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Philip haultain paper

  1. 1. CREDIT LAW CONFERENCE 2013 Credit intermediaries and agency Philip Haultain Special Counsel National Australia Bank
  2. 2. CREDIT INTERMEDIARIES AND AGENCY “That the concept of agency may properly extend to canvassers and those seeking to bring business to another party should not be controversial.” Tonto Home Loans Australia Pty Ltd v. Tavares [2011] NSWCA 389 at 178 per Allsop P PURPOSE 1. I am informed by a National Australia Bank analyst that, currently, between 40 and 45% of all mortgage loans in Australia are brokered. So, the conduct of credit intermediaries and third party responsibility for that conduct is significant to the Australian mortgage market. 2. Despite the prescriptive nature of the National Consumer Credit Protection Act 2009 (NCCP), there is cause to consider the common law rules relating to agency to assist in delimiting a licensee’s common law and statutory obligations. This paper will review when the common law and relevant legislation characterises credit intermediaries to be the agents of borrowers or of lenders and discuss some consequences. 3. Credit intermediaries are not characterised by their ability to enter into contracts on behalf of their principals. A more material issue is whether those principals are bound by the acts of the credit intermediaries or imputed with the knowledge of the credit intermediaries. THE NATURE OF AGENCY Consent, authority and a fiduciary relationship 4. A principal/agent relationship is characterised by: - the mutual consent of the parties to create the relationship. The parties will be taken to have consented if they agree to what amounts to a prinicipal/agency relationship. This is so even if the parties do not recognise that their relationship is one of agency or they disclaim an agency relationship. The consent may be express or implied from the words or conduct of the parties (Permanent Mortgages Pty Ltd v. Van Den Bergh [2010] WASC 10 at 279). The element of consent may include a “necessary degree of control *by the principal of the agent] requisite for the purpose of the role” (see Tonto Home Loans Australia Pty Ltd v. Tavares [2011] NSWCA 389 at 177 per Allsop P); - the principal granting authority to the agent to act on the principal’s behalf. That authority may be express or implied from a particular situation or from the conduct of the parties (see Bowstead and Reynolds on Agency (P Watts and FMB
  3. 3. Reynolds 19th ed, Sweet and Maxwell, London 2010 ) (Bowstead on Agency) at 2- 032; see Garnac Grain Co. Inc v. HMF Faure & Fairclough Ltd [1968] AC 1130; Field v Shoalhaven Transport Pty Ltd [1970] 3 NSWR 96 at 103; Fabry v. Commissioner of Taxation [2001] FCA 1431 at [21], [24]). Also, by its representations or conduct, a principal may hold out a third party as its agent. If a person relies on those representations or that conduct, the principal is bound by the third party’s acts as if the third party was actually authorised to act on the principal’s behalf (Freeman and Lockyer v. Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 at 503 per Diplock LJ). A person may be an agent where he or she acts on a principal’s behalf, but has no authority and no power to affect the principal’s legal relations with third parties (Bowstead on Agency at 1-019). So, intermediaries, retained as independent contractors to introduce parties to contract with one another, can be characterised as agents. The scope of an agent’s authority is ascertained by applying ordinary principles of construction including the proper implications from the words used, usage of trade and the course of business between the parties (Freeman and Lockyer v. Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 at 502 per Diplock LJ); and - the agent owing fiduciary obligations to his or her principal; the nature of the relationship requires the agent to act in the best interests of the principal (Bowstead on Agency at 1-001). An agent has fiduciary obligations even if the agent cannot affect his or her principal’s relations with third parties (see Tonto Home Loans Australia Pty Ltd v. Tavares [2011] NSWCA 389 at 177-178 per Allsop P). Acts binding the principal 5. An agent acting within the scope of his or her actual or apparent authority binds and entitles the principal (Bowstead on Agency at 8-002). An agent’s authority extends to all acts which are necessary or ordinarily incidental to the exercise of the agent’s express authority (Perpetual Trustees Australia Ltd v. Schmidt and anor [2010] VSC 67 at 159). 6. A principal is not bound by an act of his agent, which is outside the scope of the agent’s implied or apparent authority, unless the principal ratifies the act (Bowstead on Agency at 8-067). 7. An act of an agent, within the scope of his or her actual or apparent authority, can bind a principal even though the agent acts fraudulently and in furtherance of its own interests. However, the agent’s actual authority can be negated if the agent is acting in fraud of its principal (Kwei Tek Chao v. British Traders and Suppliers Ltd [1954] 2 QB 459).
  4. 4. 8. An agent’s intent can be attributed to his or her principal. With respect to torts, a principal is liable for the torts of an agent committed within the scope of the agent’s actual or apparent authority even if the requisite intent (say, to commit fraud) is not held by the principal (GE Dal Pont Law of Agency, 2nd ed, Lexis Nexis Butterworths, Sydney 2008 (Dal Pont)at [22.63] citing Permanent Trustee Australia Co Ltd v. FAI General Insurance Co Ltd [2001] NSWCA 20 at [89] per Handley JA; and Igloo Homes Pty Ltd v. Sammut Constructions Pty Ltd [2005] NSWCA 280 at [80] per Ipp JA). Also, see Colonial Mutual Life Assurance Society Ltd v. Producers and Citizens Cooperative Co. of Australia Ltd (1931) 46 CLR 41, in which an insurance company was found to be liable for defamatory statements made by an insurance agent. 9. Generally, criminal liability results from personal fault, so an agent’s intent with respect to committing a crime is not attributed ordinarily to his or her principal (Tesco Supermarkets Ltd v. Nattrass [1972] AC 153 at 179 per Lord Morris). However, statute may attribute an agent’s intent to his or her principal (for example, see section 84(1) Competition and Consumer Act 2010 with respect to the intent attributed to a principal with respect to certain cartel conduct by an agent). 10. Each of the National Consumer Credit Protection Act 2009 (NCCP) (sections 324 and 325), the National Consumer Credit Code (NCC) (section 199(1)), the ASIC Act (section 12GH(2)) and the Competition and Consumer Act 2010 (CCA) (sections 84(2) and 84(4)) deem that the act of an agent, within the agent’s actual or apparent authority, is the act of the principal for the purposes of the relevant law. 11. Under Part 2-3, Division 4 of the NCCP, the holder of an Australian Credit Licence (ACL) (a licensee) is responsible, as between the licensee and a client, for the conduct of its representatives: - that relates to a credit activity; and - on which a third person (a client) could reasonably expected to rely; and - on which the client relied in good faith, whether or not the conduct is within the authority granted to the representative (sections 74 and 75; section 5(1) “within the authority” definition NCCP). If a licensee is responsible for its representative’s conduct under the Division, the client has the same remedies against the licensee as it has against the representative (section 78(1) NCCP). However, the Division does not impose criminal responsibility or, apart from the Division, civil liability on a licensee that would not be imposed otherwise on the licensee (section 78(3) NCCP). A licensee cannot purport to contract out of the effect of the Division (sections 78(5), 78(7) NCCP).
