Mortgage broker arranged unaffordable home loans unconscionable conduct under the ASIC Act

Determination 19 August 2013 Complainant: Financial Services Provider: Mrs L an Australian Credit Licence holder Key issue Mortgage broker arranged unaffordable home loans unconscionable conduct under the ASIC Act Summary 1. I find that the FSP s conduct in arranging loans for the complainant which the FSP knew, or ought to have known, could have only been repaid by the sale of the complainant s home, is unconscionable within the meaning of section 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). 2. Consequently, I order the FSP to pay the complainant the sum of $190,980 in compensation for financial loss caused by the FSP s conduct. 1

Background to the complaint 1. This complaint is the subject of a Recommendation issued by COSL on 26 June 2013 (a copy of which is annexed to this Determination). The material facts and claims made by the complainant are set out in detail in the Recommendation. 2. The case manager s findings that the FSP engaged in unconscionable conduct, as well as conduct contrary to its professional obligations under the Mortgage Industry Association of Australia s Code of Practice, are set out in paragraphs 78-84 of the Recommendation. 3. The case manager recommended the FSP pay the complainant compensation for financial loss caused by its conduct; however, as a matter of fairness, the case manager also found that the complainant ought to bear some responsibility for her own actions in obtaining the loans. 4. The case manager recommended the FSP compensate the complainant for an amount equal to 80% of the cost of the loans it arranged (being interest, fees and charges). This amount was calculated to be $184,612.50. 5. On 10 July 2013, the complainant notified COSL that she accepted the Recommendation. 6. The FSP does not accept the Recommendation and has requested the complaint be referred to me for Determination. On 16 July 2013, the FSP (via its solicitor) provided the following submissions: Summary of submissions 2. [The FSP] disputes the findings in the Recommendation and contends that COSL should have found that it is not liable to the complainant. 3. Alternatively, if (which is denied) [the FSP] is liable to the complainant, the discount of 20% applied by COSL to the complainant s claim for her responsibility in entering into the loans and spending the funds advanced is unreasonable. [The FSP] contends that a discount reflecting the complainant s overwhelming responsibility for her losses ought to be applied in all of the circumstances of this case. No liability 5. In fact, the evidence establishes the following: (a) The complainant approached [the FSP] and instructed [the FSP] to arrange finance for her on two occasions. [The FSP] faithfully followed her instructions; (b) There were loan products available to persons in the financial position of the complainant; (c) The complainant s financial circumstances met the lending criteria of at least two reputable lenders who were prepared to offer finance at competitive rates; (d) [The FSP] carefully considered the complainant s ability to service the loans and provided appropriate advice to her as to how this was to be effected; (e) The complainant freely signed the loan application forms and declarations; (f) The complainant acknowledged, by signing [the FSP s] appointment letter on 8 September 2006 ([Annexure 3] to [the FSP s] statement dated 25 September 2012), that she had been advised by [the FSP] that it was not licensed to provide financial advice and that she should consult her accountant, investment adviser or any other appropriate licensed professional as to the financial implications of her intended loan; 2

» Page 2 (g) The complainant failed to follow [the FSP s] advice with regard to servicing the loans, which failure ultimately led to her default; and (h) The complainant misled [the FSP] in relation to the first loan application, evidenced by her drawing down funds for purposes other than those she had disclosed to [the FSP]. 8. Further, in reaching its findings, COSL attaches undue weight to the following alleged facts: (a) That the complainant was suffering from depression at the time of entering into the loans: see paragraph 78(c) of the Recommendation. Whether or not the [complainant] was suffering from depression and [the FSP s] knowledge of any depression remain disputed facts. In any event, COSL fails to draw sufficient distinction between a person suffering from depression and a person suffering from such a degree of mental impairment so as to be wholly incapable of managing his or her own affairs. There is no evidence to support a finding that the complainant was not capable of managing her own affairs. (b) That [the FSP] obtained an ABN for the complainant when she was not actively carrying on a business at the material time: see paragraph 78(d) of the Recommendation. No ABN was required on the original [Lender A] loan application (which did not proceed) or stated on the first [mortgage manager] loan application form. Accordingly, there could not have been in any circumstances a material misrepresentation of the complainant s business status to the lender in respect of the first loan. Further, in respect of the second loan application, the only reference to the ABN is in the Declaration of Financial Position. There is no express representation either in that document or in the application form that the complainant was engaged in a business activity. It is drawing a very long bow to say that the mere quoting of the ABN in the Declaration of Financial Purpose amounts to an implied representation by or on behalf of the complainant to the lender that she was engaged in income-generating business activity at the material time. (c) That the underlying land purchase transaction facilitated by the second loan may not have been in the complainant s best interests; see paragraph 78(f) of the Recommendation. COSL s finding is tantamount to imposing a requirement that a mortgage broker must give detailed consideration as to whether any transaction occasioning a finance application is in the client s best interests. While [the FSP] expressed an informal opinion that the complainant should not enter into the land purchase (and advised her to seek independent professional advice before doing anything), this should not then be held against [the FSP] as the foundation for a finding of liability against it. 9. COSL s findings are at odds with what would generally be accepted by the business community and general public as reasonable lending practices. COSL s findings in this case would suggest that any lender or mortgage broker involved in making or facilitating a loan with the following features would be acting unconscionably and in breach of the MIAA Code of Practice: (a) A loan where the sole or principal means of repayment is the sale of the security property at a point in time chosen by the applicant, rather than from periodic payments out of income; (b) A loan permitting the capitalisation of interest; or (c) A reverse mortgage. Quantum 11. While COSL has purported to take into account the sums which the complainant withdrew for her own personal use (by subtracting them from her claim), it is not clear that COSL has made any further discount in relation to the interest incurred by the complainant on such funds drawn down for her own personal use. [The FSP] submits that it would be equitable to do so. 3

