Our current registry is becoming outdated, both in terms of the legislation we work with and in terms of our technology – more on this later.
The Black Economy Taskforce conducted by the Australian Taxation Office recommended the creation of a single business register. In the 2018-19 Budget, the Government requested a detailed business case be developed for modernising the business registers by combining the Australian Business Register (the ABR) and 31 ASIC business registers on a contemporary technology platform administered by the Australian Taxation Office. The 31 ASIC registers include the registers of companies, business names, professionals and others.
By uniting the business registers, the Government can create one modern business register system providing the backbone for a transformed way of interacting with government, making it simpler and faster to start and run a business. The Government also requested the DIN regime be implemented through the registry modernisation program.
Modernising business registers will create a single, reliable, easily accessible source of trusted business registration data with the potential to:
- Support Australia with being a highly ranked ‘digital government in the world’
- Increase economic and social value of data, and
- Improve registry efficiency.
Stability of current ASIC registry platforms
I would now like to comment on the technology challenges facing the current ASIC registry. I know that AICM members are interested in this area as you rely heavily on public information and registers to assess, monitor and mitigate risks associated with the provision of credit.
The current technology utilised by ASIC to maintain the registers is ageing and there are real challenges in meeting growing future demand in the digital economy. For example, the technology platform for the companies’ register, known as ASCOT, is approaching 30 years old. By analogy, picture an old car of that age – it might even be classified as an antique and is probably functional but quite expensive on the upkeep. Or picture a mobile phone from 30 years ago – you certainly couldn’t send an SMS from it or download apps.
Our systems are expensive to maintain, hard to improve, and increasingly vulnerable to outages and service disruptions. There have been times when some of you have been on the receiving end of those outages. We are doing our best to minimise and respond to disruptions. These outages are part of the real challenge ASIC has in managing an aging technology fleet.
A few more facts about ASIC’s ageing registry systems and the case for modernisation:
- The existing ASIC registry is a complex and high-volume business, facilitating over 140 million searches, 3 million updates and around 900,000 enquiries annually.
- There are 2.7 million registered companies and 4.4 million current director ‘roles’ in ASIC’s database.
That’s a lot of grunt work being done on these old systems.
That’s why we view the program for modernising business registers and the implementation of a DIN as:
- a valuable and significant opportunity to transition ASIC’s business registers to a modern platform
- a way to deliver wide-ranging benefits to all users of the registry reducing complexity and cost, and
- an important tool for Government in addressing illegal conduct.
ASIC will continue to strongly support these proposals within Government, and we note the strong support AICM members have provided to Treasury on the modernisation of ASIC and ABR records and the implementation of a DIN during Treasury’s consultation and submission activities last year.
Active creditor participation
Moving now to my second topic – active creditor participation in external administrations of insolvent companies. ASIC encourages active creditor participation. It leads to fairer outcomes for all stakeholders, promotes better behavior by insolvency practitioners, and builds confidence in the insolvency system.
We know the return to creditors is very small or nil from most companies in external administration. For 2017-18, 92% of statutory reports lodged with ASIC stated that no dividend would be paid to creditors, and in 4.8% of reports the dividend would be between zero and 11 cents in the dollar.
Given this, I can understand that creditors of a company that goes into external administration may question why, if there is little or no prospect of receiving a dividend, they should commit further resources. But let me tell you the benefits of becoming and staying involved, and suggest some actions you can take.
The Insolvency Law Reform Act 2016 brought significant changes aimed, in part, at providing better information to creditors and empowering them to actively participate in the external administration of an insolvent company. Prior to this it was possible that a creditor would receive little or no information, and there were limited avenues available to unsecured creditors to require the external administrator to respond to requests for information.
The 2016 reforms introduced mandatory requirements for liquidators to:
- within a specified period following their appointment, provide creditors with initial information that must include details about creditors rights to request information or reports, or request a meeting be convened, and the power of creditors to remove and replace the liquidator by resolution passed at a meeting, and
- within three months of appointment, provide a statutory report setting out basic information about the company and the likelihood of a dividend being paid.
ASIC acknowledges that, apart from these notifications, there is no prescribed statutory duty for the external administrator (other than a voluntary administrator) to provide creditors with any further information. And whilst it is up to the creditor to decide the level of involvement it will have in the ongoing administration of a failed company, we see real benefits to active creditor participation.
Let me take you through four actions that ASIC encourages, and I hope you will see the benefits of becoming and staying involved.
First – tell the appointee what you know about the company
Often the external administrator is hampered in performing their duties and functions because of poor books and records or lack of cooperation from company officers.
Creditors may have valuable information that will assist the external administrator to investigate the company’s financial affairs and activities and, in some cases, recover assets for the benefit of creditors.
In their reports to creditors, the external administrator may ask creditors to assist and provide information about the company’s affairs. We encourage creditors to respond. Sometimes an asset may be recovered only because a creditor provided information about it.
