It has been more than a year since the reforms were introduced under the Fair Trade Act 1987 (New South Wales) (the Law) requiring suppliers (including financial services) to take reasonable steps to disclose harmful contract terms to their customers and for intermediaries to disclose the arrangement under which they act, including referral fees. The disclosure requirements imposed on intermediaries (including brokers) in particular are worth highlighting in the area of financial services.
With the disruption caused by COVID-19 related restrictions over the past year and the heightened focus on unfair contract terms laws across the financial services industry, it is now worth focusing on new on the impact of these changes (especially as they extend to providers such as wealth management managers, mortgage brokers). It is also worth considering how the broadening of the definition of ‘consumer’ under Australian consumer law (ACL) in mid-2021 has an impact on the information obligations of financial service providers under the law.
Disclosure Obligation Reforms
Two key reforms to disclosure obligations under the act came into effect on January 1, 2021. These reforms apply to businesses whose consumers are based in New South Wales, meaning that financial service providers who may be based interstate but who supply goods or services to consumers in NSW are nevertheless bound by them.
- Suppliers must inform the consumer – Section 47A
A supplier must, before supplying goods or services to a consumer, take reasonable steps to ensure that the consumer is aware of the substance and effect of any term or condition which could cause substantial harm to the interests of the consumer, including clauses which:
- exclude the supplier’s liability, or
- provide that the consumer is liable for damage to the delivered goods, or
- allow the supplier to provide data about the consumer, or data provided by the consumer, to a third party in a form which can enable the third party to identify the consumer, or
- require the consumer to pay an exit fee, lump sum payment or other similar payment.
- Intermediaries must take reasonable steps – Section 47B
An intermediary must, before acting under an arrangement, take reasonable steps to ensure that the consumer is aware of the existence of the arrangement. An intermediary is a person who, under an arrangement involving a financial incentive, negotiates contracts for the supply of goods or services as an agent or refers consumers to another supplier of goods or services. Financial service providers, wealth managers, brokers and agents are all intermediaries and must make this declaration.
Above all, there is no exemptions these disclosure obligations, and are in addition to the existing prohibitions on unfair contract terms under the ACL.
Expansion of the definition of “consumer”
In mid-2021, the definition of “consumer” under ACL was expanded in accordance with the Treasury (Consumer Acquisition – Financial Thresholds) Amendments Regulations 2020 (Cth). The effect is that a person is now considered to have acquired goods or services as a consumer if and only if:
- the amount of the goods or services does not exceed $100,000; or
- the goods or services were of a type customarily acquired for personal, domestic or domestic use or consumption; or
- the goods consisted of a vehicle or trailer acquired for use primarily in the transportation of goods on public roads.
Previously, the monetary threshold for goods or services sold was $40,000. The impact of raising the threshold to $100,000 is that now goods or services between $40,001 and $100,000 provided by financial services planners, wealth managers and brokers now fall within the scope of the ACL. Under the Act, ‘consumer’ has the same definition as ‘consumer’ under the ACL, and therefore the disclosure obligation reforms apply to the supply of goods or services in New Wales. South up to $100,000.
What can financial service providers do to comply?
Some compliance measures that could be considered, if they have not already been, include:
- Intermediaries should focus on the extent to which their disclosures make consumers aware of the existence of their agreements and whether any changes are needed.
- Review existing pro forma contract terms to see if pro forma contracts include harmful terms.
- If pro forma contracts contain harmful clauses which should be retained in the contract, ensure that these clauses are made clear to the consumer from the outset, for example on a cover in large print.
- If applicable, include a clause in pro forma contracts stating that an agreement exists under which a referral fee, commission, scouting fee, etc. will become payable to the supplier.
- Create checkboxes (or pop-ups with checkboxes for online sales) for consumers to tick to confirm they understand:
- that the contract includes harmful clauses and that they are aware of the substance of the harmful clauses and their effect (and list what these harmful clauses are next to the tick box);
- a commission or referral will be payable to the supplier.
- Create scripts for call center staff to follow regarding the disclosure of harmful terms and the existence of commissions/referral fees to be paid, and ask consumers to confirm they understand this before proceeding.
- Ask staff to keep notes of communications they have with consumers to ensure they are logging conversations by recording how and when harmful conditions were disclosed.