Topic 1 Credit Management

7/25/2019 Topic 1 Credit Management

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1

http://www.kaplanprofessional.edu.au/

https://www.kaplearn.edu.au/course/view.php?id=20&section=1

https://www.kaplearn.edu.au/course/view.php?id=20&section=2



1Developing

professional knowledgeand self-management skills

Overview 1.1

Learning outcomes ................................................................. 1.1

1 Overview of the lending industry 1.2

What are credit and lending?................................................... 1.2

The lending market in Australia ............................................... 1.2

Participants in the lending industry .......................................... 1.3

Satisfactory and unsatisfactory borrowers and borrowingpurposes ............................................................................... 1.9

2 Lenders 1.12

Depositor-based organisations .............................................. 1.12

Intermediary organisations .................................................... 1.15

Intermediary organisations — related parties ......................... 1.17

Associated professionals ...................................................... 1.18

Relationships between parties .............................................. 1.20

3 The regulatory framework 1.22

Consumer credit regulation prior to July 2010 ........................ 1.22

The new credit regime .......................................................... 1.22

The National Credit Code (NCC) ............................................. 1.24

Responsible lending principles under the National Consumer

Credit Protection Act ............................................................. 1.33

Regulation of credit and regulatory bodies ............................. 1.37

Ethics and codes of conduct ................................................. 1.42

Duty of care ......................................................................... 1.44



4

The lending process 1.46

Fundamentals of lending ....................................................... 1.46

The loan application process................................................. 1.50

Who is the borrower?............................................................ 1.58

Obligations as a lender ......................................................... 1.63

5 Lending products 1.68

Consumer lending products .................................................. 1.68

Comparison rates ................................................................. 1.82

Business and commercial lending products ........................... 1.84

Loan packaging and choice ................................................... 1.95

Insurance products ............................................................... 1.96

6 Self-management and professional development 1.99

Setting life and work goals .................................................... 1.99

Managing yourself and your time ......................................... 1.103

Improving your performance ................................................ 1.106

7 Effective time management 1.108

Benefits of effective time management ................................ 1.108

Self-imposed time pressures ............................................... 1.110

Time management theory.................................................... 1.111

Time management matrix.................................................... 1.112

8 Stress in the workplace 1.119

What are the effects of stress? ........................................... 1.119

What situations can cause stress? ...................................... 1.120

Controlling stress ............................................................... 1.120

Employee assistance programs ........................................... 1.121

9

Professional development 1.122

Other development options ................................................. 1.122

10

Personal development action plan 1.124

Appendix 1: Personal development action plan 1.126



Topic 1: Developing self-management skills and professional knowledge 1.1

© Kaplan Vocational Education Pty Ltd. All rights reserved.

Overview

As a professional in the financial services industry, you need to have relevantindustry knowledge and to be self-directed in terms of your career and

professional development.

The first part of the topic provides underpinning knowledge of the industry,including relevant legislation, guidelines, generic product knowledge and anoverview of the credit lending and loan evaluation process. You will apply thisknowledge in subsequent topics of the subject.

The remainder of this topic provides you with useful information and tools to helpyou plan your personal and professional future. It will assist you to formulategoals, to more effectively manage your time and to plan your own on-goingdevelopment in the industry.

The information provided in this topic and the others in the subject are generic innature and should be adapted to meet the needs and context of yourorganisation and your job role, which should be expressed in your organisation’spolicies, procedures and guidelines.

Learning outcomes

On completing this topic, you should be able to:

• demonstrate knowledge of industry products, legislation, regulation and codesof practice relevant to your work in the industry

• manage your own professional development in accordance with organisationaland industry requirements

• manage and plan your work, taking account of constraints and availableresources.



1.2 Certificate IV in Credit Management

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1 Overview of the lending industry

The lending market can be divided into two main sectors. The first is theconsumer lending market, which mainly comprises individuals borrowing money

to fund purchases of houses, cars and consumer goods.

The second sector is the commercial lending market. The borrowers in thismarket range from individuals and small businesses to international corporations.Commercial lending has a much wider range of purposes.

What are credit and lending?

Credit

Credit refers to a person or entity providing another person or entity with financialresources that do not need to be repaid immediately. Instead, an arrangement ismade to return the financial resource at a later time, either in one transaction or overa number of transactions. The provision of the financial resource creates a ‘debt’.

The ‘financial resource’ does not necessarily have to be money. The debt can becreated through the provision of goods and services (e.g. hire purchase andlease arrangements) of non-monetary financial resources (e.g. guarantees andunderwriting commitments).

The credit worthiness (or reputation) of the person or entity taking on the debt issignificant and may impact on the terms and conditions that apply to the credit

offered, the amount of return (or interest) the credit provider expects for thedegree of risk involved, and, indeed, whether credit is available at all to thatparticular person or entity.

Lending

Lending, in the context of this course, refers to making a wide range of securedand unsecured loans available to consumers and other borrowers for a range ofpurposes. Consumer lending can include the provision of funds for the purchaseof cars, boats, household items, travel and even medical and dental expenses.

Mortgage lending usually refers to the provision of funds for homes andother real estate property.

Forms of lending and loan products are discussed in more detail later in this topic.

The lending market in Australia

Prior to discussing the participants within the lending industry, it is important togain an understanding of the size of the Australian lending market.

The Australian Bureau of Statistics (ABS) prepares a number of estimates of thesize and nature of the financial services sector in Australia. Table 1 provides a

summary and break down of borrowing in Australia as at November 2010 with acomparison to the previous month.





Table 1 Australian borrowings October/November 2010

Oct 2010$m

Nov 2010$m

Oct 2010 toNov 2010 % change

Trend estimates

Housing finance for owner occupation 14,047 14,202 1.1

Personal finance 7,626 7,683 0.7

Commercial finance 29,134 29,443 1.1

Lease finance 412 416 1.1

Seasonally adjusted estimates

Housing finance for owner occupation 14,063 14,465 2.9

Personal finance 7,601 7,772 2.2

Commercial finance 29,840 30,144 1.0

Lease finance 418 420 0.5

Source: ABS, Catalogue No: 5671.0 — Lending Finance, Australia.

As Table 1 indicates, lending for owner occupied housing forms a significantproportion of all lending and the majority of retail lending in Australia.

Participants in the lending industry

The participants in the lending industry can be divided into three major

categories:

• borrowers

• lenders

• associated professionals and related parties.

Figure 1 provides an overview of the types of participants in the lendingenvironment. An explanation of the role of each of the participants in thesecategories follows.




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Figure 1 Participants in the lending industr y

Participants in the lending industry

Sole traders

Companies

Partnerships

Individuals

Trusts

Credit reporting

agencies

Mortgage

insurers

Trustees

Solicitors and

conveyancers Valuers

Government

departments

and agencies

Ass oc iated

professionals

Pool managers

Pool insurers

Mortgage managers

Funds providers

Related parties

Types of lenders

Investment

banks

Mortgage

brokers

Venture

capitalists

Insurance

companies

Intermediary

organisations

Money market

corporations

Superannuation

companies

Mortgage

originators

Investors

Building

societiesFriendly

societies

Credit

unions

Cooperativehousing

societies

Banks

Foreign banks

Pastoralfinance

companiesFinance

companies

Depositor-based

organisations

Borrowers





Borrowers and the types of borrowing entities (debtors)

Figure 2 Borrowers

Sole traders

Companies

Partnerships

Individuals

Trusts

Borrowers

The borrowers (debtors) are the lenders’ clients and are central to any loantransaction. Without the borrower there is no reason for the lending process toexist.

Borrowers incur rights and obligations under the terms of a loan agreement thatentitle them to receive the benefit of a financial resource, whilst obliging them tomeet the terms of repayment.

Individual (consumer) borrowers

Individuals borrow funds for many different reasons including: financing thepurchase of a home; for personal purposes; for financing investments or whenreleasing the equity in existing property for other purposes.

Individual borrowers must be of legal age, that is, 18 years or older, in order to

enter into a contract and must meet other criteria as set out by the lender.

Business (commercial) borrowers

Businesses borrow funds for:

• financing the cash flow requirements of the business

• business expansion

• acquisition of other businesses, and

•

purchase of plant and equipment, machinery and commercial property.The commercial lending field has a much larger range of borrowers.

There are four fundamental ways in which a business can be structured:

• sole trader

• partnership

• company, or

• trust.

Note, that a trust structure can also be used for purposes other than establishinga business. For example, family trusts, superannuation trusts and trusts tooperate not-for-profit organisations.




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Following is a brief summary of each of these business structures.

Sole trader (Proprietorship)

A sole trader is a business owned and operated by an individual who is the soleowner (proprietor) of that business. In other words, the business and thebusiness operator are a single entity. This is the simplest type of business to startand is the least regulated form of organisation. Depending on state requirements,a sole trader can start a business by simply registering a business name, or eventrade under their own name.

A sole trader keeps all the profits and is also responsible for all business relateddebt. This means that creditors can look beyond business assets, to theproprietor’s personal assets for payment which could result in the family homebeing put at risk.

The amount of equity that can be raised is limited to the proprietor’s personalwealth. This limitation often means that the business has difficulty exploiting newopportunities because of insufficient capital.

Partnerships

A partnership is similar to a proprietorship discussed above, except that there aretwo or more owners (partners). All the partners share in profits or losses, and allhave unlimited liability for the partnership debts. The way that a partnership’sprofits and losses are divided is usually described in a partnership agreement.This agreement can be an informal, even oral agreement or a formal writtendocument.

The authority and responsibilities of each partner are similar to those of aproprietorship.

Companies

A company is a legal ‘entity’, separate and distinct from its owners, which hasmany of the rights, duties, and privileges of a ‘natural person’ under the law.Companies can borrow money and enter into contracts, can sue and be sued,and can own property. A company can even be a partner in a partnership, and acompany can own shares in another company.

Establishing a company is somewhat more complicated than other types ofbusiness structures. Forming a company involves preparing a companyconstitution, which must contain a number of things, including the company’sname, the amount of share capital, a statement that the liability of members islimited and the names of the subscribers.

The constitution sets out rules describing how the company regulates its ownexistence — for example, how directors are elected. This may be a simpledocument for a small company or a very complex document when a largecompany is involved.





There are two basic company structures: private and public. They aredistinguishable by their names. A private company must have ‘proprietary limited’(abbreviated to Pty Ltd) in its company name while a public company uses‘limited’ (Ltd). Generally, anyone can buy shares in a public company through the

stock exchange, while private companies are just that — private, with a limitednumber of shareholders. Private companies are often family owned.

Trusts

A trust is an entity recognised by law as an obligation the trustee to hold property(real estate, shares, cash, etc.) for the benefit of others (beneficiaries).The trustee may be one or more people or a company.

The trustee is appointed in accordance with the trust deed and must operate thetrust in accordance with the deed. A trustee’s duties include:

• acting in the best interests of the beneficiaries

• keeping proper accounts

• exercising reasonable skill and care in carrying out the duties of a trustee.

A trustee cannot delegate responsibility and must not derive a profit from carryingout their duties.

The rules that govern what the trustee can do are contained in the trust deed.Once the trust has been established, if the deed permits it, it can establish andoperate a business. The trust can earn income and, at the end of the financialyear, may distribute the profits of the trust to the beneficiaries. The beneficiaries

individually pay tax on the distributed income.

Other terminology

Two terms common to borrowing and lending are mortgagors and guarantors.

Mortgagors

These are the people who provide security for the loan in the form of real estate.The mortgagor is usually also the borrower, although this is not always the caseas another party can provide the security for a loan. For example, parents

sometimes provide additional security so that their son or daughter can purchasea home. In other cases, people have used their own home as security forbusiness loans for themselves or their relatives.

If the mortgagor and borrower are not the same, the security is called a‘third party’ security.

Under bankruptcy law, people who have been declared bankrupt cannot be aborrower, nor can they provide security to cover a loan. This is because, whilebankrupt, the person cannot legally deal with property. Any property gainedwithin the bankruptcy period would normally go towards paying the outstandingdebt of the bankrupt.




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Guarantors

A guarantee is taken from a guarantor so that the lender has recourse to theguarantor and their assets if the borrower defaults under the loan agreement.

In effect, the guarantee is a promise to pay the debts of a borrower if thatborrower’s payments fall into arrears or they default. Policies regardingguarantees vary from lender to lender. However, a lender’s right to recover adebt from a guarantor under the guarantee is usually clear, and not restricted byany obligation to recover the debt from the borrower.