  5. 5. Where it is necessary to establish the state of mind of an entity in any proceedings under the NCCP or the ASIC Act relating to that entity’s conduct, the state of mind will be taken to have been established if an agent of that entity, that engaged in the relevant conduct on the entity’s behalf within the actual or apparent scope of the agent’s authority, had that state of mind (sections 324(3) and 325(3) NCCP, sections 12GH(1) and 12GH(3) ASIC Act). Also, note that a contract term that limits an entity’s vicarious liability for its agents may be an example of an unfair contract term for the purposes of the unfair contract terms prohibitions in the ASIC Act (section 12BH(1)(i) ASIC Act). 12. The NCCP defines a “representative” to include the licensee’s credit representatives and any person who acts on behalf of the licensee (section 5(1)). A credit representative is a third party the licensee authorises to engage in credit activities on the licensee’s behalf (section 64(1) NCCP). 13. Compare the reference in the “representatives” definition to persons who act on a licensee’s behalf with the reference to an entity’s liability for the acts of its agents under the NCCP. The Explanatory Memorandum to the National Consumer Credit Protection Act (NCCP Explanatory Memorandum) does not explain the nature of a person that “acts on behalf of a licensee” or why that term is used in the NCCP definition of “representatives” instead of “agent”. It may be that the term “acting on behalf of a licensee” is intended to connote relationships broader than agency. In any case, it is inevitable that the term is intended to cover a licensee’s agents at common law. So, assuming the other indicia of agency are present (consent; fiduciary obligation), it is likely that person who “acts on behalf of a licensee” would be the licensee’s “agent” at common law insofar that those acts involve engaging in credit activities. Knowledge imputed to a principal 14. The law may impute to a principal knowledge relating to the subject matter of the agency which the agent acquires while acting within the scope of his authority. It is presumed that an agent will inform his or principal of all information material to the subject matter of the agency (Dal Pont at [22.49]; NIML Ltd v. MAN Financial Australia Ltd [2006] VSCA 128 at [40] per Nettle JA). The scope of the agent’s authority will determine what information is material (El Ajou v. Dollar Land Holdings plc [1994] 2 All ER 685 at 702-4 per Hoffman LJ). An agent will have a more extensive duty to communicate if the scope of his or her agency is wider (Dal Pont at [22.55]). 15. Notice given to an agent is effective as notice to the principal if the agent receives it within the scope of his or her actual or apparent authority, unless the person claiming
  6. 6. the principal has that notice knew that the agent intended to conceal the notice from the principal (Bowstead on Agency at 8-204). 16. There are some limitations on the presumption: “To affect the principal with notice, *1+ the agent’s knowledge must have been derived in the particular transaction in hand; or [2] be shewn to have been in that transaction present to his mind; and further, [3] it must have been knowledge of something material to the particular transaction; and [4] something which it was the agent’s duty to communicate to his principal ..” (Wyllie v. Pollen 46 ER 767 at 770 per Lord Westbury LC). 17. Knowledge acquired by a person prior to that person becoming an agent in the relevant capacity or after termination of the agent’s authority will not be attributed to a principal (see Dal Pont at [22.60]; see Micarone v. Perpetual Trustees Australia Ltd [1999] SASC 265 with respect to pre-acquired information). 18. Knowledge is not attributed to the principal where it is acquired by an agent who is defrauding the principal in the same transaction (Bowstead on Agency at 8-208). A court may infer that a third party knew that the agent would not pass the information on to the principal where the third party is a party to the fraud of the principal by the agent (Dal Pont at [22.56] citing Kennedy v. Green 40 ER 266). 19. A principal cannot deny liability if it would not have dealt with a third party or would have dealt with a third party on different terms, if the agent had disclosed information the agent collected within the scope of the agent’s actual or apparent authority (Dal Pont at [22.50]; Tobin v. Melrose [1951] SASR 139 at 146 per Ligertwood J). Also, see Deaves v. CML Fire and General Insurance Co. Ltd (1979) 143 CLR 24 in which the High Court found that an insurer could not deny an insured’s claim on an insurance policy for misstatement where the insurer’s agent completed a proposal form incorrectly. The insurer was attributed with the agent’s knowledge of the correct information. According to Dal Pont, the reverse will apply: if an insured arranges insurance through his/her broker, non-disclosure of material facts, known only to the broker, will affect the insured and give the insurer good ground for avoiding the contract (Dal Pont at [22.52]; Blackburn, Low & Co. v Vigors (1887) 12 App Cas 531 at 539 per Lord Watson). 20. The NCC reflects the common law rule imputing an agent’s knowledge to his or her principal: for NCC purposes, a credit provider is not taken to know or have reason to believe something because the credit provider’s agent does so, unless the knowledge or reason to believe that thing is acquired by the agent acting in that capacity and in connection with the transaction concerned (section 199(4) NCC).
  7. 7. 21. Paragraph 8.325 of the explanatory memorandum to the NCCP (NCCP Explanatory Memorandum) notes that section 199 of the NCC restates the general law that the conduct of a credit provider’s agent acting within his or her actual or apparent authority will be imputed to the credit provider. The NCCP Explanatory Memorandum recites that section 199 limits this general law principle by providing that the credit provider will not be taken to know (or have reason to know) where the agent’s belief was not acquired in his or her agency capacity and in connection with the relevant transaction. However, the drafting of section 199 appears to be consistent with the limitations on the presumption at paragraph 16 above. THE NATURE OF CREDIT INTERMEDIARIES 22. For the purposes of this paper, I will categorise credit intermediaries as finance brokers, mortgage managers or referrers. Finance Brokers 23. A typical finance broker assists his or her customer to apply for credit and to intermediate between the customer and the lender with respect to settling and reviewing credit facilities. The NCCP defines “credit assistance” a broker typically undertakes (section 8 NCCP); for example, suggesting that a customer obtain particular credit or remain in a particular credit contract. 24. Finance broking services benefit customers by: - disseminating product information to assist customers to choose finance products that meet their requirements and objectives; - giving customers access to a broader range of lenders; and - facilitating dealings between customers and lenders. 25. It was typical for finance brokers to contract directly with lenders to submit loan applications to the lenders on behalf of the broker’s customers. In consideration of settling loans consequent to loan applications submitted by a finance broker, a lender paid commissions to the broker. 26. The finance broker market has seen the rise and dominance of the mortgage aggregation model. Mortgage aggregators contract with a number of lenders to form a panel of lenders to whom the aggregator may submit loan applications. A mortgage aggregator contracts with finance brokers to enable those brokers to originate loan applications to the aggregator’s panel lenders. Panel lenders pay commissions to the aggregator in consideration of credit made available consequent to loan applications originated by brokers contracted to the
  8. 8. aggregator. In turn, the aggregators “expense” off a portion of the commissions paid by lenders as commission payments to the broker that originated the relevant loan applications. 27. A typical aggregator/lender agreement will provide that: - the aggregator and its brokers are not the general agents of the lenders, though it is typical for the aggregator to be appointed as the lender’s limited agent to identify applicants in accordance with lender procedures; - the lender will consider applications only from brokers that the lender accredits; - the aggregator must originate applications to a lender according to the lender’s procedures notified to the aggregator from time to time; - the lender is obliged to pay commissions to the aggregator only. The aggregator is responsible for any payments the aggregator owes brokers; and - the aggregator is responsible for the conduct of the brokers with whom the aggregator contracts. 28. A typical aggregator/broker agreement will provide that: - the brokers are not the general agents of the aggregator, other than as the aggregator’s limited agent to identify applicants in accordance with lender procedures; - the broker must comply with the panel lender agreements to which the aggregator is a party; - the aggregator is obliged to pay commissions to the broker only. The broker is responsible for any payments the broker owes its loan consultant contractors or referrers; and - the broker is responsible for the conduct of the loan consultants with whom the broker contracts. 29. Mortgage aggregation services benefit brokers by: - giving brokers access to a broader panel of lenders; - reducing broker back office costs related to managing lender relationships and administering commission payments; - giving brokers access to better commission structures arising out of the aggregator’s “purchasing power” with panel lenders; and
  9. 9. - giving brokers access to services like customer relationship systems, training, mentoring and assistance with compliance. Mortgage aggregator arrangements benefit lenders by reducing the lenders’ costs of managing lender/broker relationships and commission payments. Mortgage managers 30. A typical mortgage manager distributes finance products manufactured by a loan programme promoter, often under white labelling arrangements allowing the mortgage manager to badge the loan products with the mortgage manager’s name. 31. A mortgage manager: - contracts with the loan programme lender or its agent (usually the programme manager or loan servicer) or both to distribute the loan programme’s products; - originates loans funded by the loan programme in relation to which the mortgage manager contracts; - undertakes services like income verification, collecting credit bureau reports and arranging valuations to support loan applications it originates; and - may deal with insurers to arrange lenders mortgage or title insurance policies relating to loans it originates. Some mortgage managers hold delegated authorities allowing them to underwrite loans. 32. After a loan is funded, a mortgage manager will perform loan management services like dealing with enquiries from borrowers and following up customers in default on behalf of the loan programme lender. 33. A typical mortgage management agreement disclaims any principal/agent relationship between the loan programme lender or its agent or both and the mortgage manager. Referrers 34. A typical referrer exploits a personal relationship with a customer to introduce that customer to a broker or a mortgage manager for credit assistance or to a lender to obtain credit. 35. The referral may be at the referrer’s suggestion or at the customer’s request. In consideration of the referral, the referrer is paid a fee or, in some cases, a fee and ongoing commission by the Referral Recipient if the referral leads to the referred customer obtaining credit.
