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Banking & Finance update October 2001

In this issue: We fill you in on the latest developments in the world of banking and finance.

Cases

Mortgages - Clog on Equity of Redemption, Uncertainty and Contracts Review Act

(Multi-Span v Portland [2001] NSWSC 696)

Second mortgage to same mortgagee no clog.

Background

Two inner city sites were purchased and were to be developed by consortiums of investors.

It was agreed a second mortgage over one property would secure loans to develop the other property.

The mortgagors claimed that they were entitled to a discharge of the first mortgage over one of the sites on payment of money owing under the first mortgage without regard to any money owing under the second mortgage.

They claimed the second mortgage was to be of no regard because, for among other reasons:

  1. the second mortgage was a fetter or clog on their equity of redemption;
  2. there was uncertainty in the second mortgage's relationship to the first mortgage; and
  3. it was unjust under the Contracts Review Act.
Decision

The Court found for the mortgagee holding that:

  1. an impermissible clog or fetter arises only if some collateral arrangement seeks to qualify the right so as to compromise the true nature of the mortgage as a security only and to contradict the fundamental proposition "once a mortgage, always a mortgage";
  2. so long as the language employed by the parties is not "so obscure and so incapable of any definite or precise meaning that the Court is unable to attribute to the parties any particular contractual intention," the contract cannot be held to be void or uncertain or meaningless. As the parties were property developers and financiers, they are taken to have higher levels of understanding of mortgage agreements than the average person; and
  3. the Contracts Review Act could not be used to review contracts (including mortgages) for people engaging "in the course of or for the purpose of a trade, business or profession". The interpretation was extended to include "investors and businessmen who regularly give personal guarantees to companies which are their corporate vehicles".

Further details can be found at http://www.austlii.edu.au/au/cases/nsw/supreme_ct/2001/696.html

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Mortgages - unconscionable conduct and undue influence 

(Commonwealth Bank of Australia v Longo [2001] VSC 191)

Reverse sexually transmitted debt. Mortgagor husband not unduly influenced by wife. Wife not unduly influenced by bank.

Background

Two mortgages were provided over an orchard. The mortgagors were long-time Italian immigrants with business experience in Australia.

The husband claimed he signed the mortgages under undue influence of his wife. The wife claimed undue influence of the bank.

The wife spoke better English than the husband and was the person who predominantly dealt with the bank. The wife further claimed she lacked literacy and fluency in spoken English.

The bank advised the couple on reducing their debt and this advice was ignored. An experienced bank officer then explained the mortgage documents to the couple. The bank officer claimed communication with the husband was satisfactory.

Decision

There was no undue influence of the bank or the wife.

The evidence established that the husband was not ignorant of relevant matters nor subject to undue influence.

The mortgagors did understand the nature and effect of the documents. Although the wife may have had a sharper appreciation, each of them understood they were giving a mortgage to secure a loan for the purposes of the land and business.

The bank did not take advantage of the defendants. In fact, the defendants stood to benefit and did benefit from the transactions in that they were enabled to commence a business, acquire assets, build a new house, and support themselves and their families.

Full details at http://www.austlii.edu.au/au/cases/vic/VSC/2001/191.html

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Banker and customer relationship and obligations of financial institutions - partnership 

(Fried v National Australia Bank Limited [2001] FCA 907)

Bank liable to partnership for unauthorised withdrawals by partner who was not signatory.

Background

A law firm trust account was established for a named beneficiary that was a client of the firm. Four partners were listed as authorised signatories of the account. A non-listed partner effected numerous withdrawals of monies and misappropriated funds. Only on one occasion did the bank actually refuse the withdrawal. The managing partner later provided written instructions adding the non-listed partner as an additional signatory to the account.

The issues before the Court were:

  • whether the fraudulent partner had authority to make the withdrawals;
  • did the bank rely on the representations of ostensible authority while they knew of the absence of actual authority; and
  • did the customer have a duty to inform the bank of unauthorised withdrawals; and
  • was the bank liable to restore the funds.
Decision

The Court found that the bank was liable for the value of the funds up to when the partner became listed with the bank. This was because:

  • the partner's actions in relation to the withdrawals were not for the purpose of the business of the partnership and s9 of the Partnership Act (Vic) 1958 cannot assist the bank in establishing he had actual authority to withdraw the money;
  • the withdrawals allowed by the bank in the absence of authority were contrary to the written agreement and in breach of the terms of the account;
  • as nobody had full knowledge of the material circumstances of the withdrawals, the customer cannot be taken to have ratified or adopted the withdrawals;
  • the managing partner had authority to deal with the bank on behalf of the firm and change the authorised signatories so fraudulent withdrawals made after the partner became a listed signatory could not be impugned.

Further details can be found at http://www.austlii.edu.au/au/cases/cth/federal_ct/2001/907.html

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Mortgages - unconscionability, Contracts Review Act, independent legal advice, special disability, economic duress 

(Karam v ANZ Banking Group Limited & 1 Ors [2001] NSWSC 709)

Prior all moneys mortgage given by guarantee, does not secure shoemakers with knowledge of the leather tongue but not the English. Subsequent confirmation with advice but under duress no help to bank.