A guarantee may not be restricted to any particular asset provided as securityunder the credit document. It is therefore more encompassing than a mortgageand may extend to cover all of the assets of the guarantor.

Appl y your knowledge 1: Borrowers and types of borrowing enti ties

If you have not already done so, spend some time thinking about yourIdentify the most appropriate structure or entity in relation to the differentscenarios detailed below.

a. A business has 15 owners. Each owner is liable for the debts incurredby the business. The business distributes all profits to the owners.Income earned by the owners is taxed as personal income.

b. This business has many owners who, in nearly all cases, are notinvolved in the operations of the business.

c. An entity that manages assets on behalf of others and must distribute allprofits to those others.

d. This business has one owner who keeps all profits, while havingunlimited liability for business debts.

e. The management and shareholders for this business are the same.However, the business is a separate legal entity.

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Check your answers to this activity against the Suggested Answers at theend of the topic.

Apply your knowledge 2: Borrowers and types of borrowing enti ties

Read the scenario below and identify a suitable business structure to meetJack and Jill’s needs. Highlight the advantages and disadvantages of thestructure identified.

Jack and Jill want to establish a new nursery business attached to theirhome property. There is plenty of equity in their home to support their

borrowing requirements. It is estimated that the business will have thepotential to earn profits in excess of $300,000 p.a. Their key desires are:

• equal ownership in the business with equal decision-making abilities forthe business

• in the event of the death of either Jack or Jill, their business share isautomatically transferred to the surviving party.


Satisfactory and unsatisfactory borrowers and borrowingpurposes

Lenders have a legal obligation to ensure borrowers and borrowing purposes arelawful, and that their policies demonstrate responsible lending practices.

Due to these obligations, the purpose of all funding applications should be

investigated and recorded in interview notes, where applicable, and on the loanapplication.

Enter text here

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The following criteria normally apply to applications:

• clear ability to be able to service (repay) the loan

• adequate security to protect the lender in the event of default

• appropriate and lawful purpose of the loan

• acceptable business/industry risk outlook

• legal borrowing entity

• satisfactory credit history.

Examples of satisfactory and unsatisfactory borrowers and borrowing purposesare set out in Table 2 and Table 3.

Table 2 Examples of satisfactory and unsatisfactory borrowers

Satisfactory borrowers Unsatisfactory borrowers

An individual or joint borrowers aged 18 years orover

Individuals younger than 18 years

A partnership Applicants with an unsatisfactory credit history(e.g. discharged bankrupts). However, it should benoted that this is an underwriting standard, whichwill differ from lender to lender

A company Individuals currently serving prison sentences

Incorporated and unincorporated associations Incorporated and unincorporated bodies declaredinsolvent

A cooperative association Any entity to whom the lender has previously lentand has incurred a loss which remainsoutstanding

The trustees of superannuation funds areacceptable borrowers under certain conditions. Itis beyond the scope of this subject to detail theconditions; however your organisation’sprocedures and guidelines will guide you in thisregard.

Non-residents

A body corporate





Table 3 Examples of satisfactory and unsatisfactory borro wing purposes

Satisfactory borrowing purposes Unsatisfactory borrowing purposes

Purchasing residential/commercial/industrialproperty for owner occupation or investment

Using funds for facilities that are to be used forillegal business

Purchasing or expansion of an establishedbusiness

Using funds for facilities that are to be used forpurposes incompatible with the lender’s standingin the community

Using funds to establish new business ventures

Financing capital purchases such as plant orequipment

Using funds for construction and development

Financing personal purchases, such as a car,boat, household and personal items, etc.

Financing lifestyle purchases, such as travel andholidays




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2 Lenders

Traditionally, the term ‘lender’ was used to describe the entity which held fundsavailable for lending, either in their own right or on behalf of others

(e.g. depositors).

With the development of non-banking intermediaries and techniques such asdebt securitisation, the term ‘lender’ may be applied to any credit provider,regardless of where the funds come from.

The vast bulk of the money available for lending comes from banks, buildingsocieties and credit unions. Each of these types of organisations can be broadlyclassified as being Authorised Deposit-taking Institutions (ADI). These and otherfunding organisations are discussed in the following sections.

Depositor-based organisationsFigure 3 Depositor-based organisations

Building

societiesFriendly

societies

Credit

unions

Cooperative

housing

societies

Banks

Foreign banks

Pastoral

finance

companiesFinance

companies

Depositor-based

organisations

Depositor-based (or deposit-taking) organisations have substantial cash reservesbuilt up through depositors or clients. The organisation draws on these reservesto fund their lending. Depositor-based institutions are categorised by the Australian Bureau of Statistics as banks or other depository corporations. Thesetypes of lenders are detailed in the following section.

Banks

Banks are the largest depositor-based financial institutions in Australia. All areauthorised to operate by the Banking Act 1959 (Cth).

Four major banks (Australia and New Zealand Banking Group, CommonwealthBank of Australia, National Australia Bank, and Westpac Banking Corporation)account for over half the total assets of all banks. These four banks (the ‘BigFour’) provide widespread banking services and an extensive retail branchnetwork throughout Australia.

The Big Four banks have billions of dollars on deposit that they can potentiallylend to borrowers.

The remaining banks provide similar banking services through smaller branch

networks. These networks are sometimes located in particular regions or areestablished to service particular states.





Banks lend to many different types of borrowers, large and small, for manydifferent purposes.

Building societies

Building societies have existed in Australia since the 1840s. They wereestablished primarily to lend funds for housing. The profits they make on housingloans are distributed back to their members through higher deposit interest ratesand lower loan charges.

Some building societies are cooperatively owned while others are owned byshareholders. The number of building societies in Australia has decreasedbecause of the number of such organisations that have become banksthemselves through mergers and acquisitions. St George Bank (previouslySt George Building Society) in New South Wales is an example. Some examplesof building societies operating in the current market are:

• Newcastle Permanent

• Australian Unity

• IMB (Illawarra Mutual Building Society).

Credit unions

Credit unions originated as financial cooperatives for members who shared acommon bond, such as employment or community interests. Like banks andbuilding societies, they also offer savings accounts and loans to members. Some

of the larger credit unions in Australia are:

• Credit Union Australia

• Maroondah Credit Union

• Police & Nurses Credit Society

• Railways Credit Union

• Telstra Credit Union

• The Credit Union of Canberra.

Friendly societies

Friendly societies have been operating in Australia since 1830. These societiesgrew from the notion of mutual self-help. Originally, members pooled their cashreserves to assist each other in times of illness, death and financial difficulty.Later this was extended to providing funds for home building and purchase.

Friendly societies operate on a not-for-profit basis. Any profit made isredistributed to the members by way of higher interest rates paid on deposits, orlower interest rates charged on loans. Some examples of these are:

•

Australian Friendly Society Ltd

• CUA Friendly Society Ltd




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• Newcastle Friendly Society Limited

• Manchester Unity Australia Ltd.

Cooperative housing societies

Cooperative housing societies have been in existence in Australia for over 60years. They provide housing loans to people on welfare and low-to-middleincomes, who do not qualify for loans with the other lending institutions. Fundsare provided either directly from the government or from banks whose loansunder this system are backed by government guarantees. Information aboutcooperative housing societies can be located via the Fair Trading website of eachstate and territory.

Finance companies

Finance companies make loans to individuals and businesses. Unlike banks,they are not authorised to receive deposits but instead obtain financing frombanks, other financial institutions, and investors (e.g. debenture holders).Finance companies include:

• GE Commercial Finance

• Esanda Finance.

Foreign banks

With the deregulation of the banking industry in the 1980s, a number of foreignbanks were granted a full banking licence. Foreign banks provide products andservices that compare and compete with Australian banks. Some of theseorganisations are:

• Bank of China Australia

• HSBC Australia

• Arab Bank Australia.

Pastoral finance companiesThese organisations provide loans to households and small-to-medium-sizedbusinesses, mainly in the rural sector. These organisations engage in a variety ofborrowing and lending activities. Some examples of pastoral finance companiesare:

• Rabobank Australia

• Rural Finance Corporation

• Rural Bank Ltd.





Intermediary organisations

Figure 4 Intermediary organisations

Investmentbanks

Mortgage

brokers

Venturecapitalists

Insurance

companies

Intermediary

organisations

Money market

corporations

Superannuation

companies

Mortgage

originators

Investors

For many years, lending in Australia and much of the western world was dominatedby large deposit-based banks. However, in the early 1980s this situation changedwith the rise of intermediary lenders — the so-called ‘non-banks’.

Intermediary lenders are unable to access deposit-based funding and instead gainfunds for lending from various external sources. These sources includesuperannuation funds, private investors and international organisations.

This type of lending (particularly in the housing sector) has grown dramatically in Australia over the last two decades, and provides strong competition to the majorbanks in this area.

Mortgage originators

Mortgage originators play a significant role in the home loan process. They writeand process mortgage loans through to settlement. The growth in non-bankmortgage originators has relied on the availability of mortgage funds sourcedfrom a form of funding known as securitised debt.

In some circumstances, the originator’ will also act as the ongoing mortgagemanager, taking their role beyond the settlement stage.

The loan products marketed by mortgage originators usually carry the originator’sbranding regardless of the source of funding. This is in contrast to products

marketed by lenders, which retain the branding of the funds provider. Some ofthe better-known intermediary lenders in the mortgage lending market in

Australia are RESI, Mortgage Choice, Aussie and Mortgage House.

Investment banks

Investment banks typically involve international finance (because of their size andcomplexity), long-term loans to companies, and underwriting. Investment banksdo not offer retail banking services to the general public. Rather, they assistrelatively large organisations to raise funds in the equity and debt markets.They may also provide organisations with other, non-financial, assistance such

as management guidance or consultancy.




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Most investment banks are large international organisations and some of thebetter-known ones who operate in the Australian market are:

• Macquarie Group Ltd

• Deutsche Australia Ltd

• Goldman Sachs & Partners Australia Pty Ltd

• Citigroup Global Markets Australia Holdings Pty Ltd

• UBS Holdings Pty Ltd.

Venture capitalists

Venture capitalists are investors who provide, generally, from $1 million to $3million in chunks of money commonly referred to as ‘rounds’. These dollars go to

growing a company, for example, hiring employees, developing productprototypes and commercialisation. Typically, they will only invest in individuals orcompanies with successful track records in their fields.

Start-up companies that receive venture capital are likely to have excellentgrowth prospects, but because they are generally private companies they do nothave access to capital markets. In return for venture capital, investors mayreceive limited control of the company’s management, as well as somecombination of profits, preferred shares or royalties.

Sources of venture capital include wealthy individual investors, investment banks,and other financial institutions that pool investments in venture-capital funds or

limited partnerships. The risks and rewards of investing through venture capitalcan be extreme.

Mortgage brokers

Mortgage brokers are intermediaries who match prospective borrowers withvarious lenders offering mortgage loan products. They are usually paid an up-front fee by the lender for their services and may also receive an ongoing (trailer)commission.

Insurance companies After the deregulation of the Australian banking industry in the 1980s, someinsurance companies started to offer loans secured by mortgages. As well asproviding funds for mortgage loans, insurance companies play an additional rolein the lending industry. All mortgagees require security properties to be insuredagainst loss or damage. Insurance companies provide building insurance to meetthis requirement. In some cases they also provide a monitoring function byadvising mortgagees if the insurance is not being maintained, allowing action tobe taken to protect the property asset.





Superannuation funds

Compulsory superannuation has provided much of the funds available to thesecompanies for investment lending. Superannuation companies have substantialfunds to invest both for the short and long term. Thus, investing some of these

funds in the mortgage industry provides long-term investments with relatively lowrisk, although Australian super funds’ enthusiasm for the international propertysector may have been tempered somewhat by the recent sub-prime mortgagecrisis in the United States.

Money market corporations

These are similar to wholesale banks and for this reason they are often referredto as merchant or investment banks. They borrow substantial dollar valueshort-term loans, which they on-lend to fund business loans and investments indebt securities.

Investors

Investors provide the money for lending. They may be individuals, companies orother organisations.

The funds can originate from a normal savings account (called a ‘passive’investment) or as a result of a more sophisticated strategy, such as the purchaseof mortgage-backed securities (an ‘active’ investment).

Intermediary organisations — related parties

Figure 5 Related parties

Pool managers

Pool insurers

Mortgage managers

Funds providers

Related parties

There are several related parties involved in establishing and managing loanswithin the securitisation process. The related parties and their roles are explainedin the following section.

Mortgage managers

Mortgage managers are responsible for managing every aspect of the borrower’sloan until it is discharged. Although some mortgage managers are also mortgageoriginators, the trend is to use independent mortgage managers.