9. The FSP has also provided further submissions concerning the issue of the lender s lending guidelines (and whether the complainant was a suitable borrower for the loan products that the FSP arranged); however, as my Determination does not turn on this issue, it is not necessary to deal with it further. Key issues 10. The key issues to be decided in this Determination are: a) whether the FSP engaged in unconscionable conduct by arranging the loans in question for the complainant; and b) if so, to what extent is the FSP required to compensate the complainant for any loss caused by its conduct. Relevant considerations 11. In making a Determination, I am required to have regard to: a) relevant legal requirements or rights provided by law to the complainants in relation to the subject matter of the complaint; b) applicable codes of practice; c) good practice in the financial services industry; and d) fairness in all the circumstances. 1 12. Both the complainant and the FSP have been given the opportunity to provide information in support of their respective positions. I am satisfied that all information provided by the parties has been exchanged between the parties, and that each party is aware of the issues raised in the complaint. Relevant legal requirements 13. I consider that the proscription of unconscionable conduct imposed by section 12CB of the ASIC Act is, in relation to the subject matter of this complaint, a relevant law to which I am required to have regard. 14. I note that paragraphs 50-59 of the Recommendation set out the relevant parts of section 12CB as well as a number of court authorities that have interpreted its meaning and application. Findings and reasons for decision 15. The FSP s submissions do not, by and large, dispute COSL s findings of fact as set out in the Recommendation; rather, the FSP disagrees with COSL s conclusion that those facts support a finding that the FSP acted unconscionably. 16. Accordingly, the facts of the complaint and the submissions made by the parties as set out in the Recommendation are incorporated into this Determination by reference. 1 COSL Rule 12.1 7 th Edition. Any reference to a COSL Rule in this Determination is a reference to the 7 th Edition Rules. 4

17. Based on the information provided by the parties, and the relevant considerations I am to have regard to under the COSL Rules, I find that: a) by arranging the loans in question for the complainant, the FSP engaged in unconscionable conduct within the meaning of section 12CB of the ASIC Act; and b) the complainant suffered a financial loss as a result of the FSP s conduct, for which the FSP is required to compensate the complainant. 18. My reasons for this finding are as follows: The FSP arranged loans that the complainant could only repay by selling her home 19. The FSP has admitted that the loans it arranged for the complainant were asset lends ; that is, the lending of money without regard to the ability of the borrower to repay by instalments under the contract, in the knowledge that adequate security is available in the event of default. 2 20. The courts have repeatedly stated that asset lending is not a legal term it is an expression used to describe a particular form of lending, which, in some cases, has been found to give rise to an unjust transaction (under the Contracts Review Act 1980 (NSW) and the National Credit Code) or amounted to unconscionable conduct. 3 21. As the case of Elkofairi v Permanent Trustee Co Ltd 4 demonstrates, a lender may be found to have acted unconscionably if it provides a loan to a borrower, which is secured by the borrower s home and sole asset, and which the lender knows the borrower has no ability to repay. Such a transaction can expose the borrower s sole asset to a real risk of loss, and, where the borrower has demonstrated an inability to reasonably protect their own interests, the law recognises that there is a public interest in considering such contracts as unjust. 5 22. In Australian Securities and Investments Commission v Australian Lending Centre Pty Ltd (No 3), 6 the Federal Court considered a series of claims brought by ASIC against a group of companies (controlled by a common director) in relation to dealings had with a number of consumers. Amongst other things, ASIC claimed that Australian Lending Centre Pty Ltd (ALC), a finance broker, had engaged in unconscionable conduct by arranging asset lending transactions. 23. In examining this claim in the context of the various consumers circumstances, the Court made the following observations: 205. What ALC had engaged in, if ASIC s allegations be made good, was obtaining Ms James consent to a brokering contract under which it promised to arrange a loan which, if completed, might be characterised as an example of asset lending and getting Ms James, at the same time, to make an offer to agree to such a loan. So viewed, the question Ms James case gives rise to is not whether asset lending is unconscionable but whether arranging an asset lending transaction is unconscionable. 2 Perpetual Trustee Company Limited v Albert and Rose Khoshaba [2006] NSWCA 41, per Basten JA at [128]; Dr J. M. Patterson, Knowledge and neglect in asset-based lending: When is it unconscionable or unjust to lend to a borrower who cannot repay? (2009) 20 Journal of Banking and Finance Law and Practice 18. 3 Kowalczuk v Accom Finance [2008] NSWCA 343, per Campbell JA at [96]-[99]; Fast Fix Loans Pty Ltd v Samardzic [2011] NSWCA 260, per Allsop J at [43]; Provident Capital Ltd v Papa [2013] NSWCA 36, per Macfarlan JA at [113]. 4 [2002] NSWCA 413. 5 Ibid, per Beazley JA at [57]-[59]; Khoshaba, per Basten JA at [128]. 6 [2012] FCA 43. 5