Background

A family company borrowed a significant sum from a bank to which the family members gave personal guarantees as security secured by previously granted all moneys mortgages. The company then became insolvent and the bank tried to enforce.

An extract from the Court's judgement follows.

"For nearly thirty years, the Karams, customers of the Bank, carried on a family business starting off in partnership, making shoes. From small beginnings, as Lebanese immigrants to this country, arriving with rudimentary English and limited education, their business came to prosper, leading to its eventual incorporation..."

The family had limited English and technical understanding of finance and security. They had a clear difficulty in understanding the documents. It was not explained the mortgages secured the guarantees.

The bank recommended taking the initial documents away to read prior to signing and legal advice. The family did not do so.

Subsequent confirmations that the mortgages secured the guarantees were obtained by the bank after the family obtained legal advice, when the family was in economic difficulty. The family sold some property under pressure from the bank.

The family alleged illegitimate pressure amounting to economic duress.

Decision

The Court held, finding for the family:

  • they were under a special disability;
  • there is a clear distinction between a bank recommending that a borrower obtain independent legal advice and recommending that a borrower take documents away and read them, particularly where the borrowers would have difficulty in understanding the documents;
  • obtaining independent legal advice does not avert a finding of illegitimate pressure where the adviser was not furnished with relevant information including security documents;
  • continued effects of duress can negate the effect of subsequent legal advice;
  • the bank was liable for equitable compensation for property sales as a result of economic duress.

However, the bank did not breach any duty of care to the family.

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Misleading and deceptive conduct, negligence and accreditation certificates 

(Smith v State Bank of NSW Ltd [2001] FCA 946)

Accredit and give references at your peril. Bank liable for fraud of adviser it accredited.

Background

A couple placed $300,000 in the hands of a dishonest business consultant for investment purposes. The money was misappropriated. Unable to recover from the consultant or consultant's company, they sought relief from the bank that had issued the company with a certificate of accreditation. The certificate was granted after a very basic multiple choice test. It stated that the person concerned had been assessed by the bank as meeting its prescribed levels of competency. The person was authorised to provide "professional" advice on the 8 subjects listed in the certificate.

The couple argued there had been:

  • a breach of ss52(1) and 53(c) and (d) of the Trade Practices Act; and
  • a negligent misstatement causing pure economic loss.
Decision

Misleading or deceptive conduct (s52 of the TPA) was made out. By allowing the third party to display the certificate, the bank engaged in conduct that was likely to mislead or deceive clients of the third party as to the quality of advice that they would receive about the subjects listed in the certificate.

The word "professional" before advice suggests: requisite expertise and a measure of integrity; advice given in an objective and disinterested fashion; advice best for the recipient not the adviser. The consultant's past history was brought in to show that there was every indication that he would not provide "professional" advice contrary to the certificate.

Causation was considered and established: the certificate was a substantial factor in the decision of the applicants to accept the advice; the representation was false and actually misled and deceived the investing couple.

Section 53 was not contravened.

Negligent misstatement causing pure economic loss was made out: the bank owed to those who read its certificates a duty to take reasonable care to ensure that statements made in those certificates were accurate. It was reasonably foreseeable to someone in the bank's position that a misstatement of the kind made in the certificate of accreditation would be relied on by people in the position of the applicants, as was loss and damage.

Third party accreditation certificates should only be given by banks following inquiries that ensure the third party is competent and likely to act professionally in giving advice about the subjects to which the certificate relates.

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Voluntary administration, receivers, retention, Romalpa or reservation of title clauses 

(Barrymores Pty Ltd v Harris Scarfe Ltd (Administrators Appointed) (Receivers & Managers Appointed) & Ors [2001] WASC 210)

All moneys ROT sets in despite administration and receivership. Appointment of receiver weakens freeze on recovery and enforcement in administration.

Background

A supplier of childrenswear sought an injunction against its purchaser which was in receivership and under voluntary administration. It wanted to restrain the purchaser's receivers and managers from using or otherwise dealing with the goods. It also sought an order for delivery up of such goods, or alternatively damages for conversion. They relied on a retention or reservation of title clause (ROT clause).

The clause on the back of the supplier's invoice stated that title was to pass when the money is paid and until title passes the purchaser must not encumber or charge goods as they are a bailee only.

The purchasers relied on 3 grounds of defence.

  1. The supplier had not proved that there was stock on hand supplied by it as at the date of appointment of the receivers and that stock was supplied pursuant to specific invoices that had not been paid.
  2. The supplier had no action in conversion because it did not have an immediate right to possession of stock supplied by it by virtue of s440C of the Corporations Law. Under s440D, the supplier could not commence proceedings without leave of the court or the administrator.
  3. The ROT clause was not accepted by the purchasers.
Decision

The supplier was entitled to the unsold goods.

