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Law of Financial Institutions and Securities Essay Example

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  • Level:
    Undergraduate
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Law of Financial Institutions and Securities

LAW OF FINANCIAL INSTITUTIONS AND SECURITIES

The product is income protection insurance which is an as per 764A of Corporations Act 2001 is a contract of insurance that is not a life policy or a sinking fund policy with meaning of the Life Insurance Act. In this case, the insurance product is a consumer credit insurance product.

Under RG 234, advertisement for financial products as well as advice service should give clear, correct and balanced messages. In this case, the details regarding the terms of offer, customers were not eligible to the gift card unless they maintained their policy for a first year and paid all their premiums on time and these conditions were not adequately prominent to make sure that customers would not be misled. This is because the offer had unexpected conditions. RG234.48 stipulates that in case an advertisement requires warning or qualifications, they are supposed to be consistent with other advertisement content and this includes any headline claims. The qualifications and warnings should also have adequate prominence to efficiently communicate the key message to a reasonable audience member on seeing the advertisement1.

Normally, information in the advertisement has a less likelihood of being noticed and understood if it is in fine print, only shown on TV or computer screen briefly or if the advertisement is located where there is distracting content. In this case, the terms of offer of the advertisement regarding those who were eligible to the gift were placed in fine print and hence the target audience had a less likelihood of noticing the terms2.

The product is a car insurance product which is an as per 764A(1)(d) of Corporations Act 2001 is a contract of insurance that is not a life policy or a sinking fund policy with meaning of the Life Insurance Act. In this case, the insurance product is a motor vehicle insurance product.

In this case, the advertisement for Woolworths Car Insurance alleged averagely customers saved $240 and the claim was founded on a sample of 109 customers who bought comprehensive car insurance from them previously and thus Woolworths compared the new premium with the premiums of the former policy. RG 234.72 stipulates that during comparison of products in advertisements, the products are supposed to have comparable aspects to ensure that the comparison is relevant and does not mislead the customers. In addition, comparisons are supposed to be made regarding returns if the information used is current, complete and precise as well. In this case, the information was not current because Woolworths was comparing premiums of two different times3. In addition, as per RG 234.71, the advertisement was supposed to include a warning as a comparison rate to assist customers in being aware that the warning information is important for them take into consideration prior to making a decision regarding the product4.

Moreover, according to RG 234.73, where just a single specific aspect of a product is highlighted, a comparison might be misleading in case other key aspects are ignored. In this case, the comparison of Woolworth’s previous and current policy ignored other aspects when comparing and hence the comparison should not have been done without considering all aspects of both policies5.

. 7. In this case, the advertisement claimed that customers were in a position to borrow from $3,000′ with an interest rate ‘from 13.99% per annum but the fine print revealed that only loans over $20,000 were entitled for an interest rate starting from 13.99% p.a. Normally, information in the advertisement has a lower possibility of being noticed and understood if it is in fine print6The first product is loan which according to 889E of the Corporations Act 2001 is money borrowed from a corporate that is a member of SEGC and the purpose of the money is to meet a payment due out of the NGF as per SEGC. The other product is interest which is a security and according to 761A of Corporations Act 2001 security is an interest in a security covered by a share in a body of a debenture of a body

RG234.48 stipulates that warning or qualifications should be consistent with other advertisement content and this includes any headline claims. The qualifications and warnings should also have adequate prominence to efficiently communicate the key message to a reasonable audience member on seeing the advertisement and this is not possible in fine print. Additionally, according to RG 234.83, the impression the products creates in regards to rate should truthfully show the real rating. The rating utilized with an advertisement is supposed to be appropriately elucidated within the advertisement. More so, advertisements should also state that ratings are just one aspect considered when deciding to make an investment for a financial product or take up a credit product8.

. 10. In this case, the advertisement featured an outstanding headline claiming offering a 5.7% interest rate that were followed with smaller statements that consisted of a 0.8% bonus but the advertisement left out critical information and did not provide conditions allied to the 0.8% bonus and this was likely to mislead customers. This is in contrary to provisions of ASIC because as per RG 234.33, a financial product/credit/product advertisement should provide a balanced message regarding the returns’ aspects, benefits and risks allied to the product and an advertisement ought not to exaggerate the possible benefits or create impractical expectations for the customers by offering undue prominence to the benefits in comparison to the risks9The financial product includes interest. Interest is a security and according to 761A of Corporations Act 2001 security implies an interest in a security covered by a share in a body of a debenture of a body

The financial product is the MasterCard and the financial service is making non-cash payment. According to Corporations Act 2001, this financial service makes payment possible without physical delivery of Australian/foreign currency and for MasterCard the service entails making payment using a purchased payment facility within the meaning of the Payment Systems (Regulation) Act 1998. Under RG 234.86, where making advertisements for awards, it is important to identify the award grantor clearly and also explain the award clearly. In addition, the advertisement should explain clearly if an award is granted by a related promoter11. In this case, Bankwest alleged in a print advert that the Breeze MasterCard was the cheapest credit card within Australia yet this was misleading because it was just the cheapest card when compared to other banks but other financial institutions such as credit unions offered cheaper credit cards. Accordingly, Bankwest should have explained this clearly to avoid confusing the customers because the advertisement made customers assume that their credit card was the cheapest yet it was not the cheapest and therefore customers were misled.