» Page 5 206. Plainly, these two questions are related. It would not generally be relevantly unconscionable for a broker to arrange a loan whose advance by a lender was not itself unconscionable. It follows that it is useful, although not determinative, to assess whether the loan which ALC undertook to arrange by the retainer letter of 23 July 2008 would have been unconscionable based on what ALC knew of Ms James circumstances. 212. In that circumstance, I am bound to accept that if a loan was advanced to Ms James with the knowledge that she would be unable to meet the repayments and that her home would be lost then this would be unconscionable within Amadio and hence within s 12CA of the ASIC Act. In this case, the loan as a matter of formality had no ongoing repayments which Ms James would be able to fail to meet for the interest was prepaid. What there was instead was a monthly prepaid interest bill of $1,300. The critical question then, so it seems to me, is whether Ms James could have serviced the loan. This is because the reasoning in both Elkofairi and Khoshaba depends on the inability of the borrower to meet the repayments and the inevitability, therefore, of default and recourse to the security. I accept that a loan which cannot be serviced and in respect of which default is inevitable may not be disguised by making an unaffordable interest bill prepaid and thereafter deducted from the initial loan proceeds. Attention must therefore be focussed on whether the loan would have inevitably led to default if the interest had not been prepaid. 24. As its submissions noted in the Recommendation reflect, the FSP maintains that it acted appropriately in arranging the first loan for the complainant because it had recommended to the complainant a strategy of capitalising the interest-only repayments for a period of around eight years, after which the complainant would repay the loan by refinancing it as a reverse mortgage (a strategy which the complainant failed to follow). 25. The FSP further maintains it acted appropriately in arranging the second loans on the basis that the complainant could sell the investment property purchased, at a time of her choosing, and by doing so make a profit or at least avoid a loss (which the complainant again failed to do). 26. I do not accept the FSP s submissions. I consider that the FSP knew, or ought to have known, that: a) the loans it arranged for the complainant exposed her home, her sole asset, to the risk of loss in the event of default; and b) as the complainant had no means of making the repayments due under the loans, the complainant s default under the loans was inevitable a fact which the continuous capitalisation of interest repayments and the hope of future refinancing or part-payment from the sale of the investment property sought to disguise. 27. At best, I consider that the FSP s willingness to arrange loans that it knew that the complainant could not afford amounts to a reckless disregard for the complainant s interest in retaining ownership of her home. 28. The court authorities have shown that, in appropriate cases, recklessness can supply the element of moral obloquy that is necessary for a finding of unconscionable conduct. 7 29. I find that, in the circumstances of this case, the FSP s recklessness in arranging these asset lend loans has the requisite degree of moral obloquy so as to render it unconscionable within the meaning of section 12CB of the ASIC Act. 7 Director of Consumer Affairs Victoria v Scully & Ors (No.3) [2012] VSC 444, at [24]-[34]; Violet Home Loans Pty Ltd v Schmidt & Anor [2013] VSCA 56, at [58]. 6

» Page 6 The FSP misrepresented the complainant s position in the loan applications 30. It is common ground that, at all relevant times during her dealings with the FSP, the complainant was unemployed and in receipt of a Centrelink Newstart Allowance. I note that the FSP understood that the complainant was undertaking some form of study in relation to welfare services, and that the she expected to earn an income from employment in this field after around four years. 8 31. In its submissions, the FSP maintains that the loans it arranged for the complainant were products available to persons in the financial position of the complainant, and that the complainant presented as an acceptable borrower under the lending criteria of at least two lenders. 9 Further, the FSP denies that it misrepresented the complainant s financial position in any material way in the applications for the first and second loans. 32. However, the FSP has not provided any information in support of its claim that the no doc loan products it arranged for the complainant were suitable for someone in the complainant s actual financial position for example, loan product information sheets, or copies of the lending criteria that the complainant s true circumstances supposedly met. 33. It is common knowledge in the financial services industry that low/no doc loans were intended for borrowers who, for one reason or another, were not able to supply financial documents (such as payslips or business activity statements) to verify their income for the purposes of a loan application. In this case though, the complainant s Newstart Allowance income was readily verifiable by way of periodic statements issued by Centrelink a fact which the FSP knew, but decided not to disclose to the lenders it approached on the complainant s behalf. 34. I consider the FSP s position that it did not misrepresent the complainant to the lenders untenable in view of the following facts: a) the FSP procured the complainant s agreement to obtain an ABN for no other reason than to ensure that the complainant s application would meet a lender s lending criteria (which, at that stage, was Lender A). In the FSP s own words: 4.2 On the 30 September 2006 [the FSP] visited [the complainant s daughter s] home and met with the complainant there. One of the lenders requirements was that an ABN needed to be supplied by the complainant. [The FSP] explained to the complainant that in order for her to successfully apply for finance she would need to have an ABN. If she did not want an ABN then she need not apply for finance and the process would be over. [The FSP] did state however that as [the complainant] wanted to use the money for investment purposes as her property was her principle investment, and she intended to improve it. The lenders requirement was that the purpose of borrowing the money had to be predominantly for business or investment purposes. The complainant agreed to apply for an ABN and ask how she could get one. [The FSP] explained that it could be done online. 4.3 [The FSP] then used [the complainant s daughter s] computer to make an application for an ABN which is document [4]. The only purpose of applying for the ABN was to comply with [Lender A s] requirements. The fact of having an ABN does not mean that one is necessarily carrying on a business. 10 8 FSP s letter to COSL dated 4 December 2012. 9 FSP s submission to COSL dated 16 July 2013. 10 FSP s letter to COSL dated 4 December 2012. 7