  10. 10. 36. A typical referrer agreement disclaims any principal/agent relationship between the referrer and the entities to whom it may refer customers. CREDIT INTERMEDIARIES AS AGENTS NCCP approach 37. The NCCP Explanatory Memorandum refers to a licensee who appoints a credit representative as the principal (paragraph 2.162). At another point, the explanatory memorandum refers to credit representatives as “credit agents” (for example, paragraph 2.171). In the light of licensees appointing credit representatives to act on the licensee’s behalf (see section 64(1) NCCP), credit representatives are likely to be characterised as the agents of their licensees. 38. Otherwise, the NCCP Explanatory Memorandum at paragraph 2.164 states that: “For the avoidance of doubt it is expressly stated in this explanatory memorandum that the Credit Bill does not seek to set out prescriptive rules to, for example, the following effect: • a broker is always only the agent of the consumer; • a broker can be the agent of the lender or the agent of a lenders mortgage insurer; • a person cannot be an agent for more than one party involved in a transaction; ...” So, it is appropriate to review the common law approach to characterising relationships between credit intermediaries, borrowers and lenders. Finance Brokers 39. The Sydney Morning Herald of 3 June 2013 reported on lo doc loan abuse claims by Denise Brailey of the Banking & Finance Consumers Support Association Inc. The SMH’s Michael West reported Ms Brailey’s claim to ASIC that she had “the last bits of a jigsaw puzzle which would prove that mortgage brokers were acting as agents of the banks in foisting loans on customers who could not afford them”. 40. Ms Brailey’s interest in completing the jigsaw puzzle would have been to impute broker knowledge to the banks thereby rendering the banks responsible for what she perceived to be broker misconduct. 41. Later in the article, Philip Field, the Financial Ombudsman, was reported as stating that “the banks, in some individual cases, may be responsible for flawed low-doc loans, but mostly – and critically in a legal sense – the mortgage brokers ... had acted as the agents of the customers rather than the bank.” Whether or not a finance broker is the lender’s agent in any case is a question which must be determined on the facts of the particular case (Esanda Finance Corporation Ltd
  11. 11. v. Spence Financial Group Pty Ltd [2006] WASC 177 at 65). However, there is a strong body of authority that supports Philip’s assertion. 42. In Con-Stan Industries of Australia Pty Ltd v. Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226, a case involving an insurance broker, the Full High Court stated (at 234): “under the general principles of the law of agency, a broker is the agent of the assured, not the insurer … There will be rare circumstances in which a broker may also be an agent of the insurer, but the courts will not readily infer such a relationship because a broker so placed faces a clear conflict of interest between his duty to the assured on the one hand and to the insurer on the other.” 43. The Courts accept that the role of a finance broker is analagous to that of an insurance broker and that, prima facie, finance brokers are the agents of their customers (Morlend Finance Corporation (Vic) Pty Ltd v. Westendorp and ors [1993] 2 VR 284 per Fullagar J at 308; Custom Credit Corporation Ltd v. Lynch [1993] 2 VR 469 at 486 per Marks J; Esanda Finance Corporation Ltd v. Spence Financial Group Pty Ltd [2006] WASC 177; Dal Pont at [1.32]). 44. This will be the case even if the broker: - approached a finance company to make credit available to the broker’s customer (Octopon Pty Ltd v. Esanda Finance Corporation Ltd (unreported, NSW Supreme Court , 3 February 1989); Steele-Smith v Liberty Financial Pty Ltd [2005] NSWSC 398); - arranged for execution of documents prepared by the lender (Octopon; Westendorp); - received commission from the lender for business introduced to the lender (Westendorp ; Lynch; Spence); - held finance application documents on the lender's letterhead that were completed by the applicant at the broker’s offices (Branwhite v Worcester Works Finance Ltd [1969] 1 AC 552 at 573 per Lord Morris; at 578-9 per Lord Upjohn; Perpetual Trustees Australia Ltd v. Schmidt and anor [2010] VSC 67; Spence); - asked an applicant for financial information of the kind ordinarily required by a financier to process and approve an application for finance; - promoted the close relationship the broker had, and the amount of business the broker did, with the lender; - was the only channel of communication between the lender and the applicant (Spence); - was required to comply with a lender’s accreditation criteria; - was required to undertake training given by the lender;
  12. 12. - was subject to some control by the lender with respect to the manner in which the broker submitted applications to the lender; - was subject to the lender’s directions with respect to advertising or promotional material relating to the lender’s products; or - was required to perform services as directed by a lender (Perpetual Trustees Australia Ltd v. Schmidt and anor [2010] VSC 67). 45. The NSW Court of Appeal decision in Tonto Home Loans Australia Pty Ltd v. Tavares [2011] NSWCA 389 illustrates the reticence of courts to find that a broker, or an intermediary in the nature of a broker, is a lender’s agent. 46. The judgment related to loans made to three separate sets of Streetwise Group investors. The Streetwise Group used high pressure tactics to entice the investors to invest in property development joint ventures Streetwise promoted. 47. Each of the investors leveraged their investments with loans funded by either the Origin or First Mac residential loan programmes. The loans were originated by Tonto Home Loans (Tonto). Tonto did not have a retail presence; it relied on mortgage brokers to introduce applicants to it. 48. A Streetwise Group company (Streetwise Loans) introduced each of the investors/borrowers to Tonto under an introducer agreement between Streetwise Loans and Tonto. Streetwise Loans did not introduce clients to other lenders. 49. Under the introducer agreement, Tonto agreed: - that Streetwise Loans would:  conduct the loan interview, discuss loan options and determine a suitable product for a customer. Tonto relied on Streetwise Loans to determine whether customers were eligible for lo doc loans;  advise the customer of the loan approval process and provide the customer with appropriate information;  assist the customer with preparing the loan application; and  obtain supporting documentation; - not to contact borrowers until after the loan had settled; - to brand loan application forms and loan approval letters with “Streetwise”; - that Streetwise Loans could use Tonto’s processing system to make enquiries relating to Streetwise Loans introduced loans applications; and
  13. 13. - to answer phone calls from Streetwise Loans clients in the name of Streetwise. Also, Streetwise Loans: - was required to “endeavour” to introduce loans to Tonto; - could recommend valuers for the Tonto panel; and - undertook not to encourage borrowers to repay a loan early or to refinance a loan. 50. Tonto underwrote each of the loans and, in so doing, failed to comply with certain of the lender’s guidelines. 51. In each instance, the investors signed a loan application in blank which a Streetwise Loans officer completed with inflated income and asset particulars. Tonto was not actually aware that Streetwise Loans falsified the loan applications. 52. The Streetwise Group collapsed; the borrowers’ investments were worthless. The lenders sought to enforce the securities they held over the borrowers’ homes. The borrowers defended the recovery actions and sought to have their loans and mortgages set aside claiming, amongst other things, that the loans were tainted by the lender’s unconscionable conduct. 53. It was accepted that Tonto Home Loans was the agent of the lenders. The borrowers claimed that Streetwise Loans was Tonto’s agent and, thus, an agent of the lenders. 54. At first instance, the NSW Supreme Court found Streetwise Loans to be Tonto’s and the lenders’ agent due to the particular arrangements in place between Tonto and Streetwise Loans. 55. The Court of Appeal overturned the primary judge’s finding on the agency point because: - the Court could not ascertain a consensual agreement between Tonto and Streetwise Loans under which Streetwise Loans was to act as Tonto’s agent (at 192 per Allsop P); and - the primary judge’s approach failed to place the introduction deed in its commercial context: an agreement between two entities each of which had its own business. One was to endeavour to introduce business from its own customer base for the mutual commercial advantage of both (at 193 per Allsop P). The Court rejected the organisational or enterprise structure of a relevant business and activity as a key factor in determining agency (at 192 and 194 per Allsop P). 56. The Court considered the following matters militated against a prinicipal/agent relationship between Tonto and Streetwise Loans:
