Australia: Legal Directions: National consumer protection legislation

Last Updated: 16 March 2010
Article by Mikaela Reynoldson

The Commonwealth Government has undertaken a significant reform agenda to be implemented by its regulatory agents being ASIC and APRA.

The Federal Government has introduced a new national consumer credit regime. The purpose of the regime is to transfer responsibility for regulation of consumer credit to the Commonwealth. The National Consumer Credit Protection Act 2010 achieves the following objectives:

  • Converts the existing State legislation (the Uniform Consumer Credit Code) into Commonwealth legislation
  • It establishes a national licensing regime and makes ASIC the sole regulator for the industry
  • It requires licensees to observe a number of general conduct requirements
  • Intermediaries who provide assistance to consumers are brought under the operation of the new regime
  • A licensing process must be observed and there is enhanced supervision by ASIC.

The legislation introduces responsible lending requirements which require the credit provider or the intermediary to make reasonable enquiries about the customer's requirements and objectives, to verify their financial situation, and to assess their capacity to repay without substantial hardship. There is prohibition on offering or suggesting credit products that are not suitable to the individual needs of the customer.

Credit providers and those intermediaries providing credit assistance will be required to comply with general conduct obligations concerning compliance, supervision and training of representatives, adequacy of resources including financial, technological and human resources, the provision of an internal and external dispute resolution process including membership of FOS or the Credit Ombudsman Service and finally will be required to have compensation arrangements in place, particularly professional indemnity cover.

Changes at Financial Ombudsman Service ("FOS")

There will be new jurisdictional limits imposed on brokers for complaints resolved by FOS.

From 1 January 2012, FOS will be permitted to hear claims up to $500,000 in dispute and can award compensation against an insurer to the value of $280,000 and to a broker to the value of $150,000. Additionally, the new terms of reference for FOS will be implemented from 1 January 2010.

Review of the Capital Adequacy Framework

APRA has signalled that it will review the Capital Prudential Standards imposed on regulated general insurers. A discussion paper is to be released this month. APRA has indicated that they will seek to implement the new capital prudential standards in 2012. Final prudential standards on enhancements to the prudential framework for life insurance companies have already been released.

Executive remuneration policy

APRA has introduced a requirement that all regulated licensed insurers must have an executive remuneration policy in place by 1 April 2010. The framework to be adopted is set out in Prudential Standard GPS 510 and Prudential Practice Guide 511. Insurers will be required to establish a Board Remuneration Committee comprised of at least three independent directors. They will be required to attest that the executive remuneration program is appropriate and is linked to the long term financial soundness of the insurer and its risk management framework. The policy is directed at the remuneration arrangements applying to the following three groups:

  • Responsible Persons - those executives and senior managers whose decisions affect the whole or a substantial part of the organisation (typically CEO and direct reports)
  • Risk and financial control personnel -includes risk managers, compliance managers, internal audit, actuarial control role and finance function
  • Employees and third parties who receive a significant proportion of performance-based remuneration.

Unauthorised Foreign Insurer ("UFI") reporting

Since 1 November 2009, APRA in its capacity as collector of national insurance statistics requires brokers to report every six months on the use of UFI's. Reports are due on 30 June 2010, 31 December 2010 and every six months thereafter. As APRA is concerned with ensuring the stability of the financial services sector and maintaining consumer confidence in the operation of the general insurance market it must be satisfied of the capacity of a authorised foreign insurer to remain solvent and to meet claims. By monitoring the extent of UFI use, it is thought that APRA will gain an understanding of the types of UFI's being used and the classes of business they are writing. APRA has prescribed the form of the two reports and has provided software for that purpose which can be downloaded free of charge from the APRA website.

Margin lending

Margin lending facilities are now required to hold a financial servicers licence following amendments to the Corporations Act.

There will be new responsible lending requirements and margin lending facilities and lenders will be required to notify consumers when margin calls are made. Additionally, a Code of Conduct for margin lending will be introduced on 1 January 2011.

Review of the General Insurance Code of Conduct

The General Insurance Code of Conduct is required to be reviewed every three years. The most recent review was undertaken by Robert Cornell AO. Mr Cornell concluded that the code was basically operating well but that the code compliance committee should be given access to statistical and premium data collected by FOS.

ASIC to assume responsibility for market supervision from ASX

In December 2010, ASIC assumed responsibility for market supervision from the ASX. ASIC is now responsible for managing the transfer of frontline market supervision including market surveillance and participant supervision as well as considering emerging market trends such as market structure, innovation and competition.

Financial claims scheme

The financial claims scheme has been introduced which requires underwriters to contribute funds to Federal Treasury which can then be applied to meet policyholder claims in the event that an insurer is wound up. The financial claims scheme was established in October 2008.


The regulatory reform program being implemented over the next 12-24 months has implications for all AFS licence holders, provider of financial products and general insurers. It is useful to check your specific business activities to ensure that you comply with the changes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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