» Page 7 b) in the application for the first loan dated 8 December 2006, the FSP admits that it described the complainant as being self-employed as a consultant in welfare services, when it knew that the complainant was neither. The FSP s explanation for describing the complainant thus is as follows: 2.14 It is evident from the documentation that [the FSP] was told by the complainant that she had no income apart from Centrelink. Evidence of the complainant s lack of clarity in describing what job she intended to obtain once she had completed her studies is evidenced by the broad description of the position she intended to obtain where [the FSP] wrote welfare/support workers/consultant. 11 c) the FSP assisted or, at best, turned a blind eye to the complainant s signing of two Declarations of Financial Position (DOFPs) in which the complainant acknowledged that: (c) I/We request the Lender to assess this facility without the documentary evidence of my/our income and financial position as such documentary evidence is not readily available or may not be a true representation of my/our financial position when, at all times, documentary evidence of the complainant s financial position was readily available and in fact known to the FSP; d) in the DOFP signed as part of the application for the second loans, the ABN obtained for the complainant was inserted. 35. On balance, I consider that the FSP s misrepresentation of the complainant to the lenders is more than merely negligent. I find it to be a deliberate course of conduct intended to procure loan approvals which would most likely not have been granted had the complainant s actual financial position been truthfully disclosed. 36. Consequently, I find that the FSP s conduct in this regard is unconscionable within the meaning of section 12CB of the ASIC Act. Assessment of loss 37. The approach of the courts when looking to remedy the effect of unconscionable conduct is to seek to achieve practical justice to do no more than the minimum necessary and to ensure that one party does not obtain an unwarranted benefit at the expense of the other. 12 38. Due to the FSP s unconscionable conduct, the complainant was able to obtain loans to the value of $416,000. The complainant spent the money, was unable to afford the repayments, defaulted under the loans and is now faced with the prospect of having to sell her home to clear her indebtedness. 39. In all of this, the complainant has had to pay interest, fees and charges on the loans, the details of which are set out in paragraph 92 of the Recommendation. It is these transaction costs which I consider to be the complainant s loss and which, in a commonsense way, the FSP s conduct played a part in causing. 13 11 Ibid. 12 Vadasz v Pioneer Concrete (SA) Pty Ltd [1995] HCA 14; Elkofairi v Permanent Trustee Co Ltd [2002] NSCA, cited in Perpetual Trustees Australia Limited v Schmidt & Anor [2010] VSC 67 at [234]. 13 Director of Consumer Affairs v Scully & Ors (No 3) [2012] VSC 444, at [41]. 8

» Page 8 40. However, the complainant must bear some responsibility for her actions. To the extent that the complainant has spent the money, she has benefited from the loans. The available information does not show that the complainant was under a special disadvantage in the legal sense in her dealings with the FSP and was therefore unable to protect her own interests. 14 41. I agree with the case manager s recommendation that, as a matter of fairness, the FSP should compensate the complainant for a sum equal to 80% of the costs of the loans it should never have arranged, from their inception up until the date of this Determination. Order I order the FSP to pay the complainant the sum of $190,980 15 settlement of this complaint. in full and final Raj Venga Credit Ombudsman 14 Commercial Bank of Australia Ltd v Amadio [1983] HCA 14. 15 The attached statement of account from the lender shows that a further $7,959.76 has been charged to the complainant s loans since the date of the Recommendation (26 June 2013). Accordingly, this amount has been discounted by 20% (i.e. $6,367.80) and added on to the full compensation amount of $184,612.50 originally set out in the Recommendation. 9

Recommendation 26 June 2013 Complainant: Financial Services Provider: Mrs L an Australian Credit Licence holder Key issue Mortgage broker arranged unaffordable home loans unconscionable conduct under the ASIC Act Summary of Recommendation 1. Based on the available information, we find that the FSP engaged in unconscionable conduct by arranging loans for the complainant in circumstances where it knew, or ought to have known, that the complainant could only repay the loans by selling her home. 2. I n order to compensate the complainant for the loss suffered as a result of the FSP s conduct, we recommend that the FSP pay the complainant the sum of $184,612.50. 101

Background to complaint The first meeting between the complainant and the FSP 1. In or around September 2006, the complainant wanted to carry out renovations to her home (Property A), and needed credit funds to do so. The complainant states that the purpose of the renovations was to improve her mental wellbeing. 1 2. The complainant owned her own home unencumbered, as a result of receiving a sum of money from her husband s assurance when he passed away. 2 3. The complainant s daughter, Ms S, had previously used the services of the FSP to obtain a loan, and Ms S recommended the complainant consider engaging the FSP to assist. 4. On 30 September 2006, the complainant met with the FSP at Ms S home. 5. At the time of this meeting with the FSP, the complainant s only source of income was from a Centrelink education allowance, a factor which was known to the FSP. 3 6. Both parties agree that, at this first meeting, the FSP conveyed the following information to the complainant: (a) the complainant could apply for a no doc line of credit loan, which the FSP described as basically an asset lend i.e. borrowing against the property value only ; 4 (b) one of the lender s requirements was for a borrower to have a registered Australian Business Number (ABN) and that if [the complainant] did not want an ABN then [the complainant] need not apply for finance and the process would be over ; 5 (c) the complainant s income was irrelevant to the loan application because it would be asset based ; 6 (d) interest would capitalise on the amount borrowed and, when the complainant reached the age of 60, the loan could be refinanced through a reverse mortgage, under which the complainant would not have to make any payments; 7 (e) a line of credit with a limit of $150,000 was appropriate for the complainant s needs; 8 and 1 In the complainant s letter dated 16 February 2011, the complainant says she suffered from depression. 2 Letter from the complainant s solicitor dated 16 February 2011. 3 The FSP s letter, via its solicitor, dated 4 December 2012. 4 The FSP s letter dated 1 June 2011. 5 The FSP s letter, via its solicitor, dated 4 December 2012. 6 Ibid. 7 The FSP s letter dated 1 June 2011. 8 Ibid. 11