It may be that information about certain company assets is not disclosed in the statutory report because information was deliberately removed from company records before the appointment of the external administrator. You should provide the external administrator with all information you have about assets the company previously held and that the external administrator hasn’t referred to their report.
Another example is creditors may have knowledge that a similar business has commenced at another location using the same name, telephone number or marketing material. Telling the liquidator can assist the liquidator perform their duties more efficiently and effectively and improve the prospects of a dividend being paid.
Second – participate in meetings
In carrying out their duties, the external administrator may write to creditors convening a meeting of creditors or asking creditors to consider and vote on a proposal without a meeting being convened.
Creditors are encouraged to carefully read and consider the information provided and decide whether they support the proposed course of action. If there is insufficient information to fully consider matters, creditors should contact the liquidator and request they provide sufficient information.
The external administration of a company’s affairs can be protracted if the external administrator does not obtain feedback from creditors on a proposed course of action or if insufficient creditors participate to enable a resolution to be passed.
If you can’t attend the meeting, we encourage you to complete a proxy. You can specify for each resolution to be considered at the meeting how you want to vote – even if the proxy form doesn’t give this option. You can also request that facilities be made available to allow you to participate by telephone.
Alternatively, if the liquidator seeks a proposal be considered without a meeting, we encourage you to complete and return your voting instructions. If you object to the proposal being considered without a meeting, you can respond advising of your objection. If a creditor objects, the external administrator cannot proceed using this mechanism and must instead hold a meeting to consider the proposal.
Third – engage with external administrators’ remuneration claims
ASIC recently wrote an article for the AICM journal entitled Fair pay for fair work – registered liquidators’ claims for remuneration. This article covered the liquidator’s entitlement to remuneration and providing guidance on matters you – as creditors – might consider, or questions you might ask, to help you decide whether the remuneration claimed is reasonable.
We have heard feedback from you that the reports provided by liquidators are very long and may discourage you from considering them. The format of the reports is intended to provide valuable information to assist creditors make decisions about remuneration. If you don’t consider the reports and don’t respond, the external administrators will not get important feedback and are unlikely to change their behaviour.
If you need further information to assess whether the remuneration is reasonable, you have the statutory right to ask – and you should ask – the external administrator to provide further information before you decide whether to approve the remuneration. This might include information about:
- why tasks were performed,
- why tasks were continued to be performed after becoming apparent no future benefit would be achieved by continuing with the work, and
- the cost of that work.
You might request access to the work in progress report. This report should include details of who performed the tasks, the time taken, and include narrations that explain what work was done.
You might also consider asking the external administrator to table your request for further information, and the Registered Liquidator’s response at the creditors’ meeting (if that is where the remuneration claim will be determined).
If you are not satisfied with the information provided by the external administrator (including in response to your requests for further information), you can:
- vote against the remuneration resolution at the meeting, or
- respond by objecting to the proposal being passed without a creditors’ meeting being convened.
It is important that AICM members who are creditors, or act for them, actively participate in the remuneration approval process. And of course, liquidators are entitled to fair remuneration for the work they perform. Exercising creditors’ rights to approve fair remuneration will promote best practice by external administrators in remuneration claiming and reporting.
Fourth – let ASIC know
If the liquidator does not respond to reasonable requests for information, you can and should report this to ASIC.
ASIC can write to an external administrator and direct them to provide information that is reasonably requested by a creditor. If the external administrator does not comply with ASIC’s direction to provide the information, ASIC can further direct that the external administrator not accept any further external administration appointments during the period specified in the notice.
If ASIC were to give such a direction, it becomes a condition on the external administrator’s registration which, if not complied with, would provide grounds for ASIC to give them a ‘show cause’ notice as to why they should continue to be registered.
I’ll move now to responsible lending.
Responsible lending obligations are a key consumer protection designed to reduce the potential for individual consumers to suffer hardship as a result of inappropriate lending. There is significant public interest in how these obligations are met.
Prior to offering a loan, lenders and mortgage brokers are required to make reasonable inquiries into both the requirements and objectives and the financial situation of the consumer, verify relevant information and make an assessment (or preliminary assessment for brokers) of whether the proposed loan will be unsuitable. Suggesting or entering into an unsuitable loan is prohibited.
With better access to information and the development of regtech tools, there is capacity for credit providers to innovate to more efficiently meet this ‘not unsuitable’ threshold in the law.
Digital data capture, comprehensive credit reporting and Open Banking provide opportunities for lenders to make lower cost, faster and more accurate lending decisions. Lenders should strive to use these opportunities to provide ‘suitable’ products that are designed and priced in a way that meets the needs of each consumer.
RG 209 review
ASIC is currently reviewing our guidance on the application of the responsible lending rules; Regulatory Guide 209 Credit licensing: Responsible lending conduct (RG 209). The purpose of the review is to provide increased certainty.
There has not been any change in responsible lending laws since RG 209 was last updated in 2014, however ASIC considered it was timely to review the guidance in response to changes to technology, judicial comment, industry reviews conducted by ASIC and the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission).