Practices Banks should follow and avoid in Advertisements

Banks should provide balanced information in their advertisements for the customers to adequately understand the nature of the product/service being advertised. Balance is important because it ensures that the overall effect of an advertisement has realistic expectation regarding the product being advertised. In addition, banks should ensure that advertisements for their financial products provide a balanced message regarding the returns aspects, benefits as well as risks allied to the financial products. The potential benefits should not be overstated in the advertisements12.

When the financial institutions have advertisements stating that a certain benefit has a likelihood of having a certain benefit, the advertisement should encompass a statement regarding the risk allied to obtaining that benefit/product. If suitable the advertisement should encompass a clear explanation regarding the presumptions made in prediction of the benefit13. More importantly, a financial institution should ensure that claims on aspects of a product/service in advertisements should only be made in case customers can reasonably anticipate those aspects to be availed to them. Lastly, banks should ensure that the advertisements provides clear information regarding the risks associated with the products and services and should not be hidden or hard for the customers to understand.14

The legal position of Amy, Hoang, and PC in relation to various issues arising from the facts

A mistaken payment is a payment that a financial institution makes on customer’s instruction through online banking facility and it results to the payment being made to an incorrect account, probably due to a customer entering a wrong BSB or wrong account details or because the customer had been provided with wrong BSB or wrong account details15. In this case, Hoang made a mistaken payment after entering the either incorrect BSB or incorrect account details that led to Hoang paying the $150 to the wrong recipient instead of his mobile phone provider. A mistaken payment demonstrates an unjust enrichment where the unjust factor is the mistake that negatives the voluntariness of the payor. The enrichment is the money which is an incontrovertible benefit while the enrichment is at the plaintiff’s expense within its subtractive sense16.

In Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349 case, it was held that if the payor can demonstrate that a mistake, factual or legal, resulted to the mistaken payment, the payor has a prima facie right to get back the money from the recipient. Normally, money is deemed to be paid thorough a mistake of fact when the payment is made on assumption that a specific fact is factual, which would warrant the recipient to the money, but which is actually incorrect, and the payment would not have been made if the payer was aware that the fact was untrue. This therefore indicates that Hoang made a mistake of fact when he made the payment17. Therefore, three questions need to be answered regarding Hoang’s mistaken payment: the first one is whether the mistake occurred, if the mistake caused the payment and whether the payee had the right to get the money that was paid. Determining if the mistake took place offers the cause of action for the money to be recovered had and received by the payee and hence Hoang need to prove that he made the payment under a mistake and cannot maintain an action for money had and received on this ground18. Establishing if the mistake caused the mistake is necessary since it will not be enough for Hoang to just prove that he made the mistake and therefore should prove that if he was aware of the mistake when he made it, he would not have made the payment. The last step is establishing if the recipient of the money had the right to receive the money that was paid and this is necessary since the recipient of the money cannot be deemed to have unjustly enriched in case he had the right to get the money paid to him by Hoang. Basically, Hoang may have been mistaken when making the payment to the recipient but his mistake will not offer a ground for the recovery of money in case the recipient of the money can demonstrate that he had the right to receive the money on some other ground19.

The Australian Securities and Investments Commission (ASIC), provides mechanisms to financial institutions to help their customers in recovering alleged mistaken payments from the account of unintended recipients where the mechanisms depend on the timeframes and conditions of every case. A customer can make a mistaken payment request to a financial institution requesting the payment to be returned from the recipient’s financial institution up to seven months after the date of the supposed mistaken payment made by the customer and various requirements are applicable depending on the time the payor takes to request for the payment’s return20. In case a customer reports a mistaken payment in 10 business days of the supposed mistaken payment and that the customer’s financial institution requests the recipient’s financial institution, the financial institution of the recipient is supposed to evaluate if the payment was actually a mistaken payment and if it is confirmed that it was a mistaken payment, the financial institution should return the money to the account of the customer normally within 5 business days21. In this case, Hoang reported the mistaken payment to his financial institution (Global Bank) in 48 hours and hence the Global Bank was supposed to assist him to get his money back by requesting the recipient’s financial institution to assess the mistaken payment and establish if indeed the payment was mistaken and if confirmed it was mistaken, the recipient’s financial institution should return the money to Hoang’s account. Global bank is therefore supposed to use all reasonable means to assist Hoang in recovering his money and because in this case Global Bank is not willing to assist him recover his money; Hoang can be able to take legal action to recover the money22.