ROT (or Romalpa) clauses rely on 2 basic mechanisms: they seek to reserve property in goods in the seller until payment and seek expressly to create in the seller proprietary rights over assets into which the goods might be transferred or with which they might be mixed. The clause here expressly created a bailment of the goods until payment of "the full purchase price" of all goods.

Where a receiver refuses to deliver up goods the subject of a valid ROT clause, the receiver will be liable to the owner in conversion. It was held that at the time of the alleged conversion, the suppliers had neither the necessary written consent nor the leave of the court to obtain possession. Action in conversion would not therefore lie against the receivers.

Leave was required to bring action under s440D because the receivers were acting as agent of the company in relation to the goods. Leave would not often be granted under s440C and s440D if the administrator had possession and was seeking to run the business of the company. However, here the receivers were in possession for the benefit of one secured creditor. Leave would normally be granted, and should be granted in this case.

Contractual terms may be inferred from the business relationship of parties if the course of their dealings raises the reasonable expectation that terms imposed on previous occasions will form part of the contract on a subsequent occasion.

The term relied upon by the purchasers here was readily identifiable, contained in what purported to be a contractual document expressed as "Terms and Conditions", cast so as to apply to all future similar dealings and was used in respect of every supply of goods by the supplier to the purchaser. By not objecting to the condition, the purchaser must be taken to have assented to the incorporation of these terms in the contract.

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Frustration and the GST

(Westpac Banking Corporation v Bickley [2001] NSWSC 756)

GST annoying but not frustrating. Change in ability to pay not frustration of loan contract.

Background

A builder had a mortgage with a bank with his house as security. The builder failed to make payments on the loan due to a downturn in his industry. The bank sought to enforce their charge over the property.

The builder claimed the contract of mortgage was unenforceable because the introduction of the GST amounted to frustration which would void the contact. This was because:

  1. the GST so deleteriously affected the building services industry and those within it, including the bank, so as to deprive the bank of a cash flow reasonably sufficient to service the bank's business and personal obligations and commitments; and
  2. in consequence of that impact on the building services industry, the performance of the said loan agreement became, without fault on the part of the builder, impossible.

The bank argued that the introduction of GST so affected the builder's business that it made it impossible for the builder to perform his obligations under the mortgage. The bank also argued that the builder's reference to the principles of frustration was misconceived.

Decision

The introduction of the GST did not make the mortgage contract fundamentally different from that originally contemplated. The contractual obligations for repayment did not alter because of the introduction of GST. Rather the builder's ability to pay became more onerous. The doctrine of frustration clearly did not apply in these circumstances.

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Currency of judgements and relevant exchange rates 

(Siemens v Schenker (No 2) [2001] NSWSC 742)

Damages to cover foreign currency payment assessed at exchange rate at time of payment.

Background

The decision of the court had been handed down and there was an issue of what currency the judgement should be in. The contentious transactions were predominantly in German Marks but the plaintiff was an Australian company which operated in Australia and kept its books in Australian dollars.

Decision

The duty of the Court is to express judgement in the currency which best reflects the losses sustained by the relevant parties. The court ordered the costs in Marks however then converted them to Australian dollars at the exchange rate on the day of the loss incurred when payment was made for which the damages sought should cover.

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Mortgage - borrowing - unconscionable conduct - emotionally transmitted debt 

(Choules & Ors v Siglin & Anor [2001] WASC 234)

Garcia can extend to mums (and sons) as well as wives, but not in this case. Garcia only applies to sureties, not borrower.

Background

A 75 year old woman signed a mortgage over her unit as borrower. The money for the benefit of her son who signed as guarantor. The sum borrowed was $400,000. The mortgage included a guarantee. The borrower defaulted under the mortgage and a notice of demand was served. The lenders were a group of investors who contributed various sums to make up the loan.

The borrower relied on unconscionable conduct (CBA v Amadio (1983) 151 CLR 447).

She argued that if she had obtained independent and appropriate legal advice before the execution of the mortgage, she would have sought information as to the project which was involved before committing her signature and that signature would not have been given if the true facts had been known. She did not read the mortgage and had no understanding of it. She was not told that some of the funds would be used for the prepayment of interest and for mortgage fees. She was not shown any valuation of the property and had not made any enquiries as to its value.

Decision

The borrower failed - no defence of unconscionable conduct was made out. Garcia v NAB Ltd principles were applied to the borrower. The Court found the following.

  • She did not understand the purport and effect of the transaction. However, she was not a "surety". She was the borrower and therefore this principle did not apply.
  • She gained from the mortgage: a payout of an earlier mortgage and removal of that prior mortgage from her title.
  • The principles of Garcia are not restricted to a wife and husband but can apply equally to a mother, particularly, an elderly mother, and a son. However, there was no evidence to show the agent for the lenders knew, or should be taken to have known, that she was putting trust and confidence in her son that he could service and repay the loan. Two matters that would have sounded alarm bells in the mind of an experienced solicitor:
  • the borrower could not get a cheaper loan from a bank;
  • the borrower was not confident of generating enough income from the loan in the first year to pay the monthly instalments.
  • It was found that the lender did not itself take steps to explain the transaction to the borrower or find out that a stranger had explained it to her.