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Mortgage managers access and package invested money to lend as mortgageloans. They typically access funds from investors who are attracted to the long-term and relatively secure nature of home lending but are unable, or do not want,to establish the infrastructure necessary for their own loan origination. For

competitive reasons, mortgage managers tend to use more than one source offunding.

One of the significant advantages mortgage managers have over banks andother ADI’s is their low overheads. This allows them to offer lower interest ratesto their clients.

Pool managers

A pool manager is another significant party to the securitised debt system.They ensure that the pool of funds available for mortgage loans is invested inhome loan portfolios that meet criteria agreed to by the investors.

The pool manager’s responsibilities include:

• setting the pool delivery rate (that is, the interest rate paid by the originators)

• payment of a guaranteed return, or interest, to the funds provider

• liaising with the funds providers, trustee, originators and pool insurer.

Pool insurers

The pool insurer insures every mortgage that is accepted as security for the

home loans funded by the pool of funds in the funds pool.

Although the same company may provide both lenders’ mortgage insurance(LMI) and pool insurance, pool insurance is a separate form of coverage.The borrower is usually unaware of pool insurance as the premium for theinsurance is paid from the pool manager’s margin.

Funds providers

Funds providers are the people or organisations who gather money frominvestors by way of cash deposits or by the sale of mortgage bonds, and create a

pool of funds which they make available to mortgage originators.

Associated professionals

Figure 6 Associated professionals

Credit reporting

agencies

Mortgage

insurers

Trustees

Solicitors and

conveyancers Valuers

Government

departments

and agencies

Associated

professionals





There are a number of associated professionals involved in the process oflending, valuation of assets and in exchange of property.

Solicitors and conveyancers

Solicitors and conveyancers are extensively involved in the lending industrybecause the purchasing and lending process is fundamentally grounded in Australia’s laws. They provide the legal knowledge and sometimes the formaldocumentation required for a loan. They also provide assistance to borrowers byhelping them understand their rights and obligations under relevant contracts andagreements, and are unusually involved in the conveyancing process.

Conveyancing is the process by which ownership of real estate is transferredfrom one party to another. This often requires a variety of dealings to beundertaken including the registration and discharge of mortgages.

Solicitors may also become involved in litigation associated with any contract orloan agreement. If any of the parties involved in the mortgage loan fail to meettheir obligations, legal action may be undertaken. Normally, such a course ofaction only occurs after all other reasonable alternatives have been exhausted.

Valuers

Valuers provide a formal opinion of the value of the property and other assetsbeing offered as security for loans.

Valuers should know their markets in order to provide the lender with an accurate

assessment of the securities being offered. Valuers may not always be used inthe loan process. This depends on the policy of the lender with regard to factorssuch as the size of the loan compared to the value of the property or other asset.

Government departments and agencies

Other parties involved in the mortgage loan process and transfer of propertyinclude:

• state or territory revenue departments that are responsible for collecting stampduties, vendor taxes and land tax, as applicable

• state or territory land titles offices that are responsible for registering thetransfer of property.

Credit reporting agencies

An important aspect of the lending process is checking the credit history ofpotential borrowers. This checking is carried out through a credit agency.

Veda Advantage and Dunn and Bradstreet are Australia’s largest credit reportingagencies. They hold records on approximately 12 million individuals and morethan one million businesses and companies. The information held by Veda

Advantage is regarded as extensive and generally accurate.




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Australia currently operates on a negative credit reporting system. This meansthat any market participant’s credit record will only make reference to adversetransactions, such as default situations and bankruptcy. Positive credit behaviour,such as paying all bills on time, is not recorded.

Credit reporting agencies must adhere to strict privacy obligations set by theOffice of the Australian Information Commissioner (OAIC).The personalinformation held by agencies is only available to agency members with alegitimate commercial reason to access the information. A limited number ofgovernment agencies with legal rights to do so can also access these files.

Mortgage insurers

Many mortgagees require mortgage insurance to be taken out in certaincircumstances, according to their lending criteria. This is to protect the mortgageein the event of loan default. If a mortgagee sale occurs and there is a shortfall inthe funds needed to repay the loan, mortgage insurance pays the outstandingbalance.

The major providers of mortgage insurance in Australia are:

• QBE LMI (QBE acquired PMI Australia in August 2008)

• Genworth Financial Mortgage Insurance.

Trustees

A trust is a fund of securities, cash or other assets, which is held by a trustee onbehalf of others. The trustee is legally responsible for the administration of thetrust.

Trustees may be individuals or companies. In the context of the mortgagebroking industry there are companies who specialise in this task.

Relationships between parties

Figure 7 shows a typical, simple loan application process involving the lender,the borrower and other essential participants, such as a solicitor or conveyancer.It also assumes the involvement of a mortgage broker.





Figure 7 Basic loan process

Lender

Mortgage Broker Borrower

Land Titles

Office

Solicitor/

Conveyancer

Valuer

Mortgage Insurer

Office of State Revenue

If other intermediaries become involved, or if the loan is securitised, the numberof participants and the interrelationships become more complex.




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3 The regulatory framework

Consumer credit regulation prior to July 2010

In 1993, each state of Australia agreed to standardise its credit laws to formallyimplement truth in lending principles across Australia. Prior to this, each statehad its own consumer credit regulation and protection laws.

The Uniform Consumer Credit Code (UCCC) became law in each state in 1996.The purpose of the UCCC was to standardise credit information in a clear andeasy-to-understand format. It also became mandatory for credit providers todisclose:

• borrowers’ rights and obligations in any credit arrangement

•

all relevant information in a written contract, including interest rates, fees,commissions and other information.

The UCCC regulated the supply of credit by lenders to individual consumers (thatis, natural persons) and strata corporations in situations where more than 50% ofthe loan proceeds were for personal, domestic or household purposes. Thisdefinition excluded many common consumer lending scenarios, such as loans byprivate investors to purchase investment properties.

Loans that were subject to the UCCC were referred to as regulated loans, withthose outside the definition of the UCCC being unregulated. The distinction isimportant because of the additional requirements and obligations placed onlenders as a result of a loan being regulated.

Criticism of the UCCC

In the years following its introduction, there had been criticism of the largelystate-based approach of consumer credit legislation, despite the efforts of theUCCC to standardise the approach across the country. Concerns over certainlending practices and the failure to include consumer credit products in theCorporations Act 2001 (Cth) (Corporations Act) also encouraged calls for reform.Complaints about predatory lending practices, increasing levels of consumer debtand the increasing complexity of lending products added to the need forgovernment intervention in the area of consumer lending.

In October 2008, the Commonwealth Government released a plan for reform,including the acceptance by the Commonwealth of responsibility for all consumercredit regulation.

The new credit regime

In 2009, the Federal Government enacted changes to the way credit is regulatedin Australia.





The primary vehicle for the changes is The National Consumer Credit Protection Act 2009 (Cth) (National Consumer Credit Protection Act) which includes theNational Credit Code (NCC) as Schedule 1 of the Act. The Act came into force on1 July 2010. It provides national uniform regulation for the Australian credit

industry and replaced the previous state-based credit licensing legislationsystems that existed in the states.

The regulatory system that is now in place controls who may lend and how theybehave as a lender through licensing. The three key features imposed by theregulatory system with regard to lending decisions are:

1. Consumers should have all the required information they need to make aborrowing decision.

2. Lenders should view lending decisions from the borrower’s point of view;gaining an understanding of the borrower’s objective as well as their capacityto repay the loan.

3. Lenders should have a process in place to resolve disputes.

There is an obligation on the credit assistant — that is, the loan originator orbroker — as well as the lender to make a suitability assessment. This means thatthe lender cannot simply rely on an initial assessment, and must make its own.

The new regime calls for a suitability assessment to be made based not only onthe consumer’s ability to repay the loan, but must also take into account theirobjectives and other factors. The assessment of the consumer’s ability to repaythe loan extends to being able to do so without financial hardship.

Issues surrounding this judgement are discussed later in this and other topics

of the course.

Status of the NCC

Despite being named a ‘code’, the NCC is, in fact, legislation. It must not beregarded as voluntary, as some of the industry codes of practice are. Breaches ofthe NCC may incur severe penalties.

Phase-in arrangements for the National Consumer Credit Protection Act

The requirements set out in the National Consumer Credit Protection Act havebeen introduced in two phases:

Phase one elements of the National Consumer Credit Protection Act(effective 1 July 2010)

These are:

• enacting the existing State credit code legislations into Commonwealthlegislation

•

establishing a national licensing regime to require providers of consumercredit and credit-related brokering services to have a licence originating fromthe Australian Securities and Investments Commission (ASIC)




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• requiring licensees to observe a number of general conduct requirements,including responsible lending practices

• extending ASIC’s powers to be the sole regulator of the new national creditframework with enhanced policing scope

• requiring mandatory membership of an external dispute resolution (EDR)body by all providers of consumer credit and credit-related brokering servicesand advice

• extending the scope of credit products previously covered by the UCCC toregulate residential investment properties

• extending the operation of the Corporations Act to regulate margin lending

• regulating trustee corporations — the National Consumer Credit Protection Actis applicable to mortgage brokers in phase one and brokers were required tobe compliant from 1 July 2010.

Phase two elements of the National Consumer Credit Protection Act

(anticipated effecti ve date 1 July 2011)

It is expected that phase two of the National Consumer Credit Protection Act willinvolve the following:

• enhancements to specific conduct obligations to stop unfavourable lendingpractices. This may include a review of credit card extension offers and otherlending issues that arise

• regulating the provision of credit for small businesses

• regulation of investment loans other than margin loans and mortgages forresidential investment properties

• reform of mandatory comparison rates and default notices

• enhanced regulation and disclosure of reverse mortgages.

The National Credit Code (NCC)

The National Credit Code (NCC) applies to the provision of credit to a natural(real) person or strata corporation. It applies when the credit is provided wholly orpredominantly:

• for personal, domestic or household purposes

• to purchase, renovate or improve residential property for investment purposes

• to refinance credit that has been provided wholly or predominantly topurchase, renovate or improve residential property for investment purposes.

Residential property means land on which a dwelling exists or will be erectedfor predominantly residential purposes.





Transitional provisions

The date that determines whether a loan falls under the UCCC provisions or thenew NCC for the purpose of being classified as regulated or unregulated is thedate of the credit contract.

Loans previously regulated by the UCCC have now become subject to the NCC.

Residential investment loans that were unregulated loans under the UCCC andwhere the loan contract was dated prior to 1 July 2010 are not subject to theNCC. However, where an unregulated loan arrangement is changed, it ispossible for it to become a regulated loan under the NCC. Where additionaladvances are made on an unregulated loan, the loan will remain unregulatedproviding the loan product does not change, and:

• the advance does not exceed 50% of the total loan, or

• the portion used for residential property does not exceed 50%.

Purpose test

There is a presumption on the part of the NCC that it will apply to a loan.However, this presumption can be overridden by a declaration from the borrowerthat the loan being applied for is to be used primarily for ‘non-code’ purposes.That is, business or non-residential investment purposes.

The declaration must be in a form prescribed by the NCC Regulations.

However, under the NCC, the presentation of a declaration only leads to another

presumption — that the loan is for the purpose stated. This is in contrast with theUCCC where such a declaration was definitive.

If a matter went to court, the court would apply an objective test. This test wouldinvolve determining what a reasonable person, in the position of the creditprovider, would understand the purpose of the loan to be. Therefore, simplyaccepting a declaration from a borrower that the loan is for a non-code purposeis not good enough if there is evidence that this might be untrue.

Apply your knowledge 3: Form of declaration and test of val id ity

Identify your organisation’s declaration of loan purpose. What is the

wording?

What process or procedure does your organisation have in place to validatethe stated purpose? Alternatively, what might trigger further investigation ofthe stated purpose?

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Products and transactions covered by the NCC

The NCC governs all transactions where consumer credit has been provided,including:

• personal loans

• credit cards

• overdrafts

• housing loans

• mortgages

• the hire of goods

• guarantees

• continuing credit accounts.

Products and transactions NOT covered by the NCC

Following is a list of some of the main products and transactions that are notcovered by the NCC:

• loans between friends and family members, where the lender is not in thebusiness of lending money

• loans where no interest or other charges are applicable

• short-term loans of 62 days or less, but only where the fees and charges areless than 5% of the amount of credit and the interest rate is less than 24%

• investment loans

• margin loans (margin loans are regulated under the Corporations Act)

• credit provided without prior agreement (for example, a cheque accountbecomes overdrawn without a previously arranged overdraft facility)

• loans provided by pawnbrokers and trustees of estates

• loans, including leases, to employees made under concessional terms

• bill facilities

• insurance premiums that are payable by instalments.