The second issue is the decision of Global Bank to refuse to extend overdraft to PC’s business and the bank’s intended action to exercise its right of combination. Revised Code of Banking Practice and Consumer Credit Code (UCCC).72 obligate banks to attempt to assist customers overcome their financial hardships. Clause 25.2 stipulates that a financial institution is supposed to try to assist customers in their credit hardships with any credit facility they have with the financial institution for instance a bank can work with its customers in developing a repayment plan. These are contractual duties between a financial institution and its customers and a dispute regarding a violation of these obligations can be forwarded to the pertinent external scheme, tribunal or court. Therefore, Global Bank has a contractual obligation to PC business, Hoang and Amy to assist them in the financial difficulties they are going through23.

Clause 2.2 obligates financial institutions to act rationally and fairly and also ethically and therefore a financial institution should give a genuine consideration to its clients, provide reasonable reasons for rejecting their proposals, consider options, communicate fairly and reasonably to the customers regarding the issue and not to comment or conclude enforcement action prior to communication of a response to any reasonable proposal by the customer concerning the overdraft or loan24.

In this case, Global bank has an obligation of assisting its customers namely; Amy, Hong and PC business to overcome their financial difficulties. However, because PC business has not been doing well, Global bank has the right to refuse to extend overdraft to PC business but does not have the right to demand its customers to pay the overdraft within 2 days prior to which it will start exercising its right of combination before discussing with them a proposal to try settling the overdraft of $18,000. Rather than Global bank demanding them to pay the overdraft within two days, the bank should come up with a proposal together with them and discuss a repayment plan or other arrangement on how the overdraft should be paid because financial institutions are obligated to help their customers when they are having financial difficulties. Therefore, in this case Global bank has not complied with its obligations and hence Amy, Hoang and PC bank can take a legal action against Global bank to prevent the bank from exercising its right of combination25.

The legal process to follow to resolve any disputes with Global Bank, and possible legal outcomes

Dispute resolution under the Code of Banking Practice

.27. In addition, under Clause 35 of the Code of Banking Practice, after financial institutions are informed of the dispute, they should carry out an investigation and notify the customer regarding their decision in 21 days or if necessary notify the customer that more time is needed to finish an investigation according to clause 35.5 of the Code. Normally, an investigation should be finished in 45 days, unless extraordinary situations arise as stipulated under clause 35.4 of the Code26The Global Bank’s internal resolution process can be used in resolving the disputes. Clause 35.1 of the Code of Banking Practice obligates financial institutions to have an internal dispute process which customers can use whenever they have an issue with a financial institution. The internal dispute resolution process should be free, fulfill the ASIC standards and offer written reasons for the decision by the financial institution to the customer

Dispute resolution under the Corporations Act

.28Financial institutions such as Global bank under Section 911A of the Corporations Act are supposed to have a dispute resolution process for customers as per Section 912A of the Corporations. According to the provisions of the Act, the bank resolution process should have an internal as well as an external dispute process to resolve their disputes where the internal resolution process should comply with the ASIC standards. Likewise, the external dispute resolution body that financial institutions choose should have an approval from ASIC. In this regard, Amy, Hoang and PS business can use Global Bank’s internal or external resolution process to resolve their disputes

Australia Financial Ombudsman Service (FOS)

If Amy, Hoang and PS business are not able to resolve the disputes with the Global Bank, they can seek Financial Services Ombudsman as an external resolution body to resolve their disputes with Global Bank. FOS is can offer them a conciliation procedure with the bank or investigate the disputes as well. Normally, decisions made by FOS on any dispute are binding to financial institutions and hence any decision that FOS can make regarding their disputes will be binding to them and Global Bank as well29.

Possible Legal Outcomes

One possible legal outcome is that Global Bank will be instructed to assist Hoang in getting his money back by requesting the financial institution of the recipient of the money Hoang sent, to investigate the mistaken payment and determine if actually the payment was mistaken and if it is confirmed that it was indeed a mistaken payment, the recipient’s financial institution should return the money in Hoang’s bank account. This is because Hoang reported the mistaken payment with 48 hours and according to ASIC, if a customer reports a mistaken payment within 10 business days, the customer’s financial institution is supposed to request the recipient’s financial institution to investigate the mistaken payment and if confirmed, the recipient’s financial institution should return the money to the account of the customer normally within 5 business days30.

