The Corporations Act requires a director of a company to prevent the company from incurring a debt if the company is insolvent, or if the company will become insolvent by incurring the debt or a range of debts including the debt.

“ASIC first contemplated issuing guidance during the downturn in economic conditions when a rise in corporate insolvencies was expected. We thought that the market, including directors and their professional advisers, would benefit from clarification about the factors we consider when deciding to commence an investigation in relation to possible insolvent trading, and issued some proposals in November last year”, ASIC Commissioner, Michael Dwyer said.

“It is important that directors focus on their obligations to prevent insolvent trading and we expect this guidance will assist directors of small-to-medium enterprises, in particular, to fulfil this fundamental responsibility”, Mr Dwyer said.

Regulatory Guide 217 Duty to prevent insolvent trading: Guide for directors sets out four key principles which ASIC considers directors should follow to meet their obligation to prevent insolvent trading, That is, to:

* keep themselves informed about the company’s financial position and affairs;
* regularly assess the company’s solvency and investigate financial difficulties immediately;
* obtain appropriate professional advice to help address the company’s financial difficulties where necessary; and
* consider and act in a timely manner on the advice.

RG 217 also details factors which ASIC will consider when deciding to bring proceedings against a director for allowing a company to trade while insolvent (including criminal proceedings and proceedings to recover compensation for loss resulting from insolvent trading).

The report, Helping home borrowers in financial hardship (REP 152), found that while some lenders are responding well to the needs of their customers, there is generally room for improvement and provides guidance to industry on how to improve practices.

‘This report highlights the importance of industry taking an active role in dealing with hardship’, said ASIC’s Senior Executive Leader, Deposit Takers, Credit and Insurance Providers, Mr Greg Kirk.

‘With forecasts of growing unemployment, we can expect to see increasing numbers of borrowers experiencing mortgage stress. In many cases, however, financial difficulties will be temporary, allowing problems that arise to be resolved.’

‘It’s important that lenders and intermediaries have processes and procedures in place to provide constructive responses to financial hardship. These include procedures to identify customers in hardship, to provide clear and timely information to customers on their right to seek relief, and to engage sufficiently with a customer’s circumstances in order to provide appropriate and flexible assistance’, said Mr Kirk.

The report found that:

• Information about financial hardship is usually only provided following payment default, making it very difficult for borrowers to take positive action at an early stage. Equally concerning, this information is often insufficient for borrowers to understand their options and make informed choices;
• Some lenders do very little to identify borrowers who may require hardship assistance. Many lenders leave this identification of need to collection officers who may not be trained for the purpose eg. one lender only identifies hardship where the borrower raises the need for assistance themselves;
• Lenders appear to prefer offering short-term assistance, such as a three month payment moratorium, rather than genuinely engaging with, and responding to, a borrower’s specific situation. For example, a home loan borrower who has lost income through reduced overtime may need their loan to be extended with lower repayments over a longer period. In such circumstances, a short moratorium is a very temporary fix leaving the borrower likely to default when repayments resume;
• Some lenders have adopted policies that are inconsistent with the rights and remedies available to borrowers under the Uniform Consumer Credit Code. For example, by refusing hardship assistance once payments are more than 60 days overdue or limiting any variation in repayments to a maximum period of six months; and
• Despite clear industry standards mortgage brokers generally have a limited understanding of their role in responding to financial hardship. While most brokers say they offer assistance, there is little evidence of formal policies and procedures to ensure it is done effectively or constructively.

‘This report examined industry practices as at late 2008 and there are already moves within some sectors to improve. On 5 April 2009, the Federal Treasurer announced an agreement with the four major banks wherein they commit to assist borrowers who are experiencing financial difficulty as a result of the global recession’, Mr Kirk said.

‘ASIC is confident industry will welcome the guidance provided by the report, and we’ll continue to work with them to promote better outcomes for borrowers.’

‘Helping home borrowers in financial hardship’ also provides guidance for borrowers. Further information for borrowers is also available on ASIC’s consumer website, FIDO, at www.fido.asic.gov.au.

Victorian borrowers are also encouraged to visit the Consumer Affairs Victoria website (www.consumer.vic.gov.au) for publications that can assist them in dealing with their credit providers. These publications explain the rights and responsibilities of both lenders and borrowers in Victoria.

It is a resource for secondary schools in each state and territory and is currently being distributed to every high school in the country.

“Young Australians who understand insurance as a way to protect their assets and superannuation as an effective way to save for retirement will get a head start on two key areas of personal finance”, Superannuation and Corporate Law Minister Nick Sherry said

“Your Money Starter includes a variety of innovative classroom materials, activities and multimedia elements designed to make learning about financial services relevant and attractive to teenagers,” ASIC chair Tony D’Aloisio said.

The materials are available in hard copy and on CD-ROM and can be downloaded, free of charge, from ASIC’s consumer website, FIDO, at www.fido.gov.au/yourmoneystarter.