By conducting this review, we are responding to increased demand for greater clarity and detailed guidance. Currently RG 209 aims to provide principles-based guidance to help licensees identify factors they should consider when determining whether the inquiries they make, and steps they take to verify information, are relevant. We are considering how we can best respond to industry requests for more and clearer guidance.
In response to a consultation paper released in February this year we received 72 submissions. 64 non-confidential submissions are published on our website.
We followed up the consultation with two days of public hearings, a process we have not utilised for many years. That reflects the importance we, and industry, attach to responsible lending and our guidance. We heard from 19 stakeholders including major banks, brokers and aggregators, consumer groups, technology providers, academics, and AFCA. The hearings were open for public viewing and streamed online, attracting an audience of over 2,000 listeners.
Statements from lenders reflected on the availability of consumer credit, citing a decrease in demand. Participants, including major banks, indicated that the responsible lending obligations, and ASIC’s guidance about these obligations, have not been the sole or main factor contributing to the perceived reduced lending. Australian Bureau of Statistics data released recently supports this view as the demand for home lending increased. In July the value of new loans issued to households jumped 3.9 per cent, driven by owner-occupiers with a 5.3 per cent increase in the amount borrowed.
We are currently preparing a response to the submissions we received and the information obtained through the public hearings with a view to updating RG 209 by the end of the year.
On 10 September 2019 ASIC filed an appeal with the Full Federal Court against the decision of the Honourable Justice Perram regarding ASIC’s allegations against Westpac Banking Corporation (Westpac).
ASIC commenced proceedings in 2017, claiming Westpac failed to properly assess whether borrowers could meet their repayment obligations before entering into home loan contracts, instead of relying on the Household Expenditure Model.
On 13 August 2019, it was found that Westpac had not breached the responsible lending rules, and therefore that a lender may do what it wants in the assessment process.
This appears at odds with the view that the National Consumer Credit Protection Act 2009 (Credit Act) imposes specific obligations on credit providers. The Westpac decision therefore creates uncertainty about what is required for a lender to comply with its assessment obligation. Our objective in appealing the Westpac decision is to clarify the application of the law. This is therefore in the interests of consumers and credit providers.
Home Lending Consumer Experience
In other work, ASIC recently published findings from research on home lending consumer experience, Report 628. We commissioned research to better understand consumer experiences and expectations when taking out a home loan directly with a bank or through a broker.
Some of the key findings were:
- Consumers who use brokers expect brokers to find them the ‘best’ loan;
- Consumers who used brokers had different characteristics to those that went direct to a lender, for example, brokers are more commonly used by first home buyers and borrowers looking for guidance and support;
- How brokers presented home loan options to consumers was inconsistent; and
- Regardless of channel, consumers had a strong tendency to take out a loan with a lender they had an existing relationship with. Consumers seek convenience.
I would encourage you to look to this report to consider what can be done to improve consumer experiences, not only in relation to consumers seeking a home loan, but to better meet the expectations of existing customers.
These findings will also inform legislative changes to better align the interests of consumers and mortgage brokers.
Legislative change and future work
As for our future work, unsurprisingly, supporting the implementation of the law reform flowing from the Royal Commission will form a substantial part of our future work. Treasury has announced the Government’s implementation timeframe. Key reforms for the credit industry include the mortgage broker ‘best interest’ duty and removal of the point of sale exemption for retail dealers.
These are in addition to the recently introduced Product Intervention Powers which ASIC has begun to utilise, and Design and Distribution Obligations which will commence in April 2021. We consider these obligations not to be a substitute for responsible lending but a requirement that credit providers have appropriate product governance processes and controls in place to ensure products are designed and distributed with a view to consumers’ objectives, financial situations and needs. We expect to provide draft guidance on Design and Distribution Obligations later in the year.
Aligning with our priority of protecting vulnerable consumers, ASIC will conduct a financial hardship review, examining how lenders engage with consumers experiencing financial difficulties, including whether the assistance lenders offer to consumers is effective in assisting the consumer to recover.
Today I have covered just a snapshot of our work, picking issues to update you on that I hope will have been of interest.
Beyond this, I strongly encourage you to read ASIC’s four-year Corporate Plan for 2019 to 2023 which we released in late August.
The Plan outlines how we aim to achieve our vision for a fair, strong and efficient financial system for all Australians through our internal change program and our key strategic priorities. For each of our 2019-20 strategic priorities, the Plan highlights the range of regulatory actions that we propose to deploy. We recognise that we need to utilise the full suite of our regulatory tools to achieve our goals.
And while the Corporate Plan sets out ASIC’s approach, striving for a fair, strong and efficient financial system should be a shared endeavour. It should be the goal of both regulator and regulated alike. Remember, Commissioner Hayne stated the ultimate responsibility for change in the financial system rests with corporate Australia. What will you do to restore trust, improve consumer outcomes and enhance fairness and professionalism in your industry?
Thank you, and I invite your questions.