The 4 principles in Garcia are cumulative - all 4 have to be established to set aside the transaction. Here only (4) applied; therefore the unconscionable conduct defence was not made out.

Amadio principles were applied to the borrower. The Court asked: do these factors, old age and lack of explanation, amount to a special disability which would justify setting the mortgage aside? In the circumstances of these 2 disabilities, did the lenders, through the agent, take unconscientious advantage of her in getting her to sign the mortgage?

Amadio was distinguished and the defence not made out: she had worked in several offices doing office work, there was no suggestion of limited English or of mental impairment and her husband was a doctor in private practice. Unlike Amadio, the lender was not aware of the son's financial difficulties.

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Trade Practices Act misleading and deceptive conduct and charge out of time - receiver's duties 

(Endormer Pty Limited v Australian Guarantee Corporation Limited [2001] FCA 1208)

Lender could enforce charge registered out of time and protect its own interests.

Background

A motor vehicle dealer in liquidation alleged misleading and deceptive conduct against his financier in relation to the financier's administration of a motor vehicle bailment floor plan. The dealer also claimed loss and damage from being wound up.

The company sought to set aside an equitable charge held by the financier over the motor vehicle dealer's assets because lodgment with ASIC that was out of time (ss263 and 266 of the Corporations Law).

An additional claim for damages was made by the motor vehicle dealer against the receiver by reason of the receiver's disposition of the motor vehicle dealer's assets at the alleged inadequate sale price (s420A of the Corporations Law. The receiver did not receive anything for the goodwill).

A mortgage over one director's home was altered by changing a reference to a previous dealing. The mortgagor alleged this invalidated it.

Decision

The financier facility was approved and was consistent with the protection of its own interest, and such status quo of limited ongoing availability of funds after that prevailed because of the financier's assessment of the dealer's confined capacity to service the facility. The cause of the dealer's woes was not the result of inadequate availability of funds or because conditions of funds were too restrictive.

No action was taken by the financier adversely to the dealer which was calculated to do anything more than was reasonably required to protect the interests of the financier as creditor, while at the same time doing as least harm as was reasonable in the circumstances to the business of the dealer.

The cause of the financial failure was chronic under-capitalisation and a critical shortage of working capital. Therefore, claims against the financier as to conduct on its part by way of contravention of ss52 and 53 of the Trade Practices Act and for negligent breach of duty of care were rejected.

Section 263 only made a charge void as against the liquidator, not the company. Only the liquidator could allege it.

The inadequate sale price claims were not made out.

The alteration was not adverse to the mortgage and did not invalidate it.

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Bank officer called as witness - internal procedures and effect on unconscionability action 

(Commonwealth Bank of Australia v Sarah Marie Holdings Pty Ltd and Anor [2001] VSC 330)

A bank cannot excuse itself from the consequences of certain behaviour, simply by saying that it accorded with its own internal procedures.

Background

This was an application to call a bank officer as a witness in a unconscionable conduct action based on Garcia v National Australia Bank. The officer was attached to the bank's Compliance and Monitoring Unit. The evidence he was expected to give if called, would go to the bank's internal processes insofar as they are designed to protect the bank against behaviour which might be properly categorised as unconscionable. He was to be asked questions going to the procedures, if any, put in place by the bank at the time of the execution of the impugned mortgage.

It was alleged that the bank was required to ensure that a person who had been appointed as sole director and secretary of a third party mortgagor, should be informed by the bank of material facts such as the financial position of the borrower. Therefore, the court was to decide whether or not the officer could say anything which would assist in determining the issue of the bank's behaviour and its characterisation as being either conscionable or unconscionable.

Decision

The application was granted and the officer could be called as a witness. The bank's internal procedures were discussed.

It was difficult to see how the internal procedures of the bank can determine this issue one way or the other. It is not for an institution such as a bank, by its internal procedures, to determine whether or not unconscientious behaviour has been entered into.

The bank cannot excuse itself from the consequences of certain behaviour, simply by saying that it accorded with its own internal procedures. A court would not be bound by those internal procedures to hold that behaviour in accordance with them, was necessarily conscientious. Similarly, a court could not be bound to hold that behaviour was unconscientious simply because it did not accord with any institution's internal procedures.

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Trade Practices Act - third line forcing, exclusive dealing; Section 47 of the TPA - severability - illegality 

(SST Consulting Services Pty Limited v Riesen & anor [2001] NSWSC 804)

Guarantee rides the storm - enforceable despite illegality. Illegal third line forcing provisions in guarantee severable, but if not severable would still not invalidate guarantee.

Background

A lender alleged that the guarantors of a loan were liable for a default. The guarantors claimed they were entitled to rely on the defence that the loan agreement was an agreement to effect the illegal purpose of exclusive dealing as defined in s47(6) of the Trade Practices Act (TPA) ("third line forcing") proscribed by s47(1) of the TPA. The clauses alleged to have contravened s47 were found in a letter which contained the Heads of Agreement:

Default events which render within 7 days of demand payment of principal and interest calculated to end of term in relation to the loan include:

  • The failure to direct all pack and unpack including transport or as the lender shall advise at agreed cost in line with market conditions.
  • Direct all work of pack and unpack to the corporations that the lender shall direct. Such work shall include transport.

