Australian consumer law :Accounting and Finance Assignment

Written activity

1. Relevant Legislation, Regulations and Codes of Practice.

The relevant Legislations, Regulations and Codes of Practice that influences the Broking Industry are as follows:

• Consumer affairs act: This legislation includes areas like Credit Act 1984, Consumer Credit (Victoria) Act 1995 and Credit (Administration) Act 1984 and is administered by the ministry of consumer affairs.
• Australian Consumer Law: This law is concerned with protecting the consumers and ensuring fair trading practices and is administered by ACCC. This law includes safety and enforcement system, rules and redress options for consumers.
• Consumer credit code: This code is administered by ASIC and it is applied to credit contracts where the credit is given to fulfil domestic needs or for the renovation of property.
• Contract law: This is regulated by Common Law and contains various rules and regulations that are important for implementation of certain promises.
• Corporations act: This is considered as the Commonwealth legislation that effectively regulates Australian companies in terms of operations, formation, takeovers, raising of funds and officers duties.
• Disclosure of any conflicts of interest: Proper disclosure of conflicting interests should be made for both legal and ethical reasons. Every organization is required to formulate and implement policies that will help in effective disclosure.
• Full disclosure of remuneration and other related fees and matters that may affect broker recommendations: FSP involved in any fee arrangement is required to fulfil the obligations contained in the statement of Fee Disclosure.
• Guarantees of confidentiality: This is concerned with providing guarantee to the client that the information provided by them in the broking relationship will not be given to any other party except in case, where the information is required in the establishment of broking options and sale of products (Mentor education n.d).
• Industry codes of conduct and practice: Several codes of practice followed in finance industry consist of General Insurance Code of Practice, Code of Banking Practice, Customer Owned Banking Code of Practice and Insurance Brokers Code of Practice.
• Insurance act: Insurance industry is regulated by Insurance Act 1973 and Insurance Contract Act, 1984 (Mentor education n.d.). This Act is concerned with maintenance of minimum level of capital and solvency and ensures the protection of interest of consumers and insurance providers.
• Preparation in utmost good faith: This belongs to Insurance Contracts Act 1984 and consists of obligation for both insurer and the consumer to behave and act with utmost good faith.
• Competition and Consumer Act 2010: Trade practice Act 1974 is replaced by this act and is concerned with improving the welfare of people in Australia by promoting competition and fair trading practices and protection of consumers interest.

2. Key Products Available In the Broking Industry.

Major products that are available in broking industry are as follows:

• Direct investments: It is defined as the investment made by the individual to acquire lasting ownership and control in the business organization operating in the economy. This organization is different from the investors company. The main purpose of investor of doing the investment in other company is to have an effective pat in the management of the company (Mentor education n.d.). Thus is concerned with holding equity of 10% or more in the foreign enterprise.
• Insurance products: Insurance products are concerned with guaranteeing the individual whose life has been insured to pay the amount on his claims. This guarantee is given by the insurer to the person or corporation who is insured. The buyer of insurance is required to make timely payments of premium amount to achieve the desired benefits of insurance.
• Loan products: It is considered important for the broker to have complete knowledge and understanding of the loan products offered in the broking industry. The structure of the loan is significantly affected by the interest charged on loan, fees paid by the client, tax amount, flexibility level and so on. There are different types of loan structures that are available in the broking industry. For instance,
• Principal and interest loan: The common kind of loan structure is principal and interest loan where the repayment of principal amount and interest is to be made over the maturity time of the loan.
• Interest only loan: The other loan structure is interest only loan where the borrower is required to make the payments of interest only and do not have to make the repayment of principal amount. Interest only loan are beneficial for the individuals and firms that treat interest charges as an expense.
• Balloon loan: Other type of loan is concerned with balloon loan where the client has to make the repayment of the part of the loan on a specified date and then can make final payment of the remaining part of the loan.
• Reverse Mortgage: Reverse Mortgage is another type of loan beneficial for retired people as they grab access to the equity in their own homes to finance their needs and requirements of retirement lifestyle.
• Interim loan: It is defined as a short term loan which is taken out by business firms to buy a new property to expand its business operations. These are in the form of interest only loans.
• Inventory and equipment loan: In this type of loan, the business enterprise make purchases of inventory or equipment and that inventory or equipment is held as security while acquiring a loan.
• Guarantee loan: This kind of loan is secured from the end of the third party. Third party can be a parent of spouse in case of individual or the investor in case the loan is acquired by the firm. In this, the third party guarantees the payment of the loan amount in case the client becomes insolvent.