(f) the $150,000 borrowed would be used for: (i) property renovations; (ii) payment of general living expenses to supplement the complainant s Centrelink income; and (iii) interest repayments on the loan. 9 7. Based on the information provided by the FSP, the complainant agreed to proceed with the proposed loan application and apply for an ABN. 10 8. On the same date, the FSP completed an electronic application for an ABN on behalf of the complainant, which was immediately registered. 11 9. The details of the ABN were as follows: (a) (b) (c) ABN [number]; the entity name was [complainant s name]; and the trading name was [complainant s name]. The first loan 10. Prior to 8 December 2006, the FSP submitted a loan application to Lender A on behalf of the complainant. 11. However, we understand that the Lender A loan application was not pursued further as Lender A was not considered an appropriate lender. 12 12. On 8 December 2006, the FSP completed a mortgage manager application for a no doc loan of $150,000, 13 which was signed by the complainant, 14 and which recorded the following relevant information: (a) the complainant was self-employed as a consultant; and (b) the purpose of the loan was future personal investments. 9 The FSP s letter, via its solicitor, dated 4 December 2012. 10 Ibid. 11 Ibid. 12 The FSP s facsimile covering letter to the mortgage manager dated 14 December 2006. 13 We understand that the mortgage manager submitted the application to Lender C for approval. 14 The FSP s letter dated 1 June 2011. 12

13. On 8 December 2006, the complainant also completed a mortgage manager no doc Declaration of Financial Position (DOFP), which relevantly stated the following: 3. Declaration of Financial Position I/We certify and warrant and represent to the Lender that: (a) I am/ we are aware that the Lender has made limited or no enquiries in relation to my/our ability to meet my/our obligations under this loan; (b) I am/we are satisfied that my/our obligations to the Lender will not adversely impact on my/our ability to meet all my/our financial obligations (including living expenses) as and when they fall due; (c) I/We request the Lender to assess this facility without the documentary evidence of my/our income and financial position as such documentary evidence is not readily available or may not be a true representation of my/our financial position; (d) I am/we are aware that the interest rate payable to the Lender is higher than the rate which would be payable if I/we qualified for an alternative loan product by the provision of satisfactory documentary evidence of my/our income and financial position; and (e) My/our ABN/ACN number is: [left blank] I/we acknowledge that the Lender is relying on this declaration in considering whether or not to approve my/our loan application 14. On 14 December 2006, the FSP submitted the complainant s loan application by facsimile to the mortgage manager. The facsimile covering letter relevantly stated that (copied verbatim): Purpose Applicant wants a new [no doc] Line of Credit of $150,000. Serviceability No Doc Security Proposed LVR on O/O property is 22%. Comments New funds required for personal investment purposes. Client to pay LMI out of loan proceeds to drawn by [the mortgage manager]. Client owns property free title. I hold it at [FSP s name]. Applicant has recently applied with [Lender A] for a loan. It is conditionally approved subject to valuation being acceptable. This came in at $710,000 however [Lender A] haven t confirmed the loan as formally approved. Their service is terrible and now that [the mortgage manager] has a better product applicant had voted with her feet to go to [the mortgage manager]. Straightforward deal and recommended for approval. Please proceed to formal approval ASAP. Thanks 15. On 22 December 2006, the mortgage manager issued a letter of preliminary approval to the complainant. 16. On 22 December 2006, the FSP sent a letter to the complainant which stated that formal finance approval had been obtained. 13

17. On 18 January 2007, the complainant signed an offer for a loan amount of $150,000, secured by a first registered mortgage over Property A (the first loan). 18. On 31 January 2007, the first loan settled. 19. On 1 February 2007, the FSP sent a letter to the complainant, which stated: We are happy to inform you that the settlement of your [mortgage manager] loan was finalised as planned. Your loan details are: Total Loan: $150,000 Type of Loan: [Loan Type A] (7.74% indicative) In the meantime, $20,000 is being deposited into your [Bank A] savings account. Should you have any questions or difficulties with your [mortgage manager] accounts or statements you can contact [the FSP] on [phone number omitted]. 20. During the first three months of the loan term (i.e. 1 February and 30 April 2007), the complainant drew a total amount of $72,022 from the loan. 15 21. The complainant s statements of account demonstrate that she made a number of large withdrawals on the following dates: 16 Date Drawdowns 07 February 2007 $ 20,000 21 February 2007 $ 20,000 27 February 2007 $ 3,600 10 April 2007 $ 20,000 30 May 2007 $ 6,820 05 June 2007 $ 5,187 02 July 2007 $ 12,000 04 July 2007 $ 12,000 21 April 2008 $ 3,000 The complainant has indicated that she drew funds from the line of credit to spend on the purchase of shares and on court proceedings related to her father s estate. 17 22. On 30 June 2008, the debit balance on the complainant s loan was fully drawn up to its $150,000 credit limit. 18 15 Information obtained from the complainant s Lender C loan statement. 16 Information obtained from the complainant s Lender C loan statement for drawdowns over $3,000. 17 Stated in a letter from the complainant s solicitor dated 19 July 2011. In another letter dated 19 December 2012 from the complainant s solicitor, it was stated that receipts relating to the drawdowns would be provided; however, to date, this information has not been provided. 18 Obtained from the complainant s Lender C loan statement, which indicates that after interest was added to the account, the balance became $150,092.76. 14