The five key areas of the NCC

The NCC covers these key areas:

• interaction with clients

• unjust transactions

• correspondence with borrowers

• documentation





• liabilities and penalties.

Following is a brief summary of compliance implications and obligations inrelation to each of the key areas listed above. In practice, each organisation willhave policies, procedures and guidelines in place to help ensure compliance with

the requirements of the NCC and other legislation, regulation and codes.

Interaction with clients

All employees of credit providers may be held personally liable if they are insome way connected with or responsible for a breach of the NCC. All actions ofcontractors, intermediaries and employees will be deemed to be the actions ofthe credit provider. In the event that a breach is confirmed, the courts willdetermine which party bears liability.

Breaches of the NCC

• Making false or misleading representations — it is an offence under theNCC to make false or misleading statements to induce a borrower to enterinto a loan contract, mortgage or guarantee.

• Answering borrower queries — statements regarding the performance ofproducts should not be made unless there is a reasonable basis for makingthe statement. As a general rule, intermediaries are not licensed to givefinancial, taxation or legal advice. They should refer clients to their accountant,financial adviser or lawyer as appropriate.

• Predicting interest rates — rates quoted or stated in offer documents areindicative only. The actual rate will be applied at settlement of the loan.

• Documentation — it is the responsibility of the credit provider and itsrepresentatives to ensure that documentation is fully and accuratelycompleted. They must ensure that all borrowers and guarantors have correctlycompleted the application form and other documents, and that appropriatesupporting documents accompany the application.

• Canvassing clients — neither a credit provider, nor its employees, nor anagent of a credit provider may visit a client’s home without a prior appointmentor induce that person to apply for or obtain credit.

• Harassment — persistent approaches by an introducer after a request has

been made to stop could amount to harassment. Single acts which aresufficiently annoying or troublesome are also prohibited.

• Advertising and marketing — any advertisement stating or implying theavailability of credit is regulated by the NCC. The NCC is primarily concernedwith any statement regarding the cost of credit and the interest rate. If anadvertisement refers to cost, it can only contain the annual interest rate orrates. It must also contain a statement that fees and charges are payable.

Unjust transactions

A credit contract, mortgage or guarantee may be declared invalid if a court

decides that the conduct of the credit provider or its representatives was unjustaround the time that the contract was entered into by the borrower.




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A court may also review a loan and can invalidate a loan agreement where it isfound to be an unjust transaction because of the borrower’s:

• age

• mental or physical condition

• lack of both understanding and access to independent advice

• having had unfair tactics used against them

• capacity to repay the loan

• understanding of the English language.

It is the representative’s responsibility to ensure that correct and complete creditinformation is analysed, and that the borrower has the capacity to repay the loan.In particular, the lender or its representative must ensure that all reasonable

enquiries into the purpose of a loan have been undertaken.

Correspondence with borrowers

The NCC has very specific requirements regarding corresponding withborrowers. Following are some of the key issues dealt with by the NCC:

Notification of changes and variations

Changes to a regulated loan must be specified in a notice sent to borrowers asfollows:

• change by agreement (other than principal increases)

• change by agreement (principal increases)

• guarantor’s consent to change.

Changes to interest rates

Changes to interest rates will affect minimum repayment amounts. Lenders arerequired to disclose interest rate changes in an advertisement in the AustralianFinancial Review. Borrowers must receive notice in writing at least 20 daysbefore the new repayment amount becomes effective.

Statements of accounts

The NCC requires statements of accounts to be provided:

• at least every six months for term loans and every month for transactionaccounts

• within seven days of the borrower’s request if they are one-off statements.

Statement of pay-out figure

The NCC requires that a statement of pay-out figure must be provided withinseven days of the borrower’s request.





Documentation

The NCC specifies certain regulations regarding documentation. Key points arelisted below. However, credit contracts under the NCC are dealt with separatelylater in this topic.

Application form

Lenders’ application forms must include:

• a declaration as to the purpose of credit needs to be signed if the loan is to beused predominantly for business or investment purposes, and therefore notsubject to the NCC.

Joint borrower nomination form

The NCC requires that correspondence be sent to all borrowers. However,borrowers living at the same address may nominate one of the borrowers toreceive documents and correspondence by completing this form.

Ongoing mortgage information

All borrowers and guarantors, if applicable, must be issued with a loan contractthat sets out the terms and conditions of the loan.

Repayments

The NCC requires that full details of loan repayments are clearly set out in the

loan documentation.

Credit fees and charges

All credit fees and charges, including those which may apply in the future, arerequired to appear in the contract.

Collections

The NCC makes provision for borrowers to apply for hardship relief. Hardshiprelief is discussed in Topic 3 of this subject.

Debt recovery

Prior to taking any debt recovery action, such as taking possession of anysecurity property, the lender must provide notice in writing, as specified by theNCC, to the borrower. Further information on debt recovery is provided in Topic 3of this subject.

Liabilit ies and penalties

Breaches of the NCC are subject to both civil and criminal penalties and theconsequences of a breach can be severe. Any person involved in any way with

the breach can attract criminal liability, which can result in fines and otherpenalties, depending on the severity of the breach.




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Credit contracts

The NCC sets out the minimum information a credit contract must contain andhow it can be executed. Following is a summary of the requirements in relation tothe credit contract.

The credit contract:

• must be in writing and signed by the borrower and the lender

• can be signed only by the lender if the offer can be accepted by the borrowerby drawing down or accessing the credit provided, or in some other waymeeting conditions that legally indicate acceptance of the offer.

The contract document must contain the following information:

• the credit provider’s name

•

the amount of credit to be provided, or, if this is not known at the time, themaximum amount to be made available

• the persons, bodies or agents to whom it is to be paid and the amountspayable to each of them; a description of land and its value if this is thepurpose of the loan; or a description of goods and their cash price

• the annual percentage rate or rates under the contract. If there is more thanone rate, how each rate applies

• how the interest rate is calculated and the frequency with which interestcharges are to be debited under the contract

• the total amount of interest charges payable if the contract is for a period ofless than seven years

• the total amount or method of calculating repayments and the total number ofrepayments to be made, if ascertainable

• a statement of the credit fees and charges that are, or may become payableunder the contract, and when each fee or charge is payable. If this informationis not ascertainable, the method of calculation of the fee or charge

• information as to whether conditions, such as the interest rate, amount orfrequency of payment of credit fees, or charge or installments payable underthe contract may be changed, or a new credit fee or charge may be imposed.The contract must state how the borrower will be advised of any such changes

• the frequency with which statements of account are to be provided (exceptwhere the annual percentage rate is fixed for the whole term of the contractand there is no provision for varying the rate).

• the default rate of interest which may be charged when payments are indefault

• the current default rate

• a statement that enforcement expenses may be payable under the credit

contract in the event of a breach• whether a mortgage or guarantee is to be or has been taken by the credit

provider and details of the guarantee





• if a commission is to be paid by or to the credit provider in relation to the loan,the amount of the commission and to whom it will be paid must be included inthe contract

• if the credit provider knows that the debtor is to enter into a credit-related

insurance contract and that the insurance is to be financed under the creditcontract, details of that insurance

• any other information or warning required by the regulations.

Amendments to the contrac t

A new contract is required to be printed for the following changes:

• loan type or product

• regulated/unregulated status

• loan amount

• specified borrowers

• primary loan security

• any collateral security, such as adding or deleting a guarantor.

Minor corrections or amendments can be initialled by the borrower without a newcontract being prepared.

Apply your knowledge 4: Review the credi t contract

Obtain a copy (or an indicative sample) of your organisation’s creditcontract.

• Review the contract and identify the information requirements listedabove.

• Are all of the requirements met by the contract document?

• Are there any omissions or discrepancies?

If you identify any omissions or discrepancies, investigate why this is thecase. Refer to a more senior colleague or manager if necessary. Note your

conclusions and findings below.

Enter text here




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Pre-contract disclosure

Before a borrower offers to accept a credit contract or signs the credit contractunder the NCC, the credit provider must give the borrower:

• a pre-contractual statement setting out the matter that will be included in thecontract

• an Information Statement setting out the borrower’s rights and obligations.

Pre-contractual statement

The pre-contractual statement essentially contains similar information ascontained in the credit contract; however, the information must be in a tableformat and shown separately from the contract.

Information Statement

The Information Statement, or Statement of Borrower’s Statutory Rights andObligations, consists of 25 questions and answers which are specified in theNational Consumer Credit Protection Regulations 2010 (NCCP Regulations).The questions are:

1. How can I get details of my proposed credit contract?

2. How can I get a copy of the final contract?

3. Can I terminate the contract?

4. Can I pay my credit contract out early?

5. How can I find out the payout figure?

6. Will I pay less interest if I pay out my contract early?

7. Can my contract be changed by my credit provider?

8. Will I be told in advance if my credit provider is going to make a change inthe contract?

9. Is there anything I can do if I think that my contract is unjust?

10. Do I have to take out insurance?

11. Will I get details of my insurance cover?

12. If the insurer does not accept my proposal, will I be told?

13. In that case, what happens to the premiums?

14. What happens if my credit contract ends before any insurance contractover mortgaged property?

15. If my contract says I have to give a mortgage, what does this mean?

16. Should I get a copy of my mortgage?

17. Is there anything that I am not allowed to do with the property I have

mortgaged?





18. What can I do if I find that I cannot afford my repayments and there is amortgage over property?

19. Can my credit provider take or sell the mortgaged property?

20. If my credit provider writes asking me where the mortgaged goods are, do Ihave to say where they are?

21. When can my credit provider or its agent come into a residence to takepossession of mortgaged goods?

22. What do I do if I cannot make a repayment?

23. What if my credit provider and I cannot agree on a suitable arrangement?

24. Can my credit provider take action against me?

25. Do I have any other rights and obligations?

Further resources

For more information the requirements of the Information Statement andanswers to the above questions, visit the ASIC website at<www.asic.gov.au> and enter ‘Credit Form 5’ into the Search field.(viewed 5 February 2011).

Responsible lending principles under the NationalConsumer Credit Protection Act

The National Consumer Credit Protection Act imposes responsible lending obligations that must be satisfied by all persons arranging and dealing with loanapplications.

Put simply, the concept of responsible lending is about the lender’s (and theirrepresentatives’) obligation to ensure that borrowers are not placed into loans orcredit facilities that they cannot afford to service, or that are not appropriate forthe borrower’s objectives and requirements.

The primary obligation is to ensure the credit facility is not unsuitable for theborrower. A credit facility will be unsuitable where:

•

the borrower cannot meet repayments, or can only meet repayments byincurring substantial hardship, or

• the loan does not meet the borrower’s requirements or objectives.

The requirement is to arrange a loan that is a not unsuitable loan, not the ‘best’loan.

How does a lender satisfy the ‘not unsuitable’ requirement?

There are two key tasks that a lender must complete to ensure that theborrower’s loan meets the not unsuitable requirement. The lender must:

• make reasonable enquiries about the borrower’s objectives and requirements,and

http://www.asic.gov.au/





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• take reasonable steps to verify the borrower’s financial situation.

What is reasonable?

What is meant by reasonable will depend on the borrower’s individual situation,and is therefore scalable. The degree of enquiry into the borrower’s objectives,requirements and financial situation must be greater:

• where the impact on the borrower is greater

• where the borrower has limited capacity to borrow, and/or

• if the borrower is confused or has conflicting objectives.

Borrower’s requirements and objectives

Some of the reasonable enquiries that can be made to determine the borrower’sobjectives and requirements include:

• ascertaining the amount of credit required

• ascertaining the timeframe for repayment

• ascertaining the purpose of the credit and the benefit to the borrower

• determining whether the desired loan product has appropriate features andflexibility.

Borrower’s financial situation

Some of the reasonable enquiries that can be made to determine the borrower’sfinancial situation include the following:

• For PAYG applicants: standard evidence of income, such as payslips, mustbe collected and efforts made to confirm employment with the employer,normally by phone.

• For self-employed applicants: standard evidence of income, such as taxreturns, BAS statements and documentation from an accountant, must becollected.

Addition verification may be required:

• where the information provided is inconsistent with information alreadyheld, or

• where the information provided is outside the range of acceptable benchmarksfor example, a shop assistant who presents evidence of income far in excessof what might be expected.