The lender was seeking to sever this provision and strike out the defence.

Decision

The offending portions of the Heads of Agreement were severable. It was then unnecessary to consider whether those provisions would have rendered the guarantee unenforceable. Nevertheless the court referred to Yango v First Chicago [1978] 139 CLR 410 which led to the following.

  • Section 47 of the TPA reveals a public policy that exclusive dealing of the kinds proscribed by s47 ought not to be permitted because they tend to inhibit what Parliament regards as a proper level of economic competition in the community.
  • That public policy can be enforced in very stringent ways, by the appropriate penalty provisions of the Act. Any breach of the law as to exclusive dealing can attract draconian pecuniary penalties and a wide range of injunctive and other remedial measures. There is no reason to think that those remedies, if enforced resolutely according to law, will be inadequate, at least in a case of the present kind, to protect to the full all relevant and legitimate public interests.
  • There is a difference between a case in which a lender is seeking to enforce the very provision which has been proscribed by the TPA; and the case where such a lender is seeking to have a normal and lawful recourse in order to enforce normal and lawful obligations to repay the loan of a large amount of money. To deny the lender any legal recourse at all in the latter type of case is unconscionable, and to confer upon the guarantors a benefit is unjust enrichment.

It would be unconscionable to use s47 to deny a lender seeking to have a normal and lawful recourse in order to enforce repayment of a loan.

Note: The Treasury Department has considered amendment of s47 of the TPA (see note below). The amendments include introduction of a substantial lessening of competition test for the third line forcing provisions of the TPA and a further amendment to treat third line forcing involving related companies in the same manner as third line forcing by a single corporate entity.

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Unfair preferences, insolvent trading, meaning of "insolvency", Directors' liability, "sexually transmitted" directorship 

(Southern Cross Interiors Pty Ltd and Anor v Deputy Commissioner of Taxation and Ors [2001] NSWSC 621)

"Sexually transmitted" directorship. Inexperienced director wife not liable for insolvent trading. Company which was late in paying creditors insolvent.

Background

A company's major debtor failed and an administrator was appointed and the company was wound up. The company paid its tax in payments during the 6 months before the application for winding up. Over that time, its deficiency of current debts to current liabilities grew from 4% to 140%. There were overdue invoices from creditors. Creditors were paid late. Cheques were drawn to pay creditors but not delivered as there was insufficient cash.

The directors (husband and wife) paid cash to the liquidator in exchange for a deed of release.

The company's liquidator commenced proceedings seeking an order against the DCT under s588FA, s588FE and s588FF of the Corporations Act 2001 for the recovery of money paid as an unfair preference.

The DCT raised a defence that the liquidator failed to prove that; the company was insolvent at the time of the payments within CA s95A and that the payments were insolvent transactions (s588FC) and voidable under s588FE(2).

The DCT sought a declaration that 2 directors of the company were liable to indemnify the DCT under s588FGA(2). The directors argued in response that (1) under construction of the deed of release the liquidator was prevented from bringing the preference proceedings; (2) the liquidator had made a promise to their accountant that on payment of a sum he would not do anything which might result in a further claim being made against them (estoppel argument).

The wife also claimed a defence under s588FGB(5) that for "illness or some other good reason" she did not take part in the management of the company.

Decision

The DCT's defence failed. The company was insolvent.

There is a useful summary of the cases and the law.

"Due and payable" for the purposes of s95A means "payable".

Insolvency is a question of fact to be ascertained from a consideration of the company's financial position taken as a whole. The Court must have regard to commercial realities.

Creditors will not always insist on payment strictly in accordance with their terms of trade, but this does not itself warrant a conclusion that the debts are not payable at the times contractually stipulated, in the absence of evidence to the contrary (like a course of conduct, or an agreement express or implied to the contrary). All debts were held payable at the time agreed and the company was considered insolvent at the time of the payments to the DCT so the DCT's defence failed.

It was held that nothing in the deed of release prevented the liquidator from pursuing his claim and the defence of estoppel failed.

The wife's defence under s588FGB(5) succeeded because she accepted responsibility with no understanding of what it entailed. Nothing was explained by her husband. She accepted the position because of the trust and confidence which she had in him. This was "good reason". Nothing was brought to her attention during her directorship which should have put her on inquiry as to the company's financial position or as to her responsibilities as a director.

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Media releases / websites

Prudential supervision of conglomerate groups 

(APRA Media Release, No 01.35, 10/10/01)

The Australian Prudential Regulation Authority (APRA) has released a Policy Discussion Paper finalising the framework for the prudential supervision of conglomerate groups that include an authorised deposit-taking institution (ADI).