Another possible legal outcome is that Global Bank’s planned exercising right of combination will be stopped and the bank will be instructed to help Amy, Hong and PC business to overcome their financial difficult by discussing a repayment plan or another arrangement on how they should pay the $18,000, overdraft. This is because financial institutions are obligated to assist their customers to overcome their financial difficulties. In Commercial Bank of Australia Ltd v. Amadio (1983) 151 CLR 447 case, an elderly couple guaranteed their son’s business debts to the commercial bank and during the mortgage execution, the bank manager knew the son’s uncertain financial status and did not explain the issue to the elderly couple. When the business of the son collapsed, the couple set aside the contract because of the bank’s unconscionable dealing. It was held that the bank was unconscientious31. Similarly, in this case Global Bank was unconscientious in planning to exercise its right of combination and only giving PC business just two days to pay their overdraft. This is because Global Bank knew the financial status of the PC bank and should have instead helped PC business in overcoming their financial difficulties.

Bibliography

ASIC, 2013, Licensing: Financial product advisers, Conduct and disclosure, Australia: ASIC.

ASIC, 2013, Doing financial services business in Australia, Australia: ASIC.

ASIC, 2012, Regulatory Guide 234: Advertising financial products and services(including credit): Good practice guidance, Australia: ASIC.

Burton, A, 2010, Consumer Credit Disputes, Lawyers Practice Manual Victoria, Victoria: Springvale Legal Service, Thompson Lawbook Co.

Lanyon E, 2008, Consumer Credit Law, Sydney: Butterworths.

Tyree A, 2005, Banking Law in Australia, Sydney: Butterworth.

O’Donovan J, 2000, Lender Liability, LBC Information Services, Austria: Thompson Lawbook Co.

Phillips J, 2000, The Modern Contract of Guarantee, Melbourne: LBC Information Services.

Kingsley, D, 2001, Banking & Lending Practice, New Jersey: AIBF and Lawbook Co.

Shanahan K, 1997, Australian Dictionary of Banking and Finance, Sydney: LBC Information Services.

Wentworth, E, 2010, Essential Banking Law and Practice, Queensland: Collins.

Weaver, C, 2010, The Law Relating to Banker & Customer in Australia, Austria: Thompson Lawbook Co.

Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349

Commercial Bank of Australia Ltd v. Amadio (1983) 151 CLR 447

Code of Banking Practice

Corporations Act 2001

Regulatory Guide 234

1Regulatory Guide 234

2Regulatory Guide 234

3ASIC, 2012, Regulatory Guide 234: Advertising financial products and services (including credit): Good practice guidance, Australia: ASIC.

4Corporations Act 2001

5Corporations Act 2001

6Corporations Act 2001

7Regulatory Guide 234

8Corporations Act 2001

9ASIC, 2012, Regulatory Guide 234: Advertising financial products and services(including credit): Good practice guidance, Australia: ASIC.

10Regulatory Guide 234

11Regulatory Guide 234

12ASIC, 2013, Licensing: Financial product advisers, Conduct and disclosure, Australia: ASIC.

13ASIC, 2013, Doing financial services business in Australia, Australia: ASIC.

14ASIC, 2013, Licensing: Financial product advisers, Conduct and disclosure, Australia: ASIC.

15Burton, A, 2010, Consumer Credit Disputes, Lawyers Practice Manual Victoria, Victoria: Springvale Legal Service, Thompson Lawbook Co.

16O’Donovan J, 2000, Lender Liability, LBC Information Services, Austria: Thompson Lawbook Co.

17Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349

18Phillips J, 2000, The Modern Contract of Guarantee, Melbourne: LBC Information Services.

19Tyree A, 2005, Banking Law in Australia, Sydney: Butterworth.

20ASIC, 2012, Regulatory Guide 234: Advertising financial products and services(including credit): Good practice guidance, Australia: ASIC.

21Phillips J, 2000, The Modern Contract of Guarantee, Melbourne: LBC Information Services.

22Weaver, C, 2010, The Law Relating to Banker & Customer in Australia, Austria: Thompson Lawbook Co.

23Tyree A, 2005, Banking Law in Australia, Sydney: Butterworth.

24Tyree A, 2005, Banking Law in Australia, Sydney: Butterworth.

25Codes of Banking Practice

26ASIC, 2013, Licensing: Financial product advisers, Conduct and disclosure, Australia: ASIC.

27Burton, A, 2010, Consumer Credit Disputes, Lawyers Practice Manual Victoria, Victoria: Springvale Legal Service, Thompson Lawbook Co.

28Corporations Act 2001

29Burton, A, 2010, Consumer Credit Disputes, Lawyers Practice Manual Victoria, Victoria: Springvale Legal Service, Thompson Lawbook Co.

30Burton, A, 2010, Consumer Credit Disputes, Lawyers Practice Manual Victoria, Victoria: Springvale Legal Service, Thompson Lawbook Co.

31Commercial Bank of Australia Ltd v. Amadio (1983) 151 CLR 447