Other reasonable enquiries that can be made include:

• whether the consumer appreciates the risks that the features of a particularcredit product may present, given the borrower’s circumstances

• the borrower’s:

– domestic situation





– previous credit history

– income-producing activity, age and language skills

– savings history and expenditure patterns.

The principles of responsible lending also apply to refinancing and loanvariations, for example, switching from a variable rate to a fixed rate or increasinga credit limit.

Responsible lending and non-standard loan products

Dealing with low-doc and no-doc lending, which normally requires minimal or noevidence of income, presents some difficulties when applying the responsiblelending principle.

The rules regarding this type of lending remain subject to revision at the time of

writing; however, it is important to remember that even if a loan is not regulatedby the NCC, the loan agreement can still be varied or set aside altogether by acourt of law. Lenders should, therefore, make sufficient enquiries to satisfythemselves that the loan product meets the not unsuitable test even for non-standard loans.

In practice, no-doc loans are no longer viable under the requirements of the NCC.

Credit assessment under the National Consumer Credit Protection Act

The National Consumer Credit Protection Act imposes responsible lending

obligations that require a lender to ensure that a credit facility is not unsuitable forthe borrower.

There are two key elements that could affect the assessment of loan unsuitability:

• The obligation to act efficiently, honestly and fairly — this means that alender must put the borrower’s needs above their own commercial interests. An efficient, honest and fair lender might advise a borrower to go to anotherlender who has a better product, or a product more suitable to that borrower’sneeds.

• The obligation to ensure clients are not disadvantaged by any conflict ofinterest — this requirement mainly applies to brokers and loan arrangers andrelates to these agents receiving more commission from one lender thananother. It could also relate to an organisation’s credit adviser if, for example,they recommend a certain product in order to meet a sales target. If the brokeror credit officer recommends a less suitable loan simply because it is to theiradvantage, and in doing so disadvantages the client, they will be in breach ofthe National Consumer Credit Protection Act.




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Regulation of privacy — collection, s torage and use of personalinformation

The Privacy Act 1988 (Cth) (Privacy Act) was introduced to prevent unwarrantedgathering, processing and dissemination of personal information aboutindividuals. Prior to 21 December 2001, the legislation only regulated dealingswith credit reports. From that date all dealings with personal information areregulated by the Act.

Collection of personal information must be lawful, that is, it must comply with thePrivacy Act. This is achieved by the lender ensuring that the Privacy Act andGeneral Consent statement (or other statement that serves this purpose) on theloan application form is properly completed and that the names and signatures ofall parties to the loan are included and dated.

To minimise the risk of breaching privacy and confidentiality, the secure storageof personal information must be ensured at all times.

Accessing credit information files without authorisation, or under false pretences,can result in a severe financial penalty. There are harsh penalties for breachingprivacy rights, such as misplacing privacy documentation, disclosing privateinformation to third parties without authorisation or dealing with a credit reportthat has been altered.

Privacy endures beyond the life of the account — it does not cease when theclient stops using or closes the account.

The Australian Securi ties and Investments Commission Act 2001

(Cth)The Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) regulates consumer protection for the provision of financial services, whichencompasses the finance broking industry and all consumer lending products,such as:

• deposit products

• credit products

• investment products

•

insurance products, and• superannuation products.

The consumer protection provisions in the ASIC Act, which were introduced in2002, are modelled on the provisions of the Trade Practices Act 1974 (Cth)(as it was then known) that apply to suppliers of non-financial goods andservices.

The ASIC Act is administered by the Australian Securities and InvestmentsCommission, which has authority to take action when a breach of the Act isdetected.

Misleading or deceptive conduct

Under the ASIC Act, the following conduct is prohibited:





• engaging in conduct that is misleading or deceptive, or likely to mislead ordeceive. This includes acts of omission, such as failures to disclose relevantinformation. This part of the legislation has been used by borrowers andguarantors against lenders alleging misleading and deceptive conduct in

areas including advertising and promising approval without authority for doingso

• falsely representing the standard, quality, characteristics, benefits, or price ofservices

• making representations or predictions without reasonable grounds.

Unconscionable conduct

The ASIC Act also prohibits unconscionable conduct for financial servicesindustry participants. Unconscionable conduct can be defined as one party to a

transaction being at a disadvantage through a lack of experience or businessacumen, impaired facilities or a poor grasp of English, and the other party takingadvantage of that disadvantage.

Conduct of corporations and individuals in consumer transactions which areunfair or unreasonable, but not necessarily misleading or deceptive, is alsoprohibited under the ASIC Act.

Lenders should take special precautions when dealing with borrowers that maybe held to be in a disadvantaged position, which may be indicated by advancedage, language difficulties, a particular reliance on the advice of another person,or other infirmities or vulnerabilities. Such situations can include relativelycommonplace occurrences, such as children advising elderly parents. In suchcases, it may be prudent for a lender to recommend that the disadvantaged partyseek independent advice before entering into a transaction, for example, from asolicitor or accountant. In the enforcement of the ASIC Act’s provisions withregard to unconscionable conduct, the onus is on the stronger party to ensurethat no advantage was taken and the transaction was fair.

Regulation of credit and regulatory bodies

The Competi tion and Consumer Act 2010 (Cth)

The Competition and Consumer Act 2010 (Cth) (the CCA) (formerly known as theTrade Practices Act 1974) prohibits certain actions by corporations that aredeemed in the CCA to be anti-competitive. Normally, such conduct will involve anarrangement or agreement between the suppliers of a financial service, but mayalso include conditions of supply designed to compel certain consumerbehaviours.

The range of prohibited conduct is extensive and includes:

• collusion: entering into a contract, arrangement or understanding with acompetitor that has the effect of substantially lessening competition. Collusioncan include:

– price fixing, in which competitors agree to supply goods or services only atagreed prices




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– agreements not to compete in certain geographical areas

– agreements not to poach, or only to supply, certain clients

• exclusive dealing: engaging in the practice of only supplying goods and

services upon certain restrictions or obligations being met, normally to compela client to acquire goods or services from a supplier that they may undernormal circumstances have sourced from another supplier

• restrictive trade practices: where a company with substantial power in amarket abuses its power to eliminate or damage a competitor, prevent acompetitor from entering the market or deter or prevent competitive conduct ina market. This includes monopolistic behaviour.

Where a borrower, mortgagor, guarantor or any other person has suffered a lossas a result of a breach of the CCA, the credit provider may be ordered tocompensate that person or entity.

The CCA is administered by the Australian Competition and ConsumerCommission (ACCC) and applies to the conduct of corporations and theiremployees, agents or officers.

The Code of Banking Practice

The Code of Banking Practice (the Code) is a voluntary code which seeks topromote best practice between banks and consumers. The purpose of the Codeis to:

• describe and establish good banking practice and service

• promote disclosure of information that is relevant and useful to clients

• promote informed and effective relationships between banks and consumers.

The Code requires banks to have dispute resolution procedures in place to assistin resolving consumers’ complaints. The Financial Ombudsman Service (FOS) isthe banking industry’s resolution scheme. If you work for or represent a bank, youmust comply with the Code’s obligations.

The introduction of the new national credit regime has triggered a review of theCode of Banking Practice, particularly in the area of compliance. The reviewprocesses, and changes made, are set out in a series of progress reports

available on the Australian Bankers Association (ABA) website,<www.bankers.asn.au>.

http://www.bankers.asn.au/







Regulation of money laundering, terrorism financing and clientidentification

The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth)(AML/CTF Act) is Australia’s regulating legislation for the detection of moneylaundering and terrorism financing. The AML/CTF Act brings Australia’sprevention and reporting regime for money laundering and terrorism financinginto line with international norms.

The AML/CTF Act compliance relies upon a risk-based approach for reportingentities and their agents. Any risk that the lender might facilitate moneylaundering or terrorism financing must be identified, mitigated and managed,which includes ongoing due diligence.

To facilitate compliance with the AML/CTF Act, lenders will generally havecompliance procedures which must be followed by employees and otherrepresentatives when accepting and processing loan applications.

Regulation of financial services – the Corporations Act

Chapter 7 of the Corporations Act includes the Financial Services Regulations(FSR), which address a number of regulatory matters, including:

• licensing and regulatory regimes for financial services participants

• a uniform regulatory regime that can accommodate the entry of newparticipants into the financial services industry

• making the financial services industry more cost effective, and

• enhancing disclosure requirements for providers of financial products andservices to consumers.

FSR aims to promote:

• confident and informed decision-making by consumers using financialproducts and services, while facilitating the efficient, flexible and innovativeprovision of these products and services

• fair, honest and professional financial service providers

• a fair, open and transparent financial services market place.

These aims are achieved through a number of measures including:

• the provision of comparable regulation of all financial products, which alsoincludes bank deposit products such as offset accounts

• licensing financial markets, including the licensing of all financial advisers anddealers through an Australian Financial Services Licence (AFSL) andimposing statutory obligations on them designed to protect retail investors

• the provision of clear and understandable disclosure documents by promotersto assist prospective investors in comparing products and make informeddecisions.




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The Anti-Discrimination Act 1977 (Cth)

Discrimination occurs when a person is treated unfairly or unequally because oftheir membership of a particular group, such as religion, gender, age, nationality,ethnic background, disability and so on.

In lending, discrimination could occur in the process of approving a loan. The Actis designed to protect people from unfair discrimination in such circumstances.

Discrimination can be both direct and indirect:

• Direct d iscrimination occurs when a person is treated differently,unfairly or unequally because of their membership of one of the relevantgroups.

• Indirect discrimination occurs when there is a requirement that is nominallythe same for all persons, but which has an unequal or disproportionate effecton certain groups, as compared to other groups.

Regulatory bodies and industry associations

There are a variety of regulatory and industry bodies at state and federal levelwhich participate in, or assist in regulating the lending industry, including:

• the Australian Securities and Investments Commission (ASIC)

• the Australian Prudential Regulation Authority (APRA)

• the Consumer Credit Legal Centre (CCLC)

• the Mortgage & Finance Association of Australia (MFAA)

• the Finance Brokers Association of Australia (FBAA).

Austral ian Securi ties and Investments Commission (ASIC)

In March 2002, the Commonwealth’s regulatory powers over consumer creditproducts were transferred from the Competition and Consumer Commission(ACCC) to ASIC. ASIC’s authority to regulate credit is vested in the ASIC Act,which allows ASIC to regulate conduct in relation to credit facilities.

Although detailed disclosure or contractual requirements relating to credit are

regulated by the National Consumer Credit Protection Act, the ASIC Act sets outbroad standards of conduct relating to credit facilities including:

• the prohibition of unconscionable and misleading or deceptive conduct

• the prohibition of making false or misleading representations, and

• implied warranties of due care, skill and fitness for purpose into contracts forthe provision of financial services.

ASIC’s powers are responsive: it can only take action for breaches of thelegislation when an act of unfair conduct has already occurred.





Further resources

For more information about ASIC and its role, visit the ASIC website at,<www.asic.gov.au>.

Aust ral ian Prudential Regulat ion Authori ty (APRA)

APRA is the prudential regulator of approved deposit-taking institutions (ADIs)such as banks, credit unions and building societies, as well as insurancecompanies covering life and general insurances, superannuation funds andfriendly societies.

APRA is not responsible for the regulation of all ADI complaints. Rather, APRAas a prudential regulator sets standards, including capital requirements, for theprudent management of banks and other ADIs, insurance companies and friendlysocieties to maximise the likelihood that they will remain financially sound and

able to meet their obligations to depositors and policyholders.

Consumer Credit Legal Centre (NSW) (CCLC)

The CCLC is a community legal centre specialising in financial services, inparticular, matters and policy issues relating to consumer credit, banking anddebt recovery. It focuses on issues that affect low income and disadvantagedconsumers. The goals of the CCLC are to:

• provide assistance to consumers of financial services, particularlydisadvantaged consumers, to effectively assert their rights and protect theirlegitimate interests

• promote consumer understanding of financial services regulation, policy andindustry practice

• achieve redress for individual clients

• promote reforms to help create a fairer marketplace for consumers of financialservices and in particular disadvantaged consumers.

Their goals are achieved through:

• the provision of information, legal advice and referral in relation to banking,credit and debt and related matters to consumers and community/welfare

agencies• the provision of ongoing casework services, including legal representation at

tribunal or court hearings as appropriate or advocacy through industry disputeresolution schemes

• the conduct of community legal education to raise public awarenessconcerning regulation, industry practices and consumer issues

• the pursuit of pro-consumer reforms in financial services regulation, policy andindustry practice through casework, campaigns, and participation in policydevelopment and review processes.