Previous papers (issued in April 2000 and November 1999) set out details on various other aspects of APRA's proposed supervisory approach (eg, on organisational structures, board composition, risk management and group relations such as common badging, distribution of products and shared premises).

However, 2 important issues remained outstanding: intra-group exposures and capital adequacy. The development of proposals in these areas has been quite difficult with the need to balance prudential objectives with a variety of existing commercial practices.

The Policy Discussions Paper released outlines APRA's conclusions on these issues. Draft Prudential Standards will be released over the next month or two for industry comment.

ADIs will be given an adequate transitional period within which to make necessary adjustments to changes. It is envisaged that full implementation of the new requirements will not occur until 2005, so as to coincide with the introduction of the new Basel Capital Accord. (See APRA's media release of 1 June 2001 for further detail on this.)

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Survey of FX and derivatives markets 

(RBA Media Release, No 2001-20, 10/10/01)

In April 2001, the Reserve Bank conducted a survey of activity in foreign exchange and over-the-counter (OTC) derivatives markets in Australia. This was part of a global survey of 48 countries, co-ordinated by the Bank for International Settlements (BIS). Similar surveys have been conducted on a three-yearly basis since 1989.

The results for the turnover survey for Australia are summarised below and in the attached tables. Central banks from other countries participating in the survey are also releasing their results. These results are available on web sites of participating central banks, as well as via a direct link from the BIS website (www.bis.org/publ/rpfx01.htm).

Results

Foreign Exchange

Foreign exchange transactions covered in the tables on foreign exchange turnover include spot and forward foreign exchange transactions, and foreign exchange swaps. Currency options and cross-currency interest rate swaps are incorporated in the derivatives part of the survey.

These are the main findings of the foreign exchange section.

  • Foreign exchange turnover in Australia for all currencies averaged US$52 billion per day in April 2001, an increase of 11% over April 1998. Turnover in Australian dollars averaged US$27 billion per day, an increase of 14% over April 1998.
  • The AUD/USD remained the most traded currency pair in Australia, accounting for 53% of all transactions, broadly in line with results reported in 1998. The USD/JPY was the second most traded currency pair, accounting for 14% of all transactions (again, in line with 1998).
  • The rise in turnover was accounted for entirely by a large increase in swap transactions. Swaps turnover rose by over 40% between 1998 and 2001, and now accounts for 68% of all transactions. This is up sharply from just over 50% in 1998.
  • Transactions between foreign exchange dealers and their customers accounted for 11% of total turnover, not much changed from the 1998 figures. But there was a significant shift in the relative importance of trading between resident and overseas dealers.
  • The proportion of foreign exchange market transactions conducted through brokers continued to rise, up from 11% in 1998 to 12.5% in 2001. An increasing proportion of the market is being transacted through the electronic brokering services, at the expense of the traditional voice brokers.

OTC Currency and Interest Rate Derivatives

These are the main findings of the derivatives section.

  • Total derivatives turnover averaged US$12 billion per day in April 2001, more than 2½ times the turnover in the previous survey in 1998.
  • Foreign exchange derivatives accounted for 18% of the turnover. Turnover in these instruments increased by 24% between 1998 and 2001, to an average of around US$2 billion per day.
  • Turnover in interest rate derivatives contracts rose sharply, from US$3 billion per day in 1998 to US$10 billion per day in April 2001. The increased use of both forward rate agreements and swaps drove most of this rise.

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New name for Takeovers Panel 

(Takeovers Panel Press Release, No 86/2001, 11/10/01)

The Corporations and Securities Panel is now known as the Takeovers Panel. The name change took effect as part of the transitional provisions of the Financial Services Reform Act 2001.

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Employee entitlements to rank ahead of secured creditors 

(Minister for Employment, Workplace Relations and Small Business Media Release, 20/9/01)

The Corporations Act will be amended to make employee entitlements for wages, annual leave, long service leave and pay in lieu of notice, have priority over secured creditors.

The Treasurer will be introducing legislation for this purpose after consultation with the finance industry and small business.

Timing for the introduction is slated for an early sitting after the election.

For further details or to comment on the proposed legislation, contact the Minister's office on 1300 135 040.

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ASIC approves banking complaints scheme 

(ASIC Media Release, No 01/339, 21/9/01)

The Australian Securities and Investments Commission (ASIC) has announced its formal approval of the Australian Banking Industry Ombudsman Scheme (ABIO Scheme).

The ABIO Scheme, which started in May 1989, is the third dispute resolution scheme currently approved by ASIC under its Policy Statement 139. Membership of an ASIC-approved consumer complaints resolution scheme is a requirement for all finance industry participants under the new financial services reform legislation.

The approval means that ASIC has now approved the 3 largest dispute resolution schemes in the finance sector, covering banking, general insurance, life insurance, funds management and advisory services.

The ABIO Scheme will also extend its Terms of Reference to coincide with the commencement of the Financial Services Reform Act on 11 March 2002.

For further information, see the media release.