The complainant s purchase of an investment property 23. On or around 8 December 2006, Mr and Ms S exchanged contracts to purchase a vacant block of land (Property B). 24. Under the purchase contract: (a) the purchase price was $215,000; (b) a deposit of $5,000 was paid by Mr and Ms S; and (c) settlement was to occur within 21 days of notification of issue of title to [Property B]. 25. We understand that Mr and Ms S were unable to obtain a loan to complete the purchase of Property B. 26. On 30 April 2007, the complainant completed an application to be substituted as the purchaser under the contract for sale, instead of Mr and Ms S. The second loans 27. On or before 30 April 2007, the complainant again engaged the FSP to arrange finance to enable her to purchase Property B. 28. The FSP informed the complainant that it could arrange another no doc loan for this purpose. 19 29. On 30 April 2007, the FSP completed a mortgage manager loan application form for a no doc loan in the amount of $266,000, which was signed by the complainant. 20 30. On 30 April 2007, the complainant signed a DOFP. With the exception of the complainant s ABN being added to the end of paragraph 3(e) of that document, the DOFP was identical in terms to the DOFP quoted in paragraph 13 above. 31. On 2 May 2007, the FSP submitted the second loan application by facsimile to the mortgage manager. The cover page to the facsimile relevantly stated that (copied verbatim): Purpose Applicant is an existing [mortgage manager] customer. She has now purchased a block, as an investment, and requires finance in the following manner: [No Doc] Loan of $266,000. Serviceability: [No Doc] Security: This loan is to be secured against the new block and the existing owner occupied property. Therefore: Value of block is $215,000 (purchase price) Value of existing owner occupied property is $780,000 Existing debt on owner occupied property is $150,000 (debt with [mortgage manager]) New debt of $266,000. 19 The FSP s letter, via its solicitor, dated 4 December 2012. 20 Ibid. 15

Therefore overall LVR is 42%. Comments: Applicant s daughter & son-in-law were planning to buy the block, but have decided against it and therefore the purchase has been transferred into the name of our applicant. Hence the additional Substituted Purchasers docs are attached. Applicant will be applying at a later date for a Pre-Approval for a construction loan of $200,000. Separate application to follow. This loan of $266,000 will provide funds for the purchase ($215,000) plus funds for purchase costs of (approx $11,000) plus approx $40,000 buffer. Interest rate applicable 7.57%. Please note finance approval is required ASAP. Titles are expected to be released this week and settlement is to follow 3 weeks after the release of titles. 32. We understand that the FSP sought approval for three loans, structured on the following basis: (a) $150,000 to refinance the first loan, secured by a registered mortgage over Property A (Loan A); (b) $115,500 to pay towards the purchase price for Property B, secured by a registered mortgage over Property A (Loan B); and (c) $150,500 to also pay towards the purchase price for the Property B, secured by a registered mortgage over Property B (Loan C). (collectively, the second loans). 33. On 9 and 10 May 2007, the mortgage manager sent the complainant letters of conditional approval for all of the second loans. 34. On 17 May 2007, the mortgage manager sent the complainant letters of preliminary approval for all of the second loans. 35. On or around 18 May 2007, the complainant signed an offer for Loans A and B, totalling $265,500. 36. On or around 18 May 2007, the complainant signed an offer for Loan C, totalling $150,500. 37. On 31 May 2007, the second loans and the Property B purchase settled. 16

38. On the same date, the FSP sent a letter to the complainant, which relevantly stated that: Congratulations on the purchase and successful settlement of [Property B]! We hereby confirm the following loan details: Lender: [mortgage manager] Security: [Property A] Existing Loan: $150,000 Type of Loan: [Loan name] NEW Loan: $115,500 Type of Loan [Loan name] NEW Loan: $150,500 Type of Loan: [Loan name] Arrangements have been made to have your monthly loan repayments drawn from your existing [loan name] (of $150,000) with account number [X]. Complainant s subsequent position 39. On or around 1 December 2008, the complainant defaulted under the loans. 40. Following the complainant s default under Loan C, Lender C took vacant possession of the Property B, and, on or around 19 August 2009, sold it under power of sale. 21 41. On 19 August 2009, the sum of $148,944.38 was credited to Loan C, which we understand represents the net proceeds from the sale of Property B. 22 42. We understand that there was a shortfall of $19,357.36 due and owing under Loan C. 43. As at 24 June 2013, the positions of Loans A and B are as follows: 23 Loan Balance Arrears A $228,271.25 $42,393.87 B $184,940.23 $34,802.55 44. The complainant says she does not have the capacity to repay these loans. 21 Email from Lender C dated 24 June 2013. 22 Obtained from Lender C s statement of account for Loan C. 23 Email from Lender C dated 24 June 2013. 17