The CCLC has made a significant contribution to regulatory review processes.ItsMarch 2003 report to ASIC on the finance industry was well received and hadsignificant influence on the industry.






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Mortgage and Finance Association of Australia (MFAA)

The MFAA is the residential mortgage industry’s representative body. It worksclosely with the financial services sector, the Commonwealth and Stategovernments to set standards for the mortgage industry. It assists industry

consumers by dealing with industry issues on behalf of its members andproviding an ombudsman scheme to facilitate resolution of disputes and addressborrower concerns.

Finance Brokers Association of Australia (FBAA)

The FBAA’s representation includes brokers who work in the chattel equipmentand commercial finance sectors. The FBAA administers a code of ethics andrequires that its members act in the best interests of clients by providing full andaccurate information, ensuring the validity and accuracy of all documentation,and providing advice and guidance to enable clients to select the most

appropriate credit facility for their needs.

Ethics and codes of conduct

A code of ethics establishes and expresses an organisation’s corporate values,responsibilities, obligations and ethical goals, as well as the way it functions. Acode of ethics provides guidance to individuals on how to handle situations thatmay pose a dilemma between alternate courses of action, or when faced withpressure to consider right and wrong. Sometimes also referred to as codes ofconduct or codes of practice, they assist in:

• defining acceptable and unacceptable behaviour

• promoting high standards of practice (sometimes known as best practice)

• providing a benchmark for members to use as self-evaluation

• establishing a framework for professional behaviour and responsibilities, and

• providing a vehicle for occupational identity and a mark of occupationalmaturity.

Ethical standards reflect the common morality for a particular occupational group.

Codes of conduct should reflect the concerns of members of a particularorganisation and the context of the business environment in which it operates.Codes may differ in whether or not they provide a method of dispute resolution orimpose any sanctions for non-compliance.

Conflict resolution procedures

The emergence of external dispute resolution schemes has played a vital role inestablishing effective industry self-regulation. The advantages of having anexternal dispute resolution scheme are that they:

• provide an alternative to expensive legal action for both consumers and

industry





• enable industry to both ascertain the problems faced by their clients and takesteps to rectify them, negating the need for government intervention

• enhance good business practices and the creation of better quality goods andservices for clients.

Resolution schemes reflect an informal style of dispute resolution, rather than aformal and adversarial style. They aim to achieve early resolution by consensus.

However, external resolution schemes do not remove the need for businesses tohave their own dispute resolution mechanisms in place — external

dispute resolution schemes should only be used when resolution between theparties cannot be reached.

Two schemes currently operating in the credit sector are those of the FinancialOmbudsman Service (FOS) and the Credit Ombudsman Service Ltd (COSL).

The Financial Ombudsman Service (FOS)

FOS is the Australian banking industry’s external dispute resolution scheme. Itconsiders complaints about banks and their affiliates operating in Australia. TheOmbudsman is able to investigate disputes and make decisions that are bindingon the service provider. FOS will consider disputes if:

• they are about a financial service provided by a member bank or an affiliate

• the dispute is lodged by an individual or a small business, or

• the amount of loss claimed is less than $500,000.

FOS is unable to consider disputes about general policies, such as interest rates,fees and branch closures.

The Credit Ombudsman Service Ltd (COSL)

The Credit Ombudsman Service Ltd (COSL), formerly known as the MortgageIndustry Ombudsman Scheme (MIOS), is an independent industry supervisoryscheme provided to clients to resolve disputes. It is provided free of charge.COSL facilitates disputes between scheme members and clients, and betweenits members.

The aim of COSL is to provide an independent and prompt resolution of disputesagainst the criteria of law, industry best practice, and fairness in allcircumstances. COSL can intermediate disputes involving sums of up to$250,000, not limited to direct losses.

Clients referred to the dispute resolution service are not bound by theombudsman’s decision and retain any legal rights they have to refer the matter toa court or tribunal. However, if a client accepts the ombudsman’s decision inaccordance with the rules of the scheme, then it will be binding on the schememember involved in the dispute.

COSL and FOS are approved by ASIC but are not regulators in themselves.

They provide a free service to consumers to facilitate the resolution of disputeswith member organisations.




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Apply your knowledge 5: The Credit Ombudsman Service Ltd

Visit <www.cosl.com.au> and answer the following questions:

• In summary, who can lodge a complaint with the Credit Ombudsman

Service Ltd?

• What types of complaints are covered by the Credit OmbudsmanService Ltd?

• What complaints are not covered?

• How do I make a complaint?


Duty of care

Duty of care is a broad-ranging legal concept, encompassing all areas of the

relationship with the client, including processing applications, requests forinformation, the provision of advice and maintenance of records.

Duty of care is judged on what a reasonable person would do or what is normalunder the circumstances. An organisation must take reasonable steps to ensurethat its actions do not cause harm or loss to any individual.

All individuals working in the credit and lending industry have a duty of care toensure they conduct their business activities within the regulatory framework.To ensure they avoid liability themselves, or on the part of their employer or theorganisation they represent, individuals working in the industry should:

•

learn how regulatory legislation affects their job• understand the application process and how lending criteria are applied to

applications

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http://www.cosl.com.au/

http://www.cosl.com.au/





• know the key features and costs of the products they are using

• not guess answers or make rash promises to clients

• make relevant file notes

• maintain the secure storage of private information

• ensure they gain the consent of all parties prior to proceeding withapplications

• not give legal or financial advice unless they are authorised and have thecapacity to do so

• explain the effect of transactions to guarantors.




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4 The lending process

Although loan application processes and approval criteria vary from lender tolender and from product to product, there are fundamentals that are common to

all lenders and products. This part of the topic provides an overview of thesefundamentals and includes preliminary loan and borrower assessment, anoverview of risk and obligations of the lender.

This part of the topic also discusses some of the costs associated withpurchasing property and borrowing funds.

A more detailed examination of the loan processing and approval process iscontained in Topic 2 of this subject.

Fundamentals of lending

The fundamentals of lending do not change irrespective of the purpose for whichthe funds will be used. What does change is the quantity and type of informationthat is required, and the time and skills needed to analyse it. Most loan proposalsare assessed on the basis of key indicators, such as the borrower’s capacity torepay the loan, character, capital strength, collateral offered as security, andconditions of the lending proposal.

The lender’s role is to accumulate sufficient information on the borrower and thefinance proposal to enable a well-informed assessment of the risks. The riskprofile of a particular lending scenario will also be influenced by the alternativesources of repayment funding available and the type and amount of security

offered. Consideration is given to the repayment capacity of the borrower(servicing) and the investment potential/earning capacity if lending to a business,together with alternative exit strategies available to the lender to ensure debtrepayment. For approval, most lenders will take into consideration servicing andsecurity.

An acceptable credit risk will be represented by a high level of assurance that theloan will be serviced and repaid as the obligation falls due in accordance with thelending approval.

An overview of risk

Financial institutions seek to engage in profitable lending through a process ofrisk assessment and loan structuring in order to avoid or appropriately price risk.The concept of risk, however, is broad and has a strong influence on all aspectsof business. This section of the topic discusses the general process of riskidentification and management which may be applied in a variety of contexts andsituations.

The process of risk assessment (which leads to the decision of whether or not toaccept a lending proposal) is based upon the exercise of informed judgment.The lender will utilise a number of procedures and guidelines in evaluating therisk attaching to a lending proposal.





Risk is defined by the Australian/New Zealand Standard for Risk Management(AS/NZS ISO 31000:2009) (the Standard) as the ‘effect of uncertainty onobjectives’. In other words, risk is the chance that something might happen thatimpacts on objectives, resulting in either a gain or a loss. The Standard sets out a

process for:• establishing goals and objectives to be achieved

• identifying risks

• analysing risks (that is, determining the likelihood that something will happen,and the consequences if it does happen)

• evaluating the risks (that is, determining if the risk is acceptable or not)

• treating the risk (that is, avoiding the risk, reducing the likelihood it willhappen, reducing the consequences, transferring it in some way, or acceptingit).

The process presented in the Standard also includes monitoring and reporting onthe effectiveness of risk treatments, which closes the loop and creates acontinuous improvement cycle.

This process is shown graphically in Figure 8.

Figure 8 Risk management process

Establish goals and context

Identify risks

M o n i t o r / R e v i e w

Ana lyse Likel ihood

Consequence

Evaluate

Treat




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Risks in the financial services industry

Every industry and organisation has its own unique set of risks that must beaddressed. In the context of this subject the risks for the organisation includemaking inappropriate lending decisions and failing to comply with compliance

obligations.

Other risks, not unique to the finance industry, include those associated with:

• the economy and economic circumstances — a sudden downturn in our ownor the world economy can have a significant effect on all industries andorganisations

• commercial relationships — organisations frequently establish relationshipswith other organisations and individuals for various reasons, including toachieve a commercial advantage. All such relationships pose risks which mustbe assessed

• human behaviour and individual activity — organisations have suffered in thepast and will continue to suffer because of the actions (or inactions) ofindividuals. Fraud, embezzlement, even incompetence, must be recognisedas potential risks

• the political environment — rules governing how industries behave and whatthey can and cannot do are often based on the politics of the time. Suchdecisions can have a significant impact on the way a business operates, itspotential profitability, and even its existence.

Appl y your knowledge 6: Areas of potent ial risk

The discussion of risk has, so far, identified a number of risk areas;however, the areas of potential risk are much broader than those listedabove.

Consider and list other areas of potential risk in your organisation.

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Strategies and tools to control and mitigate risk

Organisations deal with risk in different ways. Often, the way organisations dealwith risk depends on factors such as the size of the organisation, the degree ofcompliance involved, the attitudes of management and whether or not it is a

private company responsible only to its private shareholders, or a publiccompany answerable to a large shareholder base, the stock exchange and,possibly, the wider community.

Organisations such as those involved in credit and lending are highly regulated,and are potentially susceptible to large finance losses if risk is mismanaged. Inorder to ensure compliance and to minimise the risk of financial loss as much aspossible, strategies and tools will be in place to guide the activities of employeesand other representatives working on its behalf.

Policies, procedures, guidelines, rules and reporting usually exist to deal withrisk. You might use checklists to ensure compliance or that clients fully disclose

their financial situation. In the same way, lending guidelines attempt to ensurethat clients have the capacity to service a loan without hardship.

Specific risks such as business risk and industry risk are dealt with later in thistopic.

Apply your knowledge 7: Risk factors

a. Identify the risk factors that exist in the job that you do.

b. How has the organisation managed these risk factors? What guidelinesor tools exist to help you and the organisation identify and deal with the

risks?

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c. Are there any risks that are not being adequately addressed? If so noteand discuss them with your manager.

The loan application processThe loan application and approval process can vary for reasons such as:

• the type of loan or loan product

• the borrower’s needs and risk profile

• the lender’s requirements

• the nature of the security

• the overall lending (economic) environment.

The lending process may also vary from one lending institution to another.However, Table 4 presents a simplified view of the loan application process.Whilst this table does not necessarily identify all the potential activities requiredfor a particular loan product and situations, it does present a high-level overviewof a typical transaction. The process presented assumes that real estate isoffered as security for the loan.

Although your job role may be involved you in only part of the process, anappreciation and understanding of the whole process is critical to competent riskassessment. Table 4 divides the process into separate stages and shows thetasks that must be organised or carried out by the lender (or the lender’srepresentative) at each stage.

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Table 4 The loan application process

Stage Lender’s responsib ilit ies

Stage 1: Identification of client’s

(borrower’s) needs

• gather information on client’s needs

• gather data about the client’s financial situation andexplain the process to the client

Stage 2: Analysis of the situation • analyse data

• identify products

Stage 3: Present a solution • present the proposal to the client

• negotiate a solution, if necessary

• offer alternative solutions, if appropriate

• address client questions and concerns

• gain approval from client

Stage 4: Submission of application • advise client of documents and evidence required

•

obtain completed application and supportingdocumentation from the client

Stage 5: Approval • liaise with client, if necessary

• assess application

• validate information supplied by the client

• determine feasibility of the solution proposed basedon evidence submitted

• grant conditional approval, if appropriate

• arrange valuation

• grant final approval

• prepare documents

• prepare offer letter and terms and conditions

Stage 6: Settlement • monitor progress

• liaise with client, solicitors, conveyancers, etc. ifnecessary

• carry out settlement

Stage 7: Post-settlement • provide ongoing client care

• provide account statements

• monitor security provided, as appropriate

While the loan application process set out in Table 4 assumes separate stages inthe process, in fact, a number of stages may be merged into one. However, asexplained earlier, Table 4 has been set out this way for simplicity of explanation.