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ASX and SGX alliance 

(ASIC Media Release, No 01/367, 15/10/01)

ASIC has invited public comment on a joint proposal by Australian Stock Exchange (ASX) and Singapore Stock Exchange (SGX) to establish a market linkage service to support cross border trading between the two Exchanges.

The linkage would involve an electronic co-trading and clearing arrangement to provide brokers with a method to trade selected securities listed in the other Exchange.

Comments will be accepted up to the close of business on 26 October 2001.

Unless otherwise marked, all submissions received will be treated as public and will be provided to ASX.

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SFE to take a lead role in straight through processing and T+1 settlement 

(Sydney Futures Exchange Media Release, 25/9/01)

The Sydney Futures Exchange Corporation Limited has announced its intention to act as a 'concentrator' for both the Global Straight Through Processing Association (GSTPA) Transaction Flow Manager (TFM) service developed by the axion4 consortium, and Omgeo's Central Trade Manager (CTM) service. Omgeo is jointly owned by the Depository Trust & Clearing Corporation and Thomson Financial.

GSTPA and Omgeo have emerged as the two major global service providers facilitating STP for the various post-trade functions that take place before actual settlement of a security trade can occur. A 'concentrator' acts as a link between the individual market users and the service providers themselves.

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Protocol amending the Australia-USA Double Taxation Convention 

(Treasurer Press Release, No 074, 27/9/01)

A new protocol amending the Australia - USA Double Tax Convention has been introduced.

The Protocol reflects the close economic relations between Australia and the United States and is a major step in facilitating a competitive and modern tax treaty network for companies located in Australia. It will significantly assist trade and investment flows between the two countries.

The Protocol will remove withholding tax on certain dividends, enabling major Australian public companies to bring profits made by their US subsidiaries back to Australia without any further tax being payable. The 0% withholding tax on dividends will provide a benefit to the majority of Australian corporate groups with US operations.

Dividends derived by companies from other direct investment (where the shareholding is 10% or more) will now be subject to 5% withholding tax (compared with the current 15%). The new rules will apply to franked and unfranked dividends and achieve equal treatment between Australia and the United States.

Other changes include an updated list of taxes covered and a new provision dealing with interposed trusts in relation to permanent establishments. The Attachment provides further details of the Protocol.

The Protocol will enter into force when both countries have formally ratified it. Relevant legislation will be introduced as soon as practicable.

Copies of the Protocol are available at offices of the Australian Taxation Office (ATO) and on the ATO's internet site at: http://www.ato.gov.au under "What's New in ATOassist".

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Management of bank accounts by agencies 

(National Audit Office Press Release, 18/9/01)

The Australian National Audit Office has released Audit Report No. 10 2001-2002 Management of Bank Accounts by Agencies. The ANAO concluded that, in respect to the day-to-day operations of bank accounts, the internal control framework established by agencies was generally satisfactory.

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Australia plans stricter controls on auditors 

(The Institute of Chartered Accountants in Australia Website, by Virginia Marsh, 4/10/01)

The Australian government is considering banning auditors from joining the boards of companies they have audited within the previous 2 years as part of efforts to ensure their independence.

The move - which would bring local regulation closer to new requirements for auditors in the US - follows a string of recent high-profile corporate collapses in Australia, notably the failure of HIH, amid allegations that auditors should have been more rigorous before signing off on the companies' accounts.

Joe Hockey, Minister for Financial Services and Regulation, said the government would consider implementing the recommendations of a report that found Australia needed to take more steps to ensure that auditors were independent.

The report said that as well as the ban on auditors joining company boards for 2 years, the government should prevent close relatives of company directors from auditing that company.

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Guidelines to the National Privacy Principles released 

(Office of Federal Commissioner of Privacy Press Release, 7/9/01)

The Office of the Federal Privacy Commissioner has announced the early release of the finalised Guidelines to the National Privacy Principles. This document should assist business get up to speed to meet the legislated requirements of the National Privacy Principles as established by the Privacy Act, and help organisations provide good privacy protection for consumers. For more, see the dedicated AAR privacy site.

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ISDA introduces netalytics 

(ISDA News Release, 3/10/01)

The International Swaps and Derivatives Association (ISDA) has introduced netalytics, a new online information resource for its members covering the validity and enforceability of the early termination and close-out netting provisions of the ISDA Master Agreement in 35 jurisdictions.

Expected to be available in the fourth quarter of 2001, netalytics was developed by Allen & Overy, an international law firm, and will be offered to ISDA members on a subscription basis. The netalytics web site will contain all the netting opinions and updates commissioned by ISDA, as well as additional information, such as an overview of the legal position with respect to netting and relevant original netting legislation (if available), with an unofficial English translation.

netalytics enables members to determine at a glance whether they can enter into transactions with a counterparty organised in any of the jurisdictions covered by the ISDA Netting Opinions under the protection of the netting provisions of the Master Agreements. In addition, netalytics features cross-jurisdictional comparative analysis, which allows one or more of the key issues highlighted in the Netting Reports (such as automatic early termination) to be compared across one or more jurisdictions.

