Disclosure obligations for financial service providers in NSW: One-year on from reforms to the Fair Trading Act 1987 (NSW)

It has been over a year since reforms were introduced under the Fair Trading Act 1987 (NSW) (the Act) requiring suppliers (including of financial services) to take reasonable steps to disclose to their customers prejudicial contract terms and for intermediaries to disclose the arrangement under which they are acting, including referral commissions. The disclosure requirements imposed on intermediaries (including brokers) in particular is worth highlighting in the financial services space.

With the disruption caused by COVID-19 restrictions in the past year and an increased focus on unfair contract terms laws across the financial services industry, it’s useful now to focus again on the impact of these changes (particularly given that they extend to providers like wealth managers, mortgage brokers). It is also helpful to reflect on how the broadening of the definition of ‘consumer’ under Australian Consumer Law (ACL) in mid-2021 impacts on the disclosure obligations of financial service providers under the Act.

Reforms to disclosure obligations

There were two key reforms to disclosure obligations under the Act that came into effect on 1 January 2021. These reforms apply to businesses with consumers based in NSW, meaning that financial service providers who may be based interstate but are suppling goods or services to consumers in NSW are nevertheless bound by them.

• Suppliers must make the consumer aware – Section 47A

A supplier must, before supplying a consumer with goods or services, take reasonable steps to ensure the consumer is aware of the substance and effect of any term or condition that may substantially prejudice the interests of the consumer, including terms that:

1. 1. exclude the liability of the supplier, or
   2. provide that the consumer is liable for damage to goods that are delivered, or
   3. permit the supplier to provide data about the consumer, or data provided by the consumer, to a third party in a form that may enable the third party to identify the consumer, or
   4. require the consumer to pay an exit fee, a balloon 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 the consumer is aware of the existence of the arrangement. An intermediary is a person who, under an arrangement providing for a financial incentive, arranges 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 need to make this disclosure.

Importantly, there are no exemptions to these disclosure obligations, and are in addition to the existing prohibitions on unfair contract terms under ACL.

Broadening of the definition of ‘consumer’

In mid-2021, the definition of ‘consumer’ under ACL was expanded pursuant to the Treasury Laws Amendment (Acquisition as Consumer – Financial Thresholds) Regulations 2020 (Cth). The effect is that now a person is taken to have acquired goods or services as a consumer if, and only if:

1. the amount of the goods or services does not exceed $100,000; or
2. the goods or services were of a kind ordinarily acquired for personal, domestic or household use or consumption; or
3. the goods consisted of a vehicle or trailer acquired for use principally in the transport of goods on public roads.

Previously, the monetary threshold for goods or services sold was $40,000. The impact of the increase in the threshold to $100,000 is that now goods or services between $40,001-$100,000 being supplied by financial service 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 so the reforms to disclosure obligations apply to the supply of goods or services in NSW up to $100,000.

What can financial service providers be doing to comply?

Some compliance measures that could be considered, if they have not already, include:

• Intermediaries should focus on the extent to which their disclosures are making consumers aware of the existence of their arrangements and consider whether any changes are required.
• Review existing pro forma contract terms to check if pro forma contracts include any prejudicial terms.
• If any pro forma contracts contain prejudicial terms that are to be retained in the contract, ensure these terms are made clearly to the consumer upfront, for instance on a front cover in large font.
• Where appropriate include a term in pro forma contracts setting out that an arrangement exists whereby a referral fee, commission, spotter’s fee etc. will become payable to the supplier.
• Create check boxes (or pop up boxes with check boxes for online sales) for consumers to tick confirming they understand:
  • that the contract includes prejudicial terms and that they are aware of the substance of the prejudicial terms and effect (and list what those prejudicial terms are beside the check box);
  • a commission or referral will be payable to the supplier.
• Create scripts for call centre staff to follow in relation to disclosing prejudicial terms and the existence of commission/referral fees payable, and asking consumers to confirm they understand this before proceeding further.
• Have staff keep file notes of communications they have with consumers to ensure they are note taking conversations recording how and when the prejudicial terms were disclosed.

If you have any queries or would like further information please contact Edward Martin or Trish Kastanias.

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Authored by:

Edward Martin, Partner
Trish Kastanias, Senior Associate