In other cases, a face-to-face meeting may not occur at all, with all contact beingcarried out over the phone and by mail.

Preliminary loan assessment

A preliminary analysis of a proposal would normally include:

• identifying the borrower

• identifying the purpose of the loan

• assessing the adequacy of the amount and term of the loan

• determining general creditworthiness of the borrower and any proposedguarantor/s




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• assessing the location and quality of the security offered

• determining the borrower’s financial position (from financial statements andany cash flow projections) and gauging the corresponding ability of theborrower to service the proposal

• assessing the borrower’s length of time and experience in their field ofemployment or within their business (trading and property)

• assessing the conduct of the borrower with regard to existing facilities ofthe lender’s.

Before proceeding with an application the lender should:

• be satisfied with the quality of the borrower

• be satisfied with the quality of the proposal

•

confirm that the purpose of the request is legal and is within the lending policy• identify the business structure of the borrower, if required

• provide disclosure information to the client and any potential guarantors inaccordance with relevant legislation and codes.

Where borrowings are to be undertaken by joint debtors, there must be evidencethat all debtors will receive a direct benefit from the provision of the lendingfacility. All debtors must be made aware that they may be liable for the fullamount of the debt.

The borrower must be positively identified in order to ensure eligibility to borrow

from the lender, ability to provide security and legal responsibility for the liability.

The key questions

Table 5 provides an indication of the key questions that need to be answered ineach situation before beginning to evaluate creditworthiness. In summary, thereneeds to be an understanding of the borrower’s needs, which a lender shouldaim to satisfy, so that an appropriate level of investigation can be determined. Itis only after awareness of the basics of the transaction is achieved thatinvestigations can be made and creditworthiness analysed in an appropriatemanner.

Table 5 The key questions

Key questions Possible answers

Who is the borrower? • Individuals and sole traders

• Companies

• Trusts and partnerships.

How much will beborrowed?

What is the borrowing requirement, taking into account the purpose,i.e. purchase property plus all associated costs and government chargesless the borrower’s own contribution?





Key questions Possible answers

How long will the loanterm be?

For home lending the maximum term is generally 30 years. For commercialproperty purchases, the maximum term is normally 10-15 years withshorter terms for other business needs.

Other types of lending can vary greatly in duration. For example, personalloans may be made for three to five years, while overdrafts may extend to afew days or weeks.

How will the funds beused?

• Residential property purchase

• Commercial property purchase

• Plant and equipment purchase

• Working capital

• Consolidate debt

• Purchase existing businesses

• Purchase franchises

• For the purchase of personal or household items.

How will the loan berepaid?•

Principal and interest over maximum terms• Interest only subject to periodic renegotiation

• Payment from business cash flow.

How financially strong isthe borrower?

• The overall financial strength of the borrower

• Wide range from sole trader/fledgling entities to well respected majorcorporations

• Value of property and business varies widely.

How will the loan besecured?

• Mortgage over residential or commercial property

• Additional security over a business’s assets

• Requirement of directors’ guarantees

• Other charges over assets.

Who is giving security? Often third party by directors or other entities within a client group.

Preliminary assessment of credit, industry and bus iness risk

The principles of lending

Each borrower must be assessed individually against the organisation’s policyand lending criteria. One common method is assessment against the five ‘Cs’ oflending. This method of risk assessment is applicable to a broad range ofborrowers, including individuals and businesses.

Assessing credit risk using the five ‘Cs’ of lending method involves investigatingand assessing five major categories of potential risk. These categories are listedand explained in Table 6.




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Table 6 Assessing credit risk using the five ‘Cs’

Capacity Capacity refers to the borrower’s financial ability to repay the loan. Is their income orrevenue sufficient? Evidence for individual borrowers may include pay slips, taxreturns, statements or letters from employers, accountants or solicitors in the case of

low-doc loans.Evidence for business borrowers may include company tax returns, financialstatements, cash flow forecasts, budgets and accountant’s reports.

Character Character refers to assessment of the borrower to determine the likelihood that theywill, providing their Capacity allows, meet repayment obligations over the term of theloan. Evidence may include previous loan history, credit agency reports and savingshistory.

Capital Capital refers to the borrower’s financial strength, i.e. their assets compared to theirliabilities. It also refers to the amount they intend to contribute to the purchase.Generally, it is considered that a large deposit leads to greater commitment to meetobligations.

Collateral Collateral refers to the security being offered. Risk considerations involve assessing if

the outstanding loan balance could be easily realised through the sale of the securityasset.

Conditions This category includes any other conditions that might affect, and be beyond thedirect control of, the borrower and impact on their ability to repay the loan. Forindividual borrowers these include job security, relationship stability, family issuesand dependants. For business borrowers they include other conditions such as theeconomic situation and market conditions.

While the five ‘Cs’ cover areas of potential risk, good judgement is essentialwhen processing applications. Look objectively at applications and consider ifeverything appears to make sense and question areas that may warrant furtherinvestigation.

When assessing credit risk for businesses, the five ‘Cs’ method only provides apreliminary view of the business’s risk profile. Because every business isdifferent, and the factors impacting on that business may also be different, otherrisk assessment methods might need to be applied in order to improve the riskassessment process. Other methods include conducting risk analyses of both theparticular industry (assessing industry risk) and the business itself (assessingbusiness risk).

Industry risk factors

Industry risk refers to the risks associated with a particular industry sector.

Different industries, at various times, might be affected by any number of factorsincluding those set out in Table 7.

Table 7 Industry risk

Risk factor Issues to consider

Governmentlegislation andregulation

Is the business focused on meeting its regulatory obligations in a timely andcost-effective way?

What impact, if any, could a change in legislation have on the industry?

Seasonal factors Is there product diversity or other management techniques to deal with peaksand troughs in demand for particular products or services?

Economic cycles How susceptible is the business to changes in economic cycles?






Competitor activity Are strategies in place to discourage client migration to competitor products?

Dependence onsuppliers

Is supplier dependence minimised through identification of alternative suppliersand varying product mix?

Maturity of theindustry

Are strategies in place to manage migration to other products and services inthe mature stage of the industry cycle?

Overall profitability Are costs being controlled and is adequate emphasis being placed on the mostprofitable products and clients?

Cost structures Are strategies in place to lock in sales while developing a flexible coststructure?

Business risk factors

Business risk factors are those associated with a particular business. There canbe any number of risk factors that should be considered, as set out in Table 8.

Table 8 Business risk


Businesscharacteristics

• Business size — is the business big enough?

• Experience — has the business been operating for long?

• Competence — is the business considered to be competent in its operations?

• Integrity — is the business regarded as having high integrity?

• Reputation — is the business held in high regard?

• Maturity — is the business mature and maintaining reasonable growth?

• Diversity — does the business have a large product range and diverse clients?

Market factors • Market penetration — are products well established and in demand?

• Market risk — are the markets generally stable?

• Market forces — are competitive forces generally stable and predictable?

• Product differentiation — are there few alternative products?

Operations • Price — can the business influence supplier price?

• Continuity — are supplies readily available?

• Supply channel — are alternative suppliers available?

• Influence — does the business purchase enough supplies to be able toinfluence suppliers?

• Is the production process legal and safe?

• Is the capital equipment sufficient or will it need to be replaced/upgraded?

• Are there any environmental concerns?

• Is the business over- or under-stocked?

Production • Quality — are the products and services of high quality that meet the clients’needs?

• Consistency — is production reliable, and are products and services alwaysavailable?

• Technology — is the business up to date with the latest technology?

• Completion — are all orders and contracts completed on time and to clients’satisfaction?

• Disaster recovery — does the business have a plan to deal with disasters?

• Employee relations — does the business have good relationships with its

employees?




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Distribution • Network — does the business have networks that reach profitable markets?

• Reliability — is distribution reliable and achieved on time?

• Market coverage — is there wide market coverage, reaching the most profitable

segments?• Control — does the business have full control over distribution and promotion of

its products and services?

• Flexibility — is there a strategy to help predict changes and plan ahead tomaintain profitability?

Sales andmarketing

• Does the business have a marketing plan?

• Sales mix — are a wide range of products sold to major markets?

• Competition — is there little or no competition in major markets?

• Demand — are the products and services in demand?

• Market concentration — is the market diverse?

• Bargaining power — does the business control the sales prices?

Management • Board of Directors — is the Board of Directors independent and experienced?• Management experience — does management have wide industry experience

and a good performance record?

• Is the business dependent on key personnel? If so, is key person insuranceheld to cover these people?

• Depth and breadth of experience — is there a good mix of depth and breadth ofmanagement experience?

• Integrity — is the business held in high regard in the industry?

• Performance record — does the business have a record of meeting its forecastsand targets?

Accounting andrecord keeping

• Who maintains the records of the business and are they kept up to date?

• What are the key performance indicators, e.g. sales, gross profit, etc.?

•

Does the business plan for its taxation commitments?• Does the business prepare budgets and plans?

• Does the business have a system for debt collection and debtor follow-up?

Finance • How sensitive is the business to interest rate movements?

• How susceptible is the business to foreign exchange movements?

• Is the business highly geared?

As can be seen, the risk factors for analysing businesses are very varied andgood judgement needs to be applied to the task of risk assessment. Table 8provides a guide only and is not an exhaustive description of the many factorsthat might need to be considered when assessing a particular transaction.

Apply your knowledge 8: Ident ifying indust ry and business r iskfactors

Read the following scenario and identify as many types of industry andbusiness risk factors that you are able to, based on the informationavailable.

ABC Air Conditioning Pty Ltd imports air conditioners from one mainsupplier in China and distributes and installs these throughout the Sydneymetropolitan area. The company pays its supplier in US dollars.Thecompany is owned 50% each by Colin Bell age 49 and Martin Turner age

63.





The company has been in operation for the past 30 years. Colin enjoysinterpersonal relations and as such he manages the sales and marketingoperations of the business. Martin is a qualified accountant and looks afterthe financial affairs of the business. There is no succession plan in place. In

addition, no key person insurance is held for either Colin or Martin.The company’s sales have been solid over a number of years, however, anew entrant has recently established in Sydney and as a consequence, thecompany has had to slash profit margins by 15% to remain competitive.

This year the government has introduced a new tax levy on imports of thistype, amounting to an additional 10% import duty.

The company has a fleet of 20 vehicles used to distribute and install the airconditioners. The average age of the fleet vehicles is 10 years.


Information gathering

Information on the borrower and related parties is generally obtained from anumber of sources including:

• the borrower/debtor themselves

• employers

• directors/owners of a business

• accountant/financial controller

• physical inspection of a business site

• observations and casual discussions with employees of a business

• inspection of records, taxation returns, pay slips, financial statements,budgets, etc.

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• credit reporting and research agencies, for example, Veda Advantage,Dun & Bradstreet, Standard and Poor’s, IBIS

• government records, for example, ASIC

•

local knowledge and discussions with people familiar with the area• valuers, solicitors and real estate agents.

Who is the borrower?

It is essential for a lender to gain a thorough understanding of the borrower.The identification and understanding of the borrowing needs, which lead to thefinancing requirements, are fundamental to the assessment of the lendingproposal.

To begin the assessment it is important to gather the necessary information to

assess the ‘whos and hows’ of the proposal. Generally, the following detailswould be required:

• borrower’s structure

• borrowing purpose

• borrower’s financial information

• borrower’s summary and background

• management/management information systems (for a business borrower)

•

industry outlook/competition (for a business borrower)• repayment

• security

• verification of information to prevent fraud.

Borrower’s structure

• individual or business (sole trader, partnership, company, trust or other)

• list of directors and company secretary, if appropriate

• management structure.

Borrowing purpose

• details of existing borrowings and facilities — are they still appropriate?

• cause of current borrowing/purpose of finance sought, for example, purchasehome property, purchase commercial property, capital expenditure, specialproject, etc.

•

type and term of facility sought and level of equity provided, if any• identification of future funding requirements.





Borrower’s financial information

• an individual’s taxation returns, preferably for the previous three years, payslips, etc.

• historical financial statements (including notes), preferably for the previousthree years (for business lending)

• interim management reports for the current period

• explanation of any significant transactions and events reflected in the financialstatements

• cash flow projections together with assumptions upon which the projectionsare based, preferably covering the worst, expected and best-case scenarios

• feasibility studies for the project currently being undertaken

• statements of assets and liabilities of the owners/directors (for family andsmall business)

• business’s most recent taxation assessments, Business Activity Statements,etc.