Senator Sherry said the draft legislation addresses ambiguity around covered short selling and requires the disclosure of transactions where a seller has entered into a securities lending arrangement to cover a sale.

In particular, covered short sales would have to be disclosed by sellers to a financial services licensee who in turn would be required to disclose the position to the market operator.

Submissions are due by 21 October 2008 and can be sent to: Manager, Market Integrity Unit, Corporations and Financial Services Division, The Treasury, Langton Crescent, Parkes ACT 2600 – or email shortsellingbill@treasury.gov.au.

ASIC has also advised that it has reviewed the operation of the market since its announcements and had opportunity to consult with ASX and industry. ASIC has now issued an advisory which summarises its position regarding the prohibition of naked and covered short selling including permitted exceptions which are in line with overseas developments.

ASIC states that where covered short selling is permitted, the short selling transaction needs to be disclosed in accordance with ASIC Class Order [CO 08/751].

ASIC also notes that the exemptions may change. Accordingly, ASIC will monitor the market to ensure there is no misuse of the exemptions.

Source: Minister for Superannuation and Corporate Law media release No 057, 23 September 2008 ASIC advisory AD 08-22, 23 September 2008

The report, All we have is this house reveals that while the borrowers interviewed were generally satisfied with the reverse mortgages they had taken out, several factors inhibited ‘good consumer decision-making’.

The report identified several factors that have the potential to hinder informed decisions and increase the risk of future problems, including:

* a lack of familiarity with reverse mortgages;
* the complex nature of these financial products and their dissimilarity to other credit products,
* difficulties budgeting for the long-term with access to a large amount of credit, and estimating how much equity might be available at any time in the future;
* a reluctance to consider the risk of declining health in the future and the impact of this on their financial needs; and
* children encouraging their older parents to take out a reverse mortgage or use the funds for the benefit of these children, in inappropriate circumstances.

ASIC’s Executive Director of Consumer Protection, Mr Greg Tanzer said very few of the borrowers interviewed were aware of all the conditions of their loan and the serious consequences of not meeting these obligations.

‘Many of those ASIC spoke to did not know how much the loan was likely to cost them over time, and more than half did not know what would happen if they breached a loan condition. Most people did not have tailored projections about the likely long-term cost of a reverse mortgage’, he said.

‘Very few borrowers appeared to have considered how their financial needs might change over the next 10 or 15 years. When borrowers looked forward, they usually only looked two to three years ahead. The average life expectancy for a 65 year old is about 20 years. Therefore, planning needs to cover a much longer time period than most borrowers had considered.

‘Some borrowers had difficulty budgeting. One borrower with a reverse mortgage said it was ‘like having a credit card with a $100,000 credit limit and no repayments’. In general, borrowers who had a clearer plan of their needs before taking out the reverse mortgage were finding it easier to budget’, Mr Tanzer said.

The report notes, ‘Several borrowers commented about how difficult it had been to resist the constant availability of credit. A small number were already expressing regrets about how they had used their reverse mortgage and how quickly they had exhausted the funds they had borrowed.’
Mr Tanzer said the report included recommendations encouraging industry to tailor their practices to the consumer issues around these new and developing products, improve information for consumers, and improve consumer access to advice.

‘While reverse mortgages can be a useful way for older people to access the equity in their homes, the products have significant risks’, Mr Tanzer said.

‘In the right circumstances, a reverse mortgage might assist an older person. However, these products have unusual features. People should think carefully about their situation before using an equity release product. They need to select a suitable product and use it in the way that suits their overall needs.’

‘ASIC continues to work with industry on the issues identified in this report. We support the actions of SEQUAL and other industry bodies in developing improved standards of conduct for lenders and intermediaries in this evolving market’, Mr Tanzer said.*

ASIC undertook the research to more clearly understand the factors that can influence consumer decision making. Specifically, this work sought to identify where these products had worked well, how borrowers might be vulnerable or easily misled and what changes could help consumer make better, more informed decisions.

ASIC interviewed 29 borrowers, keeping the sample to this size to enable the collection of comprehensive information during interviews and access to information from lenders about each loan. The survey was not designed to represent the market generally, and should not be seen in this light.

Background

A reverse mortgage is a loan where the consumer borrows money against the equity in their home. The loan and interest is not repaid until the home is sold.

* SEQUAL is the Senior Australians Equity Release Association of Lenders, the industry body for reverse mortgage lenders.

ASIC’s reports are available from ASIC’s website at www.asic.gov.au/reports:

* REP 109 – All we have is this house Consumer experiences with reverse mortgages, November 2007.
* REP 59 – Equity release products report A report into equity release products such as reverse mortgages, home reversion schemes, and shared appreciation mortgages, November 2005.

Information for consumers about equity release products, including checklists of things to consider and a reverse mortgage calculator, is on ASIC’s consumer website, FIDO, at www.fido.gov.au/equityrelease

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