  14. 14. - the Streetwise Group had its own customers on whose behalf and in whose interests Streetwise Loans was obliged to act carefully and in good faith; - the obligation to “endeavour” to introduce loans did not require Streetwise Loans to sacrifice the interests of its customers if another funder or programme was more attractive; nor did it require Streetwise Loans to sacrifice its own interests if it could obtain higher commission elsewhere; - Streetwise Loans had no authority to bind Tonto to accept any loan; - the obligation to endeavour to introduce loans to Tonto were not obligations on Streetwise Loans to act in Tonto’s best interests; - Streetwise Loans did not hold itself out to customers as acting for Tonto or the lenders. On the contrary, for at least one of the loans under the Court’s review, Streetwise Loans held itself out to be the lender; and - the introducer agreement did not purport to regulate how Streetwise Loans conducted its business prior to introducing a loan to Tonto. 57. Despite the prima facie assumption that a finance broker is his or her customer’s agent, that assumption can be negated if the surrounding circumstances of a parties’ relationship indicates that the true nature of their relationship is one of principal and agent. This is the case even if the agreement between the parties disclaims a principal/agent relationship. 58. In Permanent Mortgages Pty Ltd v. Van Den Bergh [2010] WASC 10, the Supreme Court of Western Australia found that a mortgage aggregator was the agent of a particular lender. 59. The mortgage aggregator, Financial Analysis of Australia Pty Ltd (FASA), entered into a Correspondent Originator Agreement with La Trobe Home Loans of Australia Pty Ltd (La Trobe). FASA had accredited Curia, a Medfin Australia Pty Ltd broker, to “represent” FASA. Curia brokered a La Trobe programme lo doc loan that the defendant claimed to be affected by the broker’s unconscionable conduct. It was accepted that La Trobe was the agent of Permanent Mortgages Pty Ltd, the La Trobe programme lender of record. 60. The Correspondent Originator Agreement disclaimed a principal/agency relationship between La Trobe and FASA. However: - under the agreement, La Trobe appointed FASA to act on its behalf for the purpose of negotiating, or for the purpose of being an intermediary to obtain, loans to be provided by La Trobe to borrowers; and - the agreement negatived the possibility of FASA acting as the agent of a borrower or a potential borrower.
  15. 15. 61. The Court rejected La Trobe’s argument that the reference to “negotiating” was to FASA negotiating on a borrower’s behalf, as the nature of FASA’s obligations in the remainder of the agreement were inconsistent with FASA having any autonomy to represent the borrower’s interests in the borrower’s dealings with La Trobe (at 290). 62. Those obligations were: - to originate approved mortgages in accordance with La Trobe lending guidelines; - to act in accordance with La Trobe’s instructions or, in the absence of those instructions, to act in the manner which FASA reasonably considered to be in La Trobe’s best interests. This obligation precluded FASA from recommending to a borrower or potential borrower that it would not be in the borrower’s best interests to proceed with a La Trobe loan or to proceed with a different lender or to bargain on the borrower’s behalf for a better deal; - to inform La Trobe of any difficulties relating to a borrower or potential borrower whether or not that disclosure was in the borrower’s interests; - to provide La Trobe with written reports on FASA’s activities under the agreement and to keep proper records and make them available for La Trobe’s inspection; - not to delegate its authority from La Trobe; - to provide details of persons FASA engaged to promote La Trobe products and to ensure that they were suitable to La Trobe for that purpose; - to undertake enquiries, relating to prospective borrowers, of a kind which a prudent lender would consider to be appropriate in the circumstances. FASA’s disclosure obligations continued after La Trobe approved a loan up to the time the loan was advanced; and - to maintain the confidentiality of any information relating to La Trobe’s affairs or business that was not in the public domain. This prevented FASA from using information about La Trobe’s business to achieve a better deal for a borrower or potential borrower. 63. Also, the Court found that the interplay of La Trobe’s right to appoint other correspondents and La Trobe’s obligation not to directly market or approach customers referred through FASA, amounted to a promise by La Trobe to prevent its other correspondents from approaching the customers FASA referred. That indicated that: - FASA was to be the sole representative of La Trobe with respect to borrowers or potential borrowers FASA referred to La Trobe, thereby cementing the efficacy of the fee arrangements between La Trobe and FASA; and
  16. 16. - the parties did not intend to stand in an adverse commercial relationship with each other with respect to borrowers or potential borrowers FASA referred to La Trobe. 64. The Court found that FASA was La Trobe’s agent. So, due to the linked agency relationships between Curia (the broker), FASA, La Trobe and Permanent Mortgages, Permanent Mortgages was affected by the broker’s unconscionable conduct relating to the loan. 65. Conclusion on brokers: - whether or not a broker is the agent of a lender is a question which must be determined on the facts of the particular case; - however, there is considerable judicial support for characterising a broker as the agent of his or her customer; - to preserve the character of a broker’s relationship as his or her customer’s agent, lenders should take care to ensure that their arrangements with brokers or mortgage aggregators do not require the broker/aggregator to:  act in the lender’s interests generally in a manner inconsistent with acting in the customer’s best interests (for example, by taking steps to withstand churning or to deal with a customer in a manner that is persuasive of the customer maintaining facilities with the lender);  promote the lender’s products;  originate loans in accordance with the lender’s lending procedures;  undertake enquiries of the customer on the lender’s behalf; or  report information relating to the customer from time to time after loan settlement. Mortgage managers 66. There is a body of modern judicial opinion on whether or not a mortgage manager is the agent of the lender to whom the mortgage manager supplies services. 67. In Micarone v. Perpetual Trustees Australia Ltd [1999] SASC 265, the full court of the Supreme Court of South Australia considered whether loans made out of the PUMA loan programme should be set aside for unconscionability or undue influence due to the actual or constructive notice Perpetual Trustees Australia Ltd (Perpetual), the loan programme’s lender of record, had about the borrowers’ financial situation. 68. The plaintiffs claimed that:
  17. 17. - IF&I, a mortgage manager contracted to Perpetual and PUMA Management Ltd (PUMA), the PUMA loan programme manager, was Perpetual’s agent; - the mortgage manager’s knowledge of the borrower’s situation should be imputed to Perpetual. It was accepted that PUMA was Perpetual’s agent. 69. The Court referred to the mortgage manager having “similar” mortgage origination arrangements with Bank of Melbourne (BOM) and R&I Bank. Those arrangements were more likely to be introducer agreements. 70. The mortgage manager brokered the borrowers’ application to refinance their existing loans to each of BOM and R&I Bank; each Bank rejected the application on the grounds of the borrowers’ incapacity to service the loans. 71. Then, the mortgage manager submitted an application to PUMA without disclosing the rejection of the earlier applications. The mortgage manager was aware of the borrowers’ financial position and their difficulties with servicing their existing loans. 72. The Court noted that the Mortgage Origination Deed (MOD), into which IF&I and PUMA had entered, disclaimed any principal/agent relationship between them. The MOD appointed IF&I to submit applications on behalf of borrowers, to lenders for whom PUMA acted. However, IF&I was not bound to offer potential borrowers to PUMA first. IF&I did not receive a fee from PUMA for finding borrowers. It could charge a procuration fee to the successful borrowers directly. 73. It appeared that the PUMA loan programme guidelines required IF&I to give warranties as to the enquiries of the borrowers and the suitability of an application. However, PUMA did the underwriting of the loan and arranged lender’s mortgage insurance cover. 74. Once PUMA approved an application, IF&I was responsible to arrange settlement of the approved loan; giving all necessary instructions to solicitors IF&I retained. After the loan settled, the MOD required IF&I to manage the loan: directing the borrower to make payments; maintaining records of the mortgage; advising of defaults; enforcing the terms of the mortgage; and generally reporting to PUMA. 75. The Court found that IF&I was not PUMA’s agent to find loans; rather it was an independent contractor which could, if it chose, refer an application to PUMA (at 631). Rather, IF&I acted as the agent of the borrowers, as IF&I had been approached by finance brokers, acting for the borrowers, to find a lender to refinance the borrowers’ loans (at 630). 76. Once PUMA approved a loan application IF&I submitted, IF&I was PUMA’s agent to settle and manage the loan. However, the knowledge that IF&I held preceding that date was not knowledge IF&I acquired whilst acting as PUMA’s agent. It was not to be
  18. 18. imputed to PUMA or Perpetual (at 638; citing Taylor v. Yorkshire Insurance Co Ltd (1913) 2 IR 1 at 20-21; Jessett Properties Ltd v. UDC Finance Ltd [1992] 1 NZLR 138 at 143; and El Ajou v. Dollar Land Holdings PLC [1994] 2 All ER 685 at 703-4 per Hoffman LJ). 77. In Bartle and ors v. GE Custodians and ors [2010] 1 NZLR 802, the High Court of New Zealand considered whether a mortgage manager, Tasman Mortgages Ltd (Tasman), was the agent of GE Custodians (GE) the lender of record of no doc loans made to the plaintiffs. 78. The Bartles entered into contracts for the loans, secured over their home, to invest in property developments promoted by the Blue Chip Group of companies (Blue Chip). The Blue Chip Group collapsed; the Bartles’ investments were worthless. 79. The Bartles’ loans were originated by Tasman consequent to a referral by Blue Chip. At all relevant times, Tasman was a member of the Blue Chip Group. 80. The Bartles were retired, but someone changed their loan applications to state they were “self employed”. The Bartles received legal advice on the loan arrangements from a solicitor to whom they were referred by Blue Chip. 81. GE had no actual knowledge of the arrangements between Blue Chip and the Bartles or that the Bartles had insufficient income to support repayment of the loans. Tasman had that knowledge. 82. Tasman entered into a Mortgage Origination and Servicing Agreement (MOSA) with Australian Mortgage Securities (NZ) Ltd (AMS) to originate and manage loans GE funded. The MOSA disclaimed any prinicipal/agent relationship between Tasman and AMS. 83. The Bartles signed a (no doc) Declaration of Financial Position form that described the amount, the term and the monthly repayments for the loan AMS had approved. The form recommended that the Bartles obtain independent legal and financial advice prior to obtaining the loan. It recorded the Bartles as being “self-employed investors”. 84. The primary judge found that: - although there may be no general agency relationship between two parties, a specific or limited agency may arise through one party entrusting another to undertake specific tasks on his or her behalf ; - the mere fact that a task has been entrusted to another is not sufficient to create an agency relationship. The court will examine the circumstances to determine whether there is an agreement that a person will represent another in some respect or carry out an act on the other’s behalf; - where little discretion is conferred on the alleged agent, there may a pointing away from a relationship as independent contractor and towards a finding of agency;
  19. 19. - Tasman was solely responsible for the conduct of its employees and contractors; - Tasman would not issue promotional material without the prior consent of AMS and GE; - the Bartles acknowledged in writing that Tasman was neither the agent of GE or of the Bartles; - Tasman’s primary role was to originate loans and mortgages, in the course of which Tasman gathered prescribed information from applicants to support applications submitted to AMS for approval. Once AMS approved a loan, Tasman’s role was over until the loan was funded. Then, Tasman managed mortgages for AMS and exercised GE’s powers under the mortgages on GE’s behalf; - the fact that the GE Operations Manual set criteria for mortgage managers preparing applications for approval recognised the commercial reality that a broker must have a reasonable degree of specificity about the lender’s requirements in order to present loan applications which will have the best prospects of lender acceptance. In carrying out its role, the broker was acting independently and not carrying out functions on the lender’s behalf or purporting to represent the lender; and - this was the case even though some provisions in the Operations Manual required Tasman to exercise judgment; like imposing responsibility on Tasman to determine whether any information provided warranted further inquiry and to report any adverse circumstances relating to an application. 85. The primary judge found that Tasman was not the agent of GE or AMS; Tasman was an independent contractor. Its function was that of a non-exclusive originator of loan applications which it then submitted to AMS for approval. Those findings were based on: - the terms of the MOSA and the Operations Manual; - the absence of any evidence that Tasman was held out as an agent; - the absence of any conduct by Tasman that might be interpreted as that of an agent; - the fact that Tasman had no ability to approve loans or bind GE or AMS in any way; and - the express acknowledgments by the Bartles that Tasman was not acting as an agent. 86. The primary judge’s findings on Tasman’s agency were overturned on appeal. In Bartle v. GE Custodians [2010] NZCA 174, the NZ Court of Appeal found that GE had outsourced all aspects of loan origination, implementation, management and recovery
  20. 20. to Tasman, other than loan underwriting (at [187] per Arnold J). The NZ Court of Appeal placed particular emphasis on Tasman’s responsibility for arranging lender’s mortgage insurance for the loans it originated (at [187] per Arnold J; at [244] per William Young P). In doing so, it was clear Tasman acted on GE’s behalf. Tasman “carried out credit assessment functions which might more commonly be the responsibility of an employee of a lender. In that sense, its functions were closely integrated into this aspect of GE’s lending business” (at [249] per William Young P). 87. On further appeal, the Supreme Court of New Zealand did not consider whether Tasman was GE’s agent. 88. In Perpetual Trustees Australia Ltd v. Schmidt [2010] VSC 67, the Supreme Court of Victoria considered another claim relating to a property investment scam. Schmidt, a retiree and pensioner, was induced by Maddocks, a self styled financial adviser, to borrow money on the security of Schmidt’s home to invest in a property syndicate. The investments were a sham and Schmidt lost $200,000. 89. Maddocks arranged for Schmidt to apply for a loan through Medallion Finance Concepts Pty Ltd (Medallion), a finance broker. Medallion had loan introduction arrangements with Violet Home Loans Pty Ltd (VHL). VHL was party to a Mortgage Origination Agreement (MOA) with Macquarie Securitisation Ltd (MSL), the PUMA loan programme trust manager and Perpetual Trustees Australia Ltd (Perpetual), the PUMA loan programme lender of record, to originate and manage loans funded by the PUMA programme. MSL underwrote the loan applications VHL originated. 90. Schmidt defended Perpetual’s action to recover the loan on grounds including that VHL was Perpetual’s agent; that Medallion was VHL’s agent; that VHL or Medallion or both had acted unconscionably in procuring the loan; and that Perpetual was responsible for VHL’s and Medallion’s conduct. 91. Perpetual denied that VHL was its agent and, by implication, that Medallion was its agent. 92. VHL relied on finance brokers to attract customers. VHL had several sources of funds, including the PUMA programme, for the loans it originated. 93. Schmidt dealt exclusively with Maddocks to arrange his loan. He did not deal with any of Medallion, VHL, MSL or Perpetual. Maddocks completed a loan application with false information regarding Schmidt’s occupation and income. Schmidt signed the forms without reading them. 94. The primary judge found that Medallion was not VHL’s agent relying on the Victorian Court of Appeal’s decision in Westendorp. Medallion merely initiated Schmidt’s application, processed that application and submitted it to VHL. Medallion did not take any further part in processing the application or managing Schmidt’s loan. The