Complainant s claims and preferred outcome 45. As we understand it, the complainant claims that the FSP engaged in unconscionable conduct in its dealings with her; in particular, by: (a) arranging loans for the complainant which the FSP knew, or ought to have known, that the complainant did not have the capacity to repay, and under which she risked losing her home in the event of default; (b) devising an unsuitable loan plan for the complainant; (c) misrepresenting the complainant s employment status to the lender in order to obtain loan approval; and (d) misleading the complainant in relation to the need for her to obtain an ABN in order to satisfy a lender s credit criteria. In particular, the complainant claims that the FSP registered an ABN for her in circumstances where it knew that she was not, and was not likely to be, carrying on a business. 46. In resolution of the complaint, the complainant effectively wants the FSP to indemnify her for an amount equal to the debt she currently owes to Lender C. Considerations COSL is required to have regard to 47. In dealing with a complaint, COSL will observe procedural fairness and have regard to: (a) relevant legal requirements and rights provided by law to consumers; (b) applicable codes of practice; (c) good industry practice in the financial services industry; and (d) fairness in all the circumstances. 24 48. Both the complainant and the FSP have been given the opportunity to provide information in support of their respective positions. 49. We are satisfied that the information on which we have made this Recommendation has been exchanged between the parties and that both parties are aware of the issues raised in the complaint. 24 COSL Rule 12.1 7 th Edition. 18

Relevant law 50. The Australian Securities Investment Commission Act 2001 (Cth) (ASIC Act) prohibits a person, in trade or commerce, and in connection with the supply or acquisition of financial services, from engaging in unconscionable conduct. 51. At the relevant time, section 12CB of the ASIC Act relevantly stated as follows: 12CB Unconscionable conduct (1) A person must not, in trade or commerce, in connection with the supply or possible supply of financial services to a person, engage in conduct that is, in all the circumstances, unconscionable. (2) Without limiting the matters to which the Court may have regard for the purpose of determining whether a person (the supplier) has contravened subsection (1) in connection with the supply or possible supply of services to a person (the consumer), the Court may have regard to: (a) (b) (c) (d) (e) the relative strengths of the bargaining positions of the supplier and the consumer; and whether, as a result of conduct engaged in by the supplier, the consumer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier; and whether the consumer was able to understand any documents relating to the supply or possible supply of the services; and whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the consumer or a person acting on behalf of the consumer by the supplier or a person acting on behalf of the supplier in relation to the supply or possible supply of the services; and the amount for which, and the circumstances under which, the consumer could have acquired identical or equivalent services from a person other than the supplier. (4) For the purpose of determining whether a person has contravened subsection (1) in connection with the supply or possible supply of financial services to another person: (a) (b) the Court must not have regard to any circumstances that were not reasonably foreseeable at the time of the alleged contravention; and the Court may have regard to conduct engaged in, or circumstances existing, before the commencement of this section. (5) A reference in this section to financial services is a reference to financial services of a kind ordinarily acquired for personal, domestic or household use. 52. Section 12CB of the ASIC Act is not constrained by the meaning of the unwritten law when considering whether conduct is unconscionable. 53. Section 12CB of the ASIC Act covers a wider range of circumstances and the list of matters provided in that section, to which a court may have regard to when considering whether conduct was unconscionable, is not exhaustive. 25 54. As such, s 12CB of the ASIC Act operates to extend the concept of unconscionable conduct beyond the equitable doctrine, and includes conduct which is unconscionable within the ordinary meaning of that word. 26 25 Duckworth as Trustee for Ocean Farms Trust v H G & R Securities Pty Ltd [2007] FCA 1690 at [15]; Australian Securities and Investments Commission v Australian Lending Centre, at [198]. 26 Australian Securities and Investments Commission v National Exchange Pty Ltd [2005] FCAFC 226; (2005) 148 FCR 132, at [30]. 19

55. In considering the mirror provisions under the Trade Practices Act 1974 (Cth), the court in Australian Competition and Consumer Commission v Allphones Retail Pty Ltd (No 2) 27 observed that: The ordinary or dictionary meaning of unconscionable, which involves notions of serious misconduct or something which is clearly unfair or unreasonable, is picked up by the use of the word in s 51AC. When used in that section, the expression requires that the actions of the alleged contravenor show no regard for conscience, and be irreconcilable with what is right or reasonable. Inevitably the expression imports a pejorative moral judgment. 28 [Emphasis added.] 56. In Director of Consumer Affairs v Peter Gerard Scully & Others, 29 the Supreme Court of Victoria affirmed that a plaintiff claiming unconscionable conduct under s 12CB must demonstrate that the conduct complained of demonstrated moral obloquy. 57. The matters to which the court may have regard to for the purpose of determining whether a person has contravened s 12CB(1) of the ASIC Act are not limited by the list of matters contained in s 12CB(2). 30 58. For statutory unconscionability, the conduct in question must be more than merely negligent. It must involve some deliberate wrongdoing or moral fault, although there may be cases where recklessness will suffice. 31 59. A person who suffers loss or damage by conduct of another person in contravention of s 12CB may recover the amount of the loss or damage by action against that person. 32 Applicable code of practice 60. At each time the complainant engaged the FSP to act as her broker, the FSP was a member of the Mortgage Industry Association of Australia (MIAA). 61. As a member of the MIAA, the FSP is obliged to comply with the professional standards of good practice set out in the MIAA s Code of Practice (MIAA CoP), as applied at the relevant time. 27 2009 FCA 17. 28 Ibid, at 113(b). 29 2012 VSC 444. 30 Violet Home Loans Pty Ltd v Schmidt & Anor [2013] VSCA 56 at [50]. 31 Consumer Affairs Victoria v Scully & Ors (No 3) [2012] VSC 444 at [31-32] cited in Violet Home Loans Pty Ltd v Schmidt & Anor [2013] VSCA 56 at [58]. 32 ASIC Act, s 12GF. 20