3. Organisational Guidelines and Procedures on Assessing Impact of Risks and Documenting Broking Recommendations.

The common organisational guidelines and procedures that are to be applied for assessing the impact of risks and for documenting broking recommendations are concerned with completion of risk profile of the client.

Risk Profiling: Different clients have different risk level that they can take and undertake necessary precautions. The maximum level of investment risk that can be taken by the client must be ascertained after thorough discussion and communication with the client. There are 3 factors that are considered in risk profiling:

• Required level of risk: This factor is concerned with the level of returns that the client desires from doing the investment in order to accomplish goals and objectives.
• Risk capacity: This factor is concerned with the financial risk level that the client can afford to take (Mentor education n.d.).
• Risk tolerance: This is concerned with risk level that is within the comfort zone of the client.

Few organizations have installed software that will help in determining the risk profile of different clients. However, this task is best done by communicating directly with the client and achieving better understanding of their objectives and goals, resolving their queries and offering them with a wide range of product options. Organization policies and other procedures must contain detailed process that is to be followed while conducting risk profiling of the clients (Mentor education n.d.). There is no mention of mandated method to conduct risk profiling; however, a reasonable demonstration must be made by the Financial Service Providers (FSP) while giving their advice to the clients.

There are several consequences attached with inadequate risk profiling of the clients like inappropriate investments undertaken by the clients to achieve their goals, ineffective investment that is not appropriate as per the financial situation of the clients, breach of duty by FSP as have not considered reasonable basis while giving advice to the clients.

If the sufficient information about the client has not been gathered to finish the risk profile properly, there are several other methods that can be used to acquire required information. These are as follows:

• Risk profile questionnaires: Under this, a series of questions are formulated to observe the reaction of the client towards various financial outcomes. Each question is marked and summed to assess the risk profile of client ranging from conservation to aggressive risk profiles (Mentor education n.d.).
• Life cycle approach: This method is based on clients life stage and it assumes the focus of younger clients on accumulation of wealth and of older clients on the regular income. Younger clients generally have aggressive profiles as compared to older clients.
• Risk tolerance line methods: This method is concerned with asking the client to mark a point on the scale from 1 to 10 ranging from low risk tolerance to high risk tolerance level.
• Sensitivity analysis approach: This method helps in analysing the effect of various outcomes on the clients financial capacity like how their financial capacity will be influenced if they undergo any significant capital loss.

4. Relevant Risk Issues.

Clients are subjected to numerous types of risks depending on their situations and requirements. Risk issues have the potential to complicate the procedure of offering right product or service. The different type of risk issues are as follows:

1. Borrowing risk and gearing: This is concerned with the amount borrowed to invest in specific product or service. To undertake investment with the borrowed amount is very risky. The returns are good in case the markets are rising; however, there would be huge amount of loss in case the market drops. This type of investment is for the investors who have god experience. It is only considered suitable if the client has sufficient amount of income from various sources like secured amount of salary or if they come under the higher income tax bracket or in case the client have thorough understanding of risks involved in volatile and unpredictable investments.
2. Economic risk: It is defined as the probability concerned with dynamics in the macroeconomic conditions such as government policies and regulations, exchange rates, political stability, etc. all have influence on the investment done by the public or business firms. This risk is considered relevant while making decisions regarding international or domestic investment. For example- if the client wants to invest in any domestic company whose operations are highly dependent on imports then the returns will be influenced by the changes in exchange rates and if the client wants to invest overseas then he has to face economic risk of that foreign country (Mentor education n.d.).
3. Specific product risk: Different products are subject to different degree of risk. For instance, there is risk involved in interest only loan that the asset value may decrease over interest only period whereas there is no reduction in the principal amount of loan (Mentor education n.d.). Therefore, all the risks concerned with specific product must be discussed with the client in order to take effective decisions regarding investment.
4. Institutional risk: These risks are concerned with the incorrect assumptions made with regard to the institutional performance. It is essential for the client to be aware regarding the risks associated with ineffective institutional performance.
5. Risk factors and return expectations of the client: Clients expect some specific amount of return from the investment. They must be provided with the information regarding the real rate of returns on their investment. Both worst and best scenarios must be presented to the client to make informed decisions regarding the investment. Those scenarios must be based on real situations and the clients must develop effective understanding with regard to risks (Mentor education n.d.).
6. Volatility of income and capital: Volatility is concerned with the amount of risk or uncertainty with regard to significant changes in the value of the security. The securitys price can change dramatically in a short span of time in case of higher volatility whereas in low volatile investments, the value of the security changes over a long period of time. The concept of volatility must be briefly explained by the advisor to the client.