Borrower’s summary and background

• individual business history

• significant events and activities

• size of operations

• historical trading performance

• current business objectives and strategy

• any competitive advantages the company possesses.

Appl y your knowledge 9: Determin ing the bor rower and the borrow ingrequirements

Read the following scenario and consider the questions raised.

Robert and Diane Williams currently lease business premises to operatetheir business, Cottage Furniture. The business manufactures woodfurniture and customised furniture. The business employs 15 staff. Thecompany name is Williams Pty Ltd trading as Cottage Furniture and thedirectors are Robert and Diane Williams.

The premises from which the business operates has recently come on tothe market for sale. Robert and Diane would like to purchase thenon-specialised commercial property in the company name for taxationpurposes. The purchase price is $3,000,000. Purchase costs are $100,000.Robert and Diane would like to contribute $1,600,000 via the companyWilliams Pty Ltd.




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Robert and Diane own their home at 3 Monto Drive, Marrickvilleunencumbered and have offered security over this property in addition to amortgage over the commercial premises being purchased at 26–28Commercial Road, Jackman. Directors’ guarantees will also be required.

a. Who is the borrower?

b. How much are they seeking to borrow?

c. How will the funds be used?

d. How is the borrowing to be secured?

e. Who is providing the security?


Management/management information systems (for a businessborrower)

• details of key management personnel including: qualifications, types ofexperience and current responsibilities

• scope and frequency of management reporting and the type of reportsprepared (examples may be provided)

• role of external accountants and business advisers.

Industry outlook/competition (for a business borrower)

• information on the borrower’s industry, including current outlook

• details of key market players and level of competition/relative market share

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• future marketing plans and strategies

• major suppliers and clients.

Repayment

• proposed debt reduction program, if any

• source of repayment funding, for example, rental income, trading income, saleof assets, refinance, etc.

Security

• where there is more than one entity in the group, who are the securityproviders?

• assets available and offered as security, and recent valuations (if available)

• details of any prior charges over either the assets offered as security or thecompanies themselves, for example, mortgage debenture.

Verification of information to prevent fraud

Fraud represents a significant risk to the profitable many businesses and,unfortunately, lending fraud is one of the most common types of fraud. Lendingfraud can range from misrepresenting the truth on a credit card applicationthrough to a complex fraud on a business loan, involving forged supporting

documentation and untruthful verification from third parties such as accountantsand suppliers.

All information provided in support of a loan application needs to beindependently checked and not relied upon at face value. This is why lendersusually have minimum validation requirements in place. This validation isparticularly important to allow lenders to identify discrepancies in informationprovided by their clients and to confirm, for example, that people actually earn theincome or have the assets they claim to.

Why people commit fraud

The most common reasons why people commit fraud include:

• financial problems

• lifestyle

• addictions, for example, gambling, drugs.

As a significant amount of documentation is generated to establish and confirmcreditworthiness, it is essential that lenders can confirm and validate the originalsof any documentation provided.




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Accepting only or iginal documentation

Originals of all documents should be sighted. Lenders have a responsibility tosight original information supplied for a loan application because by acceptingcopies or faxes of documentation there is a risk that the information may be

changed prior to the copy being received by the lender.

Read the documents, ask questions and analyse answers

Read all of the documents carefully. If there is something that the risk assessordoes not understand, is unsure of, or does not appear to be correct, they shouldask questions and continue asking questions until they fully understand thesituation. If a detail does not seem right, it probably is not. For example, is it likelythat a cleaner earns $150,000 p.a.?

Risk assessors should always analyse the borrower’s response to a question.

Think about what the borrower is saying. Does it make sense? Does it fit withearlier statements? By doing this the assessor can pick up on information thatmay be distorted, out of the ordinary or unlikely.

Warning signs

Some of the warning signs to look out for are:

• promises of high value business/funds to the institution in the future

• if a borrower’s home or business telephone number is a mobile

• low income but high asset strength which may indicate overstated assets

• the value of certain assets is out of line with total assets

• purchase price of a property is not in line with the suburb average

• borrower’s income is out of line with their job title

• a credit report that shows multiple applications to other lenders, butcorresponding loans are not on the borrower’s loan application

• if a company has been in operation for more than two years and their detailsare not in the White Pages and/or Yellow Pages, Google Maps or any otherbusiness listing facility.

Preventative measures

Fraud preventative measures include:

• Lenders should not use any telephone numbers, addresses, etc. suppliedwithin a loan application. Verify information by obtaining telephone numbersand addresses from the White Pages/Yellow Pages.

• If lending to a business, lenders should visit the business to confirm that thebusiness exists. This is also a good way to build relationships with clients.

• Confirm any company letterhead received shows the correct contact detailsand ABN. The ABN can be confirmed against public records available via theCommonwealth Government’s website <www.abr.business.gov.au>.

http://www.abr.business.gov.au/







• Ask the client about loan enquiries made on their Veda report, if appropriate.

Obligations as a lender

Regulatory compliance and ethical considerations in lending are critical asbreaches could leave the lender and their organisation open to severe penalties.

The regulatory and compliance framework for the financial services industry ishighly evolved. Industry participants need to keep up to date with changes andensure that they continue to comply with all the necessary requirements.

Consumers have varying levels of financial literacy and it may be based solely ontheir own experience and knowledge of the borrowing process. Lenders have arole in educating clients on the loan application and borrowing processes.

Assessing the borrower’s level of knowledge

Consumer law is based on the objective of ensuring that borrowers make fullinformed decisions. From an ethical point of view, and as sound businesspractice, it is a good idea to verify and record the borrower’s understanding of thetransaction they are considering. It is important to identify and eliminate any gapsin the client’s knowledge with regard to the borrowing process and the productsand services involved in the transaction.

Assessing a borrower’s level of knowledge and experience can be achievedsimply through discussion and questioning. For example, they will invariably offerinformation that will assist the lender, for example:

• ‘We are buying our first home’

• ‘I need a loan to finance the purchase of equipment for my business’

• ‘We are after a loan for an investment property’

• The lender can also gain information by asking some simple questions:

• Are you aware of the assistance available to first home buyers?

• Are you aware that there may be taxation concessions available for theacquisition of the equipment?

• Do you have any other investment properties?

Through conversation and by using active listening and questioning techniques,the lender can assess a client’s level of experience and knowledge, and can fill ingaps in that knowledge.

A borrower who fully understands the processes and requirements associatedwith taking out a loan will not be faced with any surprises. ‘No surprises’ means ahappier experience for them and the lender, and a higher level of consumerprotection.




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The costs of purchasing and borrowing associated with residentialand non-residential property

One of the main issues that borrowers need to be aware of are the potentialcosts associated with purchasing property and borrowing funds. Total costs canbe significant and need to be accurately estimated when calculating the fundsneeded.

The lender needs to know what costs are involved and how to calculate them inorder to properly advise their borrowers and to ensure that they have sufficientfunds available.

The cost components will vary depending on the purpose of the loan. Forexample:

• buying an existing house or refinancing

• borrowing for business purposes

• building a new house.

Costs are associated with both purchasing property and borrowing funds.

The following is a summary of the primary costs that should be allowed for ineach of these categories.

Purchasing costs

Purchasing costs are costs associated with the purchase and transfer of property.The costs listed here are payable by the purchaser.

Stamp duty (on property purchases)

Stamp duty is a state-based tax and is payable on the transfer of property, leasesand mortgages. The amount payable is assessed on a sliding scale, based onthe amount of the transaction. The amount increases as the transaction amountincreases. The rate of duty varies for each state.

The purchaser or transferee is normally liable for the duty on property purchases.

Some states offer stamp duty concessions such as reductions or exemptions forfirst home buyers.

Further resources

For details, visit your state or territory revenue office:

• New South Wales <www.osr.nsw.gov.au>

• Queensland <www.osr.qld.gov.au>

• Australian Capital Territory <www.revenue.act.gov.au>

• Victoria <www.sro.vic.gov.au>

• South Australia <www.revenuesa.sa.gov.au>

• Northern Territory <www.revenue.nt.gov.au>

http://www.osr.nsw.gov.au/

http://www.osr.qld.gov.au/

http://www.revenue.act.gov.au/

http://www.sro.vic.gov.au/

http://www.revenuesa.sa.gov.au/

http://www.revenue.nt.gov.au/

http://www.revenue.nt.gov.au/

http://www.revenuesa.sa.gov.au/

http://www.sro.vic.gov.au/

http://www.revenue.act.gov.au/

http://www.osr.qld.gov.au/

http://www.osr.nsw.gov.au/





• Tasmania <www.treasury.tas.gov.au/tax>

• Western Australia <www.dtf.wa.gov.au>

Solicitor or conveyancer charges

Although it is possible for a purchaser to undertake the conveyancing processpersonally, it may be a complicated and time-consuming process, and theconsequences of making an error may be significant. For these reasons mostpeople choose to retain the services of a solicitor or conveyancer. These peopleare licensed and required to have professional liability insurance. This providesprotection for both the purchaser and the vendor in the event of error ornegligence that results in either party suffering a financial loss.

Conveyancing fees vary but most are based on a set scale. In addition to the feecharged for conveyancing, solicitors and conveyancers also pass on to the

purchaser the incidental costs incurred in carrying out the service. These arecalled disbursements and may include the cost of photocopying, mailing andtelephone calls. Disbursements also include the fees of others involved in theprocess, including services such as pest and building inspection. These costs areoften paid for by the solicitor or conveyancer on behalf of the client and thencharged to the client.

Council and water rates

Purchasers of property are generally responsible for the payment of council ratesand taxes on a pro rata basis. The solicitor or conveyancer will verify thesecharges, calculate the payment required and ensure the amount payable onsettlement is adjusted accordingly.

Land tax

Land tax is a state issue and varies for each state. In some states, such as NewSouth Wales, land tax is payable on all properties except the principal residence.The principal residence may also be subject to land tax if its land value exceedsa certain amount and/or is greater in size than prescribed land holdings.

The existing owner is generally responsible for the payment of land tax; however,purchasers need to find out whether all taxes have been paid to ensure that they

do not inherit any of the tax liability.

Insurance

It is normally a condition of borrowing for the purchase of a property that anybuildings on the property that are part of the security are adequately insured. Thisis to ensure that the value of the security is preserved and the mortgagee’sinterests are protected in the event that the building is damaged or destroyed.This requirement applies to both residential and non-residential property offeredas security.

http://www.treasury.tas.gov.au/tax

http://www.dtf.wa.gov.au/

http://www.dtf.wa.gov.au/

http://www.treasury.tas.gov.au/tax




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Borrowing costs

Borrowing costs are those costs associated with taking out the loan. The costslisted below are payable by the borrower.

Appl ication or establishment fee

Most lenders charge a loan application or establishment fee. This is a one-off feefor the processing of the loan application and varies between lenders. The feemay also vary between different loan products provided by the same lender.

It may be payable when the loan application is submitted or at settlement. Atcertain times some lenders may offer ‘no establishment fee’ loans to attractclients for home lending.

In respect to commercial lending, the loan establishment fee can be substantialto reflect the administration work required in assessing a business loan

application. As a general guide, the fee is represented as a percentage of theloan amount, and is usually around 0.60% of the loan amount.

Stamp duty (on mortgages)

As well as stamp duty on the property purchase and transfer, stamp duty mayalso be payable on the mortgage. Where applicable, it is normally a percentageof the loan amount and is payable by the borrower.

Mortgage registration fee

Mortgagees protect their interest by registering the mortgage with the state landtitles office. This provides official recognition of the mortgagee’s interest in theproperty. Registration is carried out through the state revenue office, whichcharges a fee in the order of $100. The borrower is usually required to pay thefee. Some state and territory authorities also charge a discharge registration fee,incurred to release any mortgage/s held against a borrower’s sold property orproperties.

Valuer’s fee

Lenders normally require a formal valuation of the security property. Valuers

base their valuations on their experience and research of the prices paid forsimilar properties in the area. In many cases, for residential home lending, thevaluation fee will be incorporated into the loan application or establishment fee,although this will generally cover only one valuation. If more than one propertyneeds to be valued, the additional valuation costs will usually be charged to theborrower. Commercial property valuations can be substantially higher than that ofresidential property to reflect the complexities of the property involved andwhether it is specialised or not.





Lender’s mortgage insurance in respect to residential lending

The lender will often require the borrower to cover the cost of lender’s mortgageinsurance (LMI). This protects the lender in the event that the borrower defaultsand the value of the security property is insufficient to repay the outstanding debt.

There is a one-off premium that varies according to factors such as the LVR andthe amount of the loan.

Generally all securitised loans are covered by