  21. 21. fact that VHL had accredited and trained Medallion did not indicate a principal/agent relationship between them. 95. Perpetual did not give VHL actual authority to act on its behalf. The MOA disclaimed a principal/agent relationship between Perpetual and VHL. 96. The primary judge considered whether VHL had apparent authority to act on Perpetual’s behalf. He considered that, arguably, Perpetual had held out VHL as its agent by referring to VHL’s status as a mortgage manager in the loan terms. 97. However, the judge found that VHL could not be characterised as having been clothed with apparent authority to act on Perpetual’s behalf as Schmidt did not rely on any representations by Perpetual. Schmidt knew no details about his loan; he relied solely on Maddocks. He did not read the loan contract and did not rely on the loan contract as conveying that VHL acted on Perpetual’s behalf. VHL made no representations to Schmidt about its relationship with Perpetual (at 140). 98. The judge did find that VHL held implied authority from Perpetual (at 156). This was the case despite: - the MOA disclaiming a principal/agent relationship; or - VHL having a number of sources for funding loans it originated; a person can be the agent of separate principals for separate transactions. 99. The judge considered the following features indicated a principal/agent relationship between Perpetual and VHL: - VHL’s origination and processing of Schmidt’s application was to Perpetual’s benefit; - the loan contract recited that VHL was authorised to exercise all of Perpetual’s powers, rights and functions under the contract on Perpetual’s behalf; - the MOA required VHL to comply with Perpetual’s directions. The PUMA fund parameters dictated in precise terms the manner in which VHL was to deal with Perpetual’s borrowers; and - once the borrower entered into the loan contract, VHL handled all aspects of managing the loan for Perpetual . 100. VHL failed to interview Schmidt as required by PUMA programme parameters. Schmidt’s loan did not meet the PUMA programme criteria. Perpetual argued that, if VHL was Perpetual’s agent, VHL acted outside its authority by failing to act within those parameters.
  22. 22. 101. However, the judge found that the parameters were a series of promises by VHL as to the manner in which VHL would exercise its authority, not a limitation on VHL’s authority from Perpetual. (Also, see Tonto Home Loans at 212-213 per Allsop P). 102. Perpetual was liable for VHL’s conduct relating to originating the loan. Perpetual had a claim in contract against VHL for breaching the parameters. 103. In Michalopoulos v. Perpetual Trustees Victoria Ltd [2010] NSWSC 1450 the plaintiffs claimed that, by way of attribution, their lender was aware of false information in their loan application to a mortgage manager and responsible for the mortgage manager’s unconscionable conduct in originating their loan. 104. The Mortgage Group was contracted to Interstar Wholesale Finance Pty Ltd (Interstar), a loan programme servicer, to market and promote loan products Interstar manufactured. Interstar was the agent of Perpetual Trustees Victoria Ltd (Perpetual), the loan programme lender of record. 105. The mortgage manager could carry out credit checks on applicants and was required to give Interstar all information that came to the mortgage manager’s attention and that might be relevant to Interstar underwriting an application. After a loan was settled, the mortgage manager continued to liaise with the borrower, to answer borrower enquiries, and to manage and service loans in accordance with Interstar’s Operations Manual. 106. White J found that the plaintiffs did not appoint the mortgage manager to act for them in submitting their loan application to Interstar. The mortgage manager was required to disclose all information coming to its attention which might be relevant to Interstar’s decision whether or not to approve an application; that information could be adverse to the borrower’s interests. Neither was the mortgage manager acting as an independent contractor to submit loan applications to Interstar; without Interstar’s approval it could not delegate its functions. 107. White J found that the mortgage manager was Interstar’s agent; the mortgage manager’s acts and omissions were attributed to Interstar and the loan programme lender (at [79]). His Honour’s reasoning was adopted by Rein J in Tran v. Perpetual Trustees Victoria Ltd [2012] NSWSC 1560 with respect to loan management matters undertaken by another Interstar mortgage manager (at paragraphs 42-45). 108. Conclusion on mortgage managers: - whether or not a mortgage manager is the agent of the loan programme lender of record or that lender’s agent is a question which must be determined on the facts of the particular case;
  23. 23. - it is typical for the mortgage manager’s arrangements to require the mortgage manager to perform lending administration duties (both before and after loan settlement) that would have to be performed by the lender otherwise. A mortgage manager is likely to discharge those duties under specific authority granted by the lender, observable from mortgage manager conduct or recited in loan terms and conditions. It is likely that a mortgage manager would be taken to have a fiduciary obligation to the lender to act in the lender’s best interests in performing those services. So, typically, a mortgage manager will be the agent of the lender for whom it originates and manages loans; the lender will be responsible for the mortgage manager’s conduct relating to those services. It is inevitable that a mortgage manager will be the lender’s agent where the lender has delegated an underwriting authority to the mortgage manager. The lender will not be responsible for the mortgage manager’s conduct in supplying other services (for example, property investment services) to the customer outside the scope of the authority granted by the lender; - if a mortgage manager brokers loans as well and a customer approaches the mortgage manager to broker a loan for the customer, the mortgage manager may be the customer’s agent, rather than the lender’s agent, at least for the purpose of arranging the customer’s loan, even if the mortgage manager will manage the loan; - it may be possible for a lender to reduce the risk of liability for mortgage manager conduct during loan origination by structuring origination arrangements:  in a manner that delinks origination from post-settlement management services; that is, the lender could consider applications from finance brokers only; or  with a mortgage manager much in the manner of the arrangements Tonto Home Loans had with Streetwise Loans, but the arrangements would have to allow to mortgage manager to: ^ act in its own interests; and ^ not regulate how the mortgage manager conducts its business prior to introducing a loan to the lender. Referrer as agent 109. Merely facilitating a transaction will not result in a referrer being characterised as the agent of his/her referred customer or the entity to whom the referral is made. For the referrer to be an agent, he/she would have to be vested with some authority to represent the putative principal for the purpose of soliciting business with the
  24. 24. principal (per Dal Pont at [2.23] citing NMFM Property Pty Ltd v. Citibank Ltd (No. 10) [2000] FCA 1558 at 544-562 per Lindgren J). 110. Also, some guidance can be taken from point of sale finance cases like: - Custom Credit Corporation v. Lynch [1993] 2 VR 469, in which the Court of Appeal of Victoria found that, in completing and witnessing a finance application, a merchant (Mr Cheap, a purveyor of caravans) was acting on its own behalf to advance the sale of a caravan and on the respondent’s behalf (perhaps also on its own behalf) to enable the respondent to obtain finance; and - Mercantile Credit Co. Ltd v. Hamblin [1965] 2 QB 242 at 269 per Pearson LJ: “In a typical hire-purchase transaction the dealer is a party in his own right, selling his car to the finance company, and he is acting primarily on his own behalf and not as general agent for either of the other two parties.” 111. Referrers may owe some duty akin to a fiduciary duty to a customer they refer: “Even canvassing agents usually have authority to make and receive communications on behalf of their principals and can be expected to act loyally in exercising those powers” (Bowstead at 6-037 and see Mercantile Credit Co. Ltd v. Hamblin [1965] 2 QB 242 at 269 per Pearson LJ). 112. Conclusion on referrers: - whether or not a referrer is the agent of the loan programme lender of record or that lender’s agent is a question which must be determined on the facts of the particular case; - it is more likely that a referrer will be an independent contractor acting on its own behalf, as a customer, and the entity (the Referral Recipient) to which a customer is referred, will not grant authority to the referrer to affect the customer’s or the Referral Recipient’s relations with each other. Nor would a referrer be expected to act in the best interests of the customer or a Referral Recipient; - despite that, a referrer may have a duty to the customer to convey information about a customer when the customer requests it to do so; and - also, a referrer may have contractual duties to the Referral Recipient relating to the form in which a referral is made and to avoid engaging in credit activities in the course of making a referral. DUTIES OF AGENTS 113. At common law an agent:
  25. 25. - must act in good faith towards his or her principal; not making a profit out of his or her trust; and not act for his or her personal benefit or the benefit of a third person without his principal’s informed consent (Bowstead on Agency at 6-038; Bristol and West Building Society v. Mothew [1998] 1 Ch. 1 at 18 per Millet J); - who is appointed by contract is bound to act in accordance with the terms of that contract and not exceed his authority (Bowstead on Agency at 6-002); - must exercise such skill, care and diligence in the performance of his undertaking as is usual or necessary in or for the ordinary conduct of the profession or business in which he is employed, or is reasonably necessary for the proper performance of the duties undertaken by him (Bowstead on Agency at 6-015). If the agent holds himself out as having special skills, the standard of care may be higher (Bowstead on Agency at 6-020; Duchess of Argyll v. Beuselink [1972] 2 Lloyd’s Rep. 172 at 183-4). The agent’s standard of care may be limited to using due diligence or best endeavours to achieve the result required (Bowstead on Agency at 1-016); - is bound to obey all lawful and reasonable instructions of his or her principal in relation to the manner in which the agent carries out his or her duties (Bowstead on Agency at 6-008); - should carry out his obligations with reasonable dispatch. What is reasonable will depend on all the circumstances of the case (Bowstead on Agency at 6-012; Woodhouse A.C. Israel Cocoa Ltd S.A. v. Nigerian Produce Marketing Co. [1972] AC 741 at 772). If an agent cannot, or will not, carry out his orders when instructed or within a reasonable time, he must inform the principal (Bowstead on Agency at 6-012; Youell v. Bland Welch & Co Ltd (No. 2) *1990+ 2 Lloyd’s Rep. 431at 446-7); - must keep his principal informed about matters which are of concern to the principal (Bowstead on Agency at [6-019]; Premium Real Estate Ltd v. Stevens [2009] 2 NZLR 384). The agent is under a duty to disclose to his or her principal information gained by the agent in the course of, and which is material to, a transaction in which the agent is employed on the principal’s behalf (Sargent v. ASL Developments Ltd (1974) 131 CLR 634 at 658-9 per Mason J); and - with respect to professional agents, must take reasonable care to keep himself or herself up to date with current developments in their profession (Bowstead on Agency at 6-017; Park v. Hammond (1815-16) VI Taunt. 495). 114. Compare the common law duties of an agent with an Australian Credit Licence holder’s general conduct obligations are set out in section 47 of the NCCP. Those obligations include:
  26. 26. - doing all things necessary to ensure that the credit activities authorised by the licence are engaged in efficiently, honestly and fairly; - having in place adequate arrangements to ensure that clients are not disadvantaged by any conflict of interest that may arise wholly or partly in relation to credit activities engaged in by the licensee. This obligation does not require an ACL holder to avoid conflicts of interests that might disadvantage a customer; though that event may indicate that the ACL holder has not put arrangements in place or that any arrangements are inadequate (compare with ASIC commentary at RG 205.79 ff). Assuming that the obligation implies a duty to avoid conflicts of interest that disadvantage a customer, that duty colours an agent’s common law duties to act in his or her principal’s best interests. Disclosure will not be enough to absolve an agent from the consequences of acting in conflict of interest, relating to regulated credit activities; the agent must also ensure that the conflict will not disadvantage the customer; - maintaining competence to engage in the credit activities authorised by the licence; and - having available adequate resources (including financial, technological and human resources) to engage in the credit activities authorised by the licence and to carry out supervisory arrangements. Also, credit assistance is a financial service for the purposes of the ASIC Act (see the interplay of the financial product and financial services definitions in sections 12BAA and 12BAB). The ASIC Act implies warranties into contracts for the supply of financial services that: - the services will be supplied due care and skill; and - if the consumer makes known the purposes for which he or she requires the services or the result he or she desires the services to achieve, that the services will be reasonably fit for purpose or are of such a nature and quality that might reasonably be expected to achieve that result, except if the circumstances show that the consumer does not rely , or that it is unreasonable for the consumer to rely, on the person’s skill or judgment (section 12ED(1) and (2)). REMUNERATION 115. An agent is only entitled to remuneration for his services as agent if either the express or implied terms of the agency contract, if any, so provide. 116. Where the contract contains express terms providing for remuneration to be paid, the agent cannot normally claim remuneration other than in accordance with those terms. In the absence of express terms, the right to claim any remuneration, and the amount and terms of such remuneration, may be implied. 117. Compare with section 114 NCCP with respect to quotes. If a broker wishes to charge a customer directly for credit assistance relating to regulated credit, the broker must
  27. 27. give the customer a quote setting out the nature of the credit assistance and the maximum amount the broker may charge. The quote must be in writing and must be signed by the customer (section 114(1), section 114(2)). The broker cannot charge the customer more than the maximum amount quoted (section 114(3)). TERMINATION 118. The actual authority of an agent is terminated: - by agreement between the principal and the agent; - if given for a particular transaction, by the completion of that transaction; - if given for a limited period, by the expiration of that period, or in any case after the elapsing of a period which is reasonable in all the circumstances; - by the happening of any event upon the happening of which it is agreed between the principal and the agent that the authority shall terminate or upon the happening of which the agent should reasonably infer that the principal does not or would not wish the authority to continue; - by the death, mental incapacity or (in some situations) insolvency of the principal or the agent; or where the principal or the agent is a body corporate, by its dissolution; and - by notice of revocation or renunciation given, whether or not in breach of contract, by the principal to the agent (Bowstead on Agency at 10-002). 119. Compare with the NCCP provisions relating to a licensee terminating its authorisation of a credit representative. That authorisation is taken not to have effect, and is taken to cease automatically, if the credit representative is affected by any of the events set out in section 64(5) NCCP: including not being a member of an approved EDR scheme; being subject to a banning order; or being convicted of “serious fraud” within the previous 10 years (section 64(4)). ACL HOLDER DUTIES UNDER THE NCCP 120. An Australian Credit Licence (ACL) holder is responsible for the conduct of its representatives relating to engaging in credit activities (see paragraph 11; also see ASIC commentary at RG 205.86 ff). 121. Also, the NCCP requires an ACL holder to: - do all things necessary to ensure that the credit activities authorised by the licence are engaged in efficiently, honestly and fairly (section 47(1)(a)).
  28. 28. In ASIC v. Camelot Derivatives Pty Ltd (in liquidation) [2012] FCA 414, the Federal Court (at 70 per Foster J) accepted the following submissions from ASIC relating to the requirement for an Australian Financial Services Licence holder to do all things necessary to ensure that the financial services covered by an AFSL are provided “efficiently, honestly and fairly”: (a) the words “efficiently, honestly and fairly” must be read as a compendious indication meaning a person who goes about their duties efficiently having regard to the dictates of honesty and fairness, honestly having regard to the dictates of efficiency and fairness, and fairly having regard to the dictates of efficiency and honesty: Story v National Companies and Securities Commission (1988) 13 NSWLR 661 at 672; (b) the words “efficiently, honestly and fairly” connote a requirement of competence in providing advice and in complying with relevant statutory obligations: Re Hres and Australian Securities and Investments Commission [2008] AATA 707; (2008) 105 ALD 124 at [237]. They also connote an element not just of even handedness in dealing with clients but a less readily defined concept of sound ethical values and judgment in matters relevant to a client’s affairs: Re Hres and Australian Securities and Investments Commission [2008] AATA 707; (2008) 105 ALD 124 at [237]; (c) the word “efficient” refers to a person who performs his duties efficiently, meaning the person is adequate in performance, produces the desired effect, is capable, competent and adequate: Story v National Companies and Securities Commission (1988) 13 NSWLR 661 at 672. Inefficiency may be established by demonstrating that the performance of a licensee’s functions falls short of the reasonable standard of performance by a dealer that the public is entitled to expect: Story v National Companies and Securities Commission (1988) 13 NSWLR 661 at 679; (d) it is not necessary to establish dishonesty in the criminal sense: R J Elrington Nominees Pty Ltd v Corporate Affairs Commission (SA) (1989) 1 ACSR 93 at 110. The word “honestly” may comprehend conduct which is not criminal but which is morally wrong in the commercial sense: R J Elrington Nominees Pty Ltd v Corporate Affairs Commission (SA) (1989) 1 ACSR 93 at 110; and (e) the word “honestly” when used in conjunction with the word “fairly” tends to give the flavour of a person who not only is not dishonest, but also a person who is ethically sound: Story v National Companies and Securities Commission (1988) 13 NSWLR 661 at 672;
  29. 29. - have in place adequate arrangements to ensure that the licensee’s clients are not disadvantaged by any conflict of interest that may arise wholly or partly in relation to credit activities engaged in by its representatives (section 47(1)(b)); - take reasonable steps to ensure that its representatives comply with the credit legislation (section 47(1)(e)). This requires ACL holders to monitor and supervise their representatives. The NCCP defines “credit legislation” to include the NCCP; Div 2 of Part 2 of the ASIC Act (dealing with unconscionable conduct and consumer protection relating to financial services); and any legislation that covers conduct relating to credit activities whether or not it also covers other conduct, but only insofar as it covers conduct relating to credit activities. The definition would be broad enough to cover the Privacy Act and the AML/CTF Act insofar that those obligations relate to credit activities in which a licensee’s credit representative or other agent engages; - ensure that its representatives are adequately trained, and are competent, to engage in the credit activities authorised by the licence (section 47(1)(g)); - have an internal dispute resolution procedure that: * complies with standards and requirements made or approved by ASIC in accordance with the regulations; * covers disputes in relation to the credit activities engaged in by its representatives (section 47(1)(h)); - be a member of an approved external dispute resolution (EDR) scheme (section 47(1)(i)). A licensee is taken to be a member of an approved EDR scheme if it is a member of an ASIC approved scheme that covers disputes in relation to the credit activities engaged in by the licensee or its representatives (section 11(1)); and - have adequate arrangements for compensating persons for loss or damage suffered because of a contravention of this Act by the licensee or its representatives (section 48(1)). 122. If ASIC reasonably requests assistance from a licensee in relation to whether the licensee and its representatives are complying with the credit legislation, the licensee must assist ASIC (section 51(1) NCCP). 123. An ACL holder must inform ASIC of particulars relating to the ACL holder’s credit representatives (Division 3, Part 2-3 NCCP). 124. In March 2013, ASIC issued Report 330 “Review of licensed credit assistance providers’ monitoring and supervision of credit representatives”. The report was made after ASIC reviewed 26 ACL holders that had appointed 12,545 credit representatives between them. 125. The report included recommendations relating to:
  30. 30. - a licensee’s compliance and training documents for credit representatives being tailored to reflect the nature, scale and complexity of the licensee’s business; - licensees having practices and procedures to ensure their credit representatives remain appropriately qualified on an ongoing basis; - a licensee’s access to credit representative records to ensure the licensee can meet any customer request for a copy of a preliminary assessment undertaken by the licensee’s credit representatives; - licensees being able to identify each instance of credit assistance given by their credit representatives, including where credit was not provided ultimately and particulars of the types of loans with respect to which credit representatives gave credit assistance; - licensees having appropriate practices and procedures for undertaking compliance reviews of credit representatives; - licensees testing credit representative compliance with responsible lending obligations by reference to the licensee’s policies; - licensees addressing potential systemic compliance issues by updating training materials, compliance plans and risk management systems regularly; and - licensees having processes to identify and rectify consumer detriment arising out of compliance issues with respect to credit representative conduct. Philip Haultain Special Counsel NAB Legal 25 September 2013