Task 2 - Third Party Report

1. List of complex needs:

• Commercial loan: Commercial loans are needed by the entrepreneurs to finance their capital needs and operational costs. These are also used for business expansion.
• Chattel leases: Chattel leases are moveable property used as security. They are used to buy fixed assets.
• Native title rights: Aboriginal and Torres Strait Islander people have on their land and water is native title rights (Mentor education d.). Those who receive income from such rights that are not taxed and conceding of such rights are taken no notice off.

2. Different types of risk issues faced by the client are as follows:

• Asset allocation and investment spread: Limiting the investment to one or two stocks could be unsafe. To mitigate this, client must branch out his investments in cash bonds, shares and property, called asset allocation and investment spread.
• Economic risk: It is defined as the probability concerned with dynamics in the macroeconomic conditions such as government policies and regulations, exchange rates, political stability, etc. all have influence on the investment done by the public or business firms. This risk is considered relevant while making decisions regarding international or domestic investment (Mentor education n.d.). For example- if the client wants to invest in any domestic company whose operations are highly dependent on imports then the returns will be influenced by the changes in exchange rates and if the client wants to invest overseas then he has to face economic risk of that foreign country.

3. Risk profiling considers three factors-

• Risk required- related to return on investment that a client seeks for
• Risk Capacity- realistic financial risk a client can take
• Risk tolerance- risk within clients comfort zone

There are software to ascertain a clients risk profile however it is best suited if done while talking to the client about it. There is no such process of it, though Financial Service Providers (FSP) can do that. Financial Ombudsman Service shall look over FSP for addressing inherent and specific limitations in risk profiling tool or try to understand clients needs etc.

5. Consequences for wrong loan structures are missing opportunities for tax deduction, lack of flexibility reduces the retrievation of money etc. therefore adequate loan should be chosen. Types are-

• Principal and interest loans- these are the most common type principal and interest are paid at the cessation of maturity period. .
• Balloon loan is when the client will repay part of it at a certain time and the rest on the last day as agreed beforehand.

Some methods to look into which is the adequate option for the loan-

• Internet- Mozo is a site that compares the variety of loans (Mentor education n.d.)
• Colleagues- taking opinions from them is also helpful
• Networking- by gathering information from your network may help in gathering information.

Principal and interest loan seems to be adequate for the client.

6. Economic factors-

• Industry based- if the business is in a growing industry then the consequences shall be different as compared to one who is tanking.
• Local economy- a business supplying to local traders of a growing economy shall be at a more privileged position.

Legislation- one must be aware of the legislations that he be accustomed too after entering that industry. Like health and safety legislation, consumer credit (Victoria) act, 1995 etc.

Taxation- under taxation laws, a client can achieve tax benefits. Like claimable benefits, reporting requirements etc.

Insurance- types are

• Insurance on the assets like cars, properties, etc. is called asset insurance (Garcia et al. 2018).
• If a client cannot give 20% mortgage on a loan, then mortgage insurance is done.

Trading with local traders shall benefit the business of the client and working in accordance with the health and safety acts shall give him protection from legal implications.

7. To review the information, one must prepare a model, analyze and prioritize the options. A model should have-

• Fees- both setup and the ongoing fees.
• Features- include repayment, redrawing options short and long term loans etc.
• Charges- such as mortgage insurance, charges on restructure of loan etc.
• Risks- interests rate risks, having funds to meet balloon payments etc.

8. Personal loans, cross-securitization loans have been rejected. Personal loans are high interests loans using personal assets as security. Cross securitization is where one keeps more than one asset as security (Mentor education n.d.). Such types of loans are not useable for our client because he is not in a position to put his own assets as security. He has limited amount of it and therefore seeking for loan to raise fund for his business. For another type, he is more of calculative person and a safe-sided type. He does not want to put all his eggs in one basket. Therefore is does not want to put two assets as security for one mortgage.

9. Legislations, regulatory and ethical legislations are-

• Consumer affairs act- administered by minister of consumer affairs.
• Contract law- regulated by common law divided into categories like contractual information, avoidance of it, terminations of contracts etc.
• Corporations act, 2001- regulated the companies with formation, operations, takeovers etc.

To fall under the contracts law, the client must cater to the requirements of it like a contract should be valid, there must be offer and acceptance between the parties, valid consideration backed by capacity to contract (Mentor education n.d.).

10. Broking options like-

• Direct investments- this gives leverage to the investor by acquiring 10% or more in that firm. It is mostly perpetual in nature.
• Loan products- this includes different types of loans.
• Sources of funding- like sale of assets, cash savings, etc.

For explanatory materials, one must see that the brochures include the real rate of interests, the benefits that he shall get if done direct investments, websites like Mozo which states the types of loans beneficial of the customers, product information sheets that tell about the products and their benefits, etc.

11. At times, for better advice a client has to be referred to accountants, financial advisors or lawyers. Accountants guides on the best available options that could benefit at tax deductions. For long term investments to be made, financial advisors words works as gospel (Mentor education n.d.). For vetting the legal binding and legal enforceability, contracts are scrutinized by the lawyers that impart their knowledge on it.

List of referrals-

Corporations act, 2001

Australian consumer law

Chartered accountants

12. For Asset Allocation and Investment Spread which means investment in one area, the alleviation of it requires investments in a mix of assets and in cash bonds, shares and properties.

Borrowing risk means when a person borrows to invest in particular goods. So this risk can be reduced only if the investor is experienced; or if prone to loss, the client has enough money from other sources to compensate that; or the client comes under higher income tax bracket where he can have tax benefits etc

Anticipated fees include both setup and ongoing fees that cannot be anticipated but are going to occur in near future. Like salary of employees.

Anticipated charges are like more of penalties that is imposed for any wrong act. Like late payment charge, restructure of loan, etc.

13. According to FSP, an internal dispute resolution mechanism should be there to redress the issues (Mentor education n.d.). The complaint procedure should have-

• Details of the complaint officer like contact, address etc.
• Verbal or written complaints, both are acceptable
• Administered by trained people

As per ASIC regulatory guide 165 external dispute resolution (EDR) is the most simple way. It assists the organization and the client through negotiations and conciliation and makes decisions that are beneficial and accepted to both of the parties. Some of them are financial ombudsman service (FOS), superannuation complaints tribunal.

• Clients name- Mr. XXX
• His needs- Mr. XXX needs information related to how to invest in a broking industry. This means right from choosing the adequate industry till payment of his services he took in getting that information, is the whole procedure.
• The various recommendations made are appropriate for him because he is new to this industry and this kind of business. Therefore the most simple and risk freeways are adequate for him
• Risks could include in opting for a wrong loan structure, being unaware of the frauds that take place, failure to understand the legal policies etc. For these, a thorough knowledge, trust-worthy colleagues, experienced accountants, financers and lawyers have to be there.
• A specialist advice to Mr. XXX is that he should find a person who is already an investor in this industry. He can guide him better than anybody else.

15. Governed by section 28 of The Humans Right Act, 2019, Aboriginal and Torres Strait Islander have their own cultural rights. [1] There are number of effects of native title rights in the financial and broking industry for those paying and receiving those benefits (Price and Rogers 2019).

16. For borrowing gearing, it is risky because once an amount is borrowed that has to be paid with interest. If not paid, then penalty is imposed.

For economic risks, internationally is very vulnerable since one cannot know what changes done shall be in his favor or not.

17. Risk profiling is the process where one scrutinizes the optimum level suitable for the client (Mentor education n.d.). So in judging that the broker can see what is the risk, how is going to affect the client and what implications shall the client face if he accepts it.

For documenting the broking recommendations, one could see that whether direct investments is suitable, which is the best way to raise the funds, what can the possible rate of interests, the time period etc.

Research task and written/oral questions

1. Commercial loans are mostly used either to raise capital or cater to operational costs.

Chattel lease are moveable properties used as securities and used to buy fixed assets usually (Mentor education n.d.).

Native title rights are those which Aboriginal and Torres Strait Islanders have.

The client can raise capital through such kinds of loans and lease.

2. Asset allocation risk, borrowing risk, economic risks, these are which each investor faces at some point of time. For that the broker must have the knowledge of the industry and the uncertainties that his client might face.

For risk tolerance, the age, health and ability to recover govern the risk tolerance of the client.

3. Every client has his own tolerance power and perhaps gutsy to take it. With communication, a client can have an expert opinion and distinguish between a calculative risk and just a risk (Mentor education n.d.). Calculative risk is what when odds are against the person but a small probability could give him triumphs.

4. Impact of risks can be measured by three things-

• The risk required- like return on investments
• The risk capacity- level of risk a client can take
• The risk tolerance- level of risk a client can tolerate (Brayman et al. 2017).

Others include FSP, FOS, risk profile questionnaires, risk tolerance line methods, etc.

5. Risk profile questionnaires are those that a client gives him feedback to the different financial outcomes. It is measured from conservative to aggressive profile.

Risk tolerance line methods are those ranging on a scale of five or ten, the client rate it from low-risk tolerance to high-risk tolerance.

6. A clients current situation and his loan structure determine the opportunities and constraints for him. Like if a client is old, then he shall be having good financial stability (opportunity) but looking to retire in future (constraint). Similarly, if a current income is consistent then it has high growth opportunities, if not then less.

• Internet Research the websites that give detailed information about the loans and also compare it on Mozo.
• Colleagues- Discussion with colleagues can be informative.
• Networking- maintaining communication with other people in your industry. One can share information regarding new or non-standard products.

8. Economic factors-

• Industry based- a growing industry businesss consequences shall be different as compared to one which is tanking.
• Legislation- Like health and safety legislation, one must be aware off before entering any industry.
• Taxation- under taxation laws, a client can achieve tax benefits.
• Insurance- like asset insurance of cars, machinery etc.

9. 4 things-

• Fees- like monthly statement fees, administration fees etc.
• Features- like repayment options, short and long term loans etc
• Charges- like late payment charge, on restructure of loans etc
• Risk- like increase in interest rates, changes in governmental regulations, etc.

10. After the outcome of modeling, one can scrutinize , on the basis of above what stands appropriate for the client like interest paid, maturity of loan, tax benefits etc. After this, broker needs to prioritize as per clients needs all of the above outcomes and reject the inappropriate ones.

11. Legislations- consumer affairs act, Australian consumer law, consumer credit code, contract law, corporations act, insurance act, state and territory legislation, competition and consumer act, 2010 etc.

Regulatory- disclosure of any conflict of interests, guarantees of confidentiality,

Ethical- industry code of conduct and practice, integrity checks, preparation in utmost faith

12. One has to relate the product options or check the information in conformity with the legislations and regulations and check that whether that protects his interests or not (Mentor education n.d.). Each preliminary option has to be put complimentary to clients needs. This shall result in option best of all.

13. Explanatory material like brochures, product information sheets and website addresses etc. help the client in reviewing the best broking options. The documentation of such materials should be adequate as per the policy of the company and should consist of appropriate disclaimers, preventing legal implications.

14. Accountant- more accustomed to the changes in the taxation policies and experienced in forecasting the implications of any changes made.

Financial advisors- help in determining the product that has the potential to meet the clients future goals. They are more experienced in guiding investments, etc.

Lawyers- Before surrendering to the law, one must know what the law is. He who understands the legal language knows which move could be used to bait his client in contract.

• Identifying the risk- this means what kind of risk the client is open too. Example, asset allocation, borrowing, economic risks, etc.
• Analyzing the risks- to analyze on the basis of priority of probability, consequence and frequency (Mentor education n.d.).
• Managing the risk- providing solution of the risks through insurance, diversification of loans, setting process of purchases, etc.

16. To gain their trusts and make them believe in your work, this phase is very important. Making the client believe that the charges and the fees are levied as the standard policies make them more loyal towards the service provider. Therefore this should be communicated explicitly.

17. Internal dispute resolution should include the contact details of the complaint officer, guarantee of fast and fair process, etc. (OBrien and Seneviratne 2017).

External dispute resolution should include the steps to be taken by the client if unhappy with response of the complaint, not satisfied with the result of internal dispute resolution, delay in response of the complaint by the organization, etc.

18. Information like clients details, risk associated with the recommendations, a summary of clients goals, any specialist advice, fees and charges, etc. must be included in the documented broking information and loan structures while presenting various products to the clients.