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17 March 2011 |
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MacGillivrays |
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Warning to Credit Licensees |
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Warning!
DO YOU RECEIVE MONIES ON BEHALF OF ANOTHER?
ASIC recently issued Information 136 (Info 136) dealing with the issue of “Complying with your Trust Account obligations as a Credit Licensee”.
When finance brokers, mortgage managers, aggregators and lenders applied for their Australian Credit Licence there was a question posed on the application as to whether or not the applicant held “Trust Monies”. We suspect that most applicants answered the question in the negative, assuming that they would never be in receipt of monies that would be characterised as “Trust Monies”.
However, Credit Assistants often receive valuation fees upfront and application fees to be passed on to lenders.
Info 136 issued by ASIC is a timely reminder for each credit licensee to examine what monies they do receive from borrowers on account of loan applications and whether those monies are in fact impressed with a Trust.
ASIC Info 136 provides a good summary of ASIC’s view of matters and expressed as follows:
“Under the National Credit Act, you must maintain a trust account if:
< you hold a credit licence that authorises you to provide a credit service; and < in the course of providing that service, you or one of your representatives receives money on behalf of another person.
Examples of receiving money on behalf of another person in the course of providing a credit service include, but are not limited to:
< collecting funds from a customer to cover valuation fees payable to the credit provider or valuation company; and < collecting application fees on behalf of the credit provider.
If the payment is made directly in favour of the other person (such as a cheque or money order) and you are only forwarding the means by which payment is being made, you are not required to maintain a trust account.
If you hold money on trust, but not in the course of providing a credit service (e.g. because of obligations under an Australian Financial Services (AFS) licence), the trust account obligations under the National Credit Act do not apply.”
Please note that the expression “person”, includes a “company”. A person can be any person and does not need to be the borrower.
Lets use valuation fees as an example and lets consider the following scenarios to illustrate whether or not monies are impressed with a trust requiring a credit licensee to open and maintain a trust account.
The examples given are in relation to a credit assistant who could be a finance broker or a mortgage manager.
Scenario 1
Borrower applies for a loan, borrower gives broker a cheque payable to a valuer for the valuation fee. The cheque is held on the broker’s file. When valuation conducted, finance broker pays borrowers cheque to finance broker.
Unlikely to be Trust Monies because the cheque was made out in favour of the valuer.
Scenario 2
Borrower applies for loan, makes application for loan: finance broker collects anticipated valuation fee: cheque made out in favour of broker and banked by broker: when valuation conducted, valuer is paid according to broker’s normal terms of trade.
The money received on account of the valuation fee will be considered Trust Monies.
Scenario 3
Borrower applies for a loan and agrees to pay valuation fee: valuation conducted and invoice received from valuer: broker pays valuation fee and then seeks reimbursement from borrower who makes payment to broker.
The payment made by the borrower is not Trust Monies because there is a present and existing legal obligation on the part of the borrower to reimburse the broker on account of valuation fees previously paid.
Scenario 4
Borrower applies for a loan: an application fee is payable to the broker which covers matters such as legal and valuation fees and is non-refundable to the borrower: borrower pays the application fee to the broker and the broker retains that amount and then in due course pays the valuer and legal fees.
These monies are not Trust Monies because they are characterised as a non-refundable application fee and belong to the broker.
Similar considerations could also apply in relation to payments received on account of mortgage insurance premiums and application fees eventually remitted to lenders. Each credit licensee needs to consider their own business.
While there have been suggestions in some quarters that monies received by lenders from borrowers on account of application fees, valuation fees and the like may also be impressed with a Trust, we are not convinced at this time by those arguments. However, the business of each credit licensee needs to be examined.
Importantly, you will find that some credit licensees also hold an AFS licence. ASIC notes that a credit licensee, who also holds an AFS licence and maintains a Trust Account under that AFS licence, cannot use the same account to keep Trust Monies received as part of their credit services business, even if the same client is involved. That means that two Trust Accounts will need to be maintained.
If a credit licensee does receive Trust Monies, then they must:
< Establish and maintain a Trust Account in accordance with the legislation; < Designate the account title as Trust Account; < Pay into the Trust Account monies received by the licensee or it’s representatives; < Deal with the monies in the account in a certain way; < Lodge a periodic Trust Account Statement with ASIC; and < Have the Trust Account audited and lodge the auditors report with ASIC.
It’s important that each credit licensee examine the flow of monies they receive from borrowers to determine whether or not they hold monies which are required to be characterised and dealt with as Trust Monies. Valuation fees is the most obvious example and problem area, but all other monies received need to be considered and reviewed. No doubt, if ASIC conduct an on-site inspection of a credit licensees business, that will be one of the matters examined by ASIC as part of any enquiry or inspection.
By Richard Williams, Partner, Banking Services
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