62. At the time of the events giving rise to this complaint, the MIAA CoP contained the following clauses relevant to complaint: 33 21A. A Residential Loan Member must suggest or recommend to an applicant only those arrangements for mortgage finance that the Member genuinely and reasonably believes are appropriate to the needs of that applicant. 24. A Residential Loan Member must always make such enquiries as are necessary to determine an applicant s capacity to repay the proposed loan. 35. A Member must act with all due skill, care and diligence in their Mortgage Industry dealings. 42. A Member must not engage in any acts or omissions of a misleading, dishonest, deceptive or fraudulent nature. Did the FSP engage in unconscionable conduct? Complainant s position 63. In the complaint form received on 7 October 2010, the complainant states that (copied verbatim): I applied for a loan through a broker to purchase an investment block of land and do some home renovations. He applied for 3 no doc loans. One for the block of land, one to make the loan repayments for a year on that block of land and one for renovations on my own home. I was on centrelink benefits only of about $350 per fortnight so the broker applied for a no doc loan so i didn t have to provide proof of income. The broker also applied for an abn and stated i was self employed on the forms however i wasn t. In hindsight i should never have been granted the loan because i had no way of making the repayments let alone living. I own my primary home however do not want to have to sell it to pay the loan. I am a widow and only have my own income with no one else to help pay the repayments. I was forced the sell the block of land at a 70K loss to pay out that loan to which i have a short fall of 15k currently with a collection agency. 64. A letter from the complainant s solicitor to COSL dated 16 February 2011, states (copied verbatim): Our client is a 57 year old widow and has suffered from depression since the birth of her daughter 27 years ago. Our client has been unemployed since the arrival of her daughter until quiet recently. Our client has been under medical treatment for the last 10 years. Our client husband died 23 years ago and had assurance which covered the building cost of a residence on a block owned by our client which our client has now owned for a considerable time and before the transactions detailed herein owned free from encumbrances and then valued at over $700,000. In December 2006 our client approached [the FSP representative] at [FSP] a broker selling mortgages on behalf of [the mortgage manager] to raise funds to carry out renovations on her residence because she felt she would be able to come out of her depressive state if she carried out renovations on her house. We are instructed that our client disclosed to [the FSP representative] that she was suffering and had suffered from depression for many years and that the only income she had at the time was a Centrelink pension, probably the Newstart allowance of some $400 per fortnight. In fact our client told [the FSP representative] that due to her depression she was not able to work. Our client also advised [the FSP representative] why she was borrowing the money 33 MIAA Code of Practice dated 22 June 2005. 21

On the application for the loan, a copy of which is attached, which is completed by [the FSP representative] in his handwriting he has noted that our client is a 'Consultant' in Welfare Services which is untrue and our client never claimed to be a consultant in welfare services. Our client remembers telling [the FSP representative] that she ran a non profit [type of business]. Our client did not read nor was asked to read the application before she signed the same and was not aware of and was not asked to read the declaration she signed. Our client applied through [FSP] for an additional $265.500 to purchase the block from [Lender C]. The application is made on 23 May 2007 to [the mortgage manager] and in this application she is described as a 'Management consultant'. At the time our client was still not employed and did not state she was a consultant let alone a management consultant. Once again our client signed where she was told to by [the FSP representative] without reading the application or declaration. With part of these funds our client bought the block. Our client advised [the FSP representative] why she was purchasing the block. Some time later in January 2008 our client obtained part time employment at [Business A] and earned on average $400 per fortnight. The client left in September 2008 after over two years as her hours were reduced and consequently she was paid less. Our client then decided to train [Employment A] and has 4 months left of her course. In the course the client works part time and is earning $400 per fortnight on average and her reduced Centrelink pension is paid into the loan account. 65. A letter from the complainant s solicitor to COSL dated 19 July 2011, states (copied verbatim): [Ms S] can verify that our client did not state that she was a consultant and that our client advised [the FSP representative] that she was in receipt of Centrelink benefits and [Ms S] remembers [the FSP representative] choosing from a list of options that would explain that our client was on benefits. It came to light that he chose consultant. In fact [the FSP representative] asked for bank statements which [Ms S] downloaded and handed to [the FSP representative] which would have disclosed the Centrelink payments. [The FSP representative] would have known this before the first application was made. In fact [the FSP representative] advised our client to pay her Centrelink payments into the account that was created when the first loan was processed. Further the Centrelink payments were incorporated into the plan prepared by [the FSP representative]. He nominated the product and produced a handwritten plan as to how to manage the mortgage with Centrelink income. This plan was not easy to follow by both our client and her daughter [Ms S]. The exit strategy was to keep the mortgage going until our client turned 60 and then apply for a reverse mortgage. The so called plan did not work as is shown from what has transpired. When our client received the default notices she again sought [the FSP representative s] advice who in [Ms S ] presence advised our client 'You did not stick to the plan' At the time our client was working part time at [Business A] and [the FSP representative] said 'You need to get a proper job'. The advice [the FSP representative] gave was' You will have to sell the house. You did not stick to the plan.' It was not until after our client defaulted that she mention to [the FSP representative] that she had invested in some shares but not investing in property. At the time our client was involved in court proceedings as to her father's estate. 22