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General

ABA pledges to improve consultation 

(AFR, 4/9/01)

The Australian Bankers' Association (ABA) is to create a consultative forum as a result of the independent review of the banking code of practice.

The code, which will be launched in the first quarter of 2002, will also be extended to cover small businesses. ABA chief executive, Mr David Bell, said the aim of the forum would be to improve communication between the ABA, regulators and the community. He said banks would have to provide better information to prospective guarantors of debt.

Submissions received by the code's reviewer, Mr Richard Viney, revealed that consumers and small business were concerned about loan guarantees. While the ABA accepted many of Mr Viney's recommendations, it differed on the question of the bank becoming an adviser to a prospective guarantor.

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Viney's final report 

(AFR, 9/10/01)

A review of the Banking Code of Conduct has rejected the corporate regulator's calls for tougher penalties for banks that repeatedly breach the regime.

In the final report in his review of the code, Mr Richard Viney has proposed a system that relies on the public naming of repeat offenders as its ultimate penalty.

In the report, Mr Viney has proposed a code that applies to small business customers and not just individuals.

It also requires banks to do the following.

  • Promise they will act fairly and reasonably towards their customers.
  • Provide greater pre-contractual disclosure for intending guarantors.
  • Establish a forum to enable consultation between the ABA, consumer and community groups, and regulators.
  • Try to help customers with bank loans who encounter financial difficulties.

The recommendations were welcomed by the ABA.

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Legislation update

FSR Act

The Minister for Financial Services & Regulation, Mr Joe Hockey, has announced that the Financial Services Reform Act will start on 11 March 2002.

In a monumental signing session on 27 September, the Governor-General gave the Royal Assent to much of the key legislation, including the:

  • Financial Services Reform Act 2001 (Act No 122); and
  • Financial Services Reform (Consequential Provisions) Act 2001 (Act No 123).

For more information on the FSR legislation and regulations, and regular updates, see the dedicated AAR FSR site.

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Travelling expenses - deductibility 

(Treasurer Press Release, No 078, 8/10/01)

The Government will amend the income tax legislation concerning the deductibility of expenses incurred by taxpayers in travelling between 2 places of unrelated income earning activity.

Legislative amendment is required as a result of the High Court's decision earlier this year in Commissioner of Taxation v Payne. The Commissioner took action because the pilot's expenses were for travel between his farming property where he lived and also had a business, and the airport where he worked.

In finding that the expenses were not related to deriving income from either activity, the court upheld the Commissioner's view but on broader grounds.

The amendment is necessary to maintain deductibility for relevant expenses incurred in travelling between 2 places of unrelated income earning activity, to accord with the Commissioner's long held views. For example, the amendment will retain deductibility for expenses of travelling directly from one job to a second job, and also for expenses of travelling from the usual workplace to an alternative workplace and between the alternative workplace and home.

The amendment will take effect from the 2001-02 income year.

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US bill to expand loan competition 

(Legal Media Group Euromoney, 16/9/01)

US Republican senator Wayne Allard is preparing to introduce a bill in the US Congress at the end of September that would challenge the dominant position of the Federal National Mortgage Association (Freddie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) in the US loan market.

The bill would widen the scope of the Government National Mortgage Association (Ginnie Mae), an established securitisation program for federally insured and guaranteed mortgage loans, to include conventional mortgage loans that carry private mortgage insurance.

It would allow more competition in the market by giving mortgage insurers and lenders a new outlet to sell affordable housing loans, argue proponents of the bill. Supporters of the bill refer to the plan as "Ginnie Mae Choice".

The bill would permit Ginnie Mae to securitise $50 billion in conventional loans under a pilot scheme. Choice loans would have loan to value ratios of 80% to 97% with loans of up to $275,000 - the limit of Freddie and Fannie loans.

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Singapore's Securities and Futures Act

The Singaporean Government is finalising the proposed Securities and Futures Act, which will become the cornerstone of Singapore's capital markets architecture by covering in a single rulebook most of the activities in the market. The Act will introduce a single licensing regime covering the various activities in securities and futures, fund management and corporate finance advice.

The Monetary Authority of Singapore has recruited to the position of assistant managing director for securities and futures the current executive director of policy and market regulation at ASIC, Mr Shane Tregillis. His appointment commences in November this year.

These moves are part of the South East Asian government's drive to shore up its regulatory approach to market development and investor protection.

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Discussion paper - possible amendments to the Trade Practices Act 1974 (Cth) 

(Treasury Department Release, September 2001)

The Treasury Department has released a discussion paper outlining possible amendments to the Trade Practices Act (the Act). The amendments being considered include, of particular interest to financiers, the introduction of a substantial lessening of competition test for the third line forcing provisions contained in Part IV of the Act, and a further amendment to treat third line forcing involving related companies in the same manner as forcing by a single corporate entity.

Third line forcing is currently a "per se" offence and has no related company exception. This means it can apply in an inconvenient and unintended way eg, where a bank uses its broker subsidiary to perfect security over CHESS securities. The paper is available at http://www.treasury.gov.au/contentlist.asp?classification=14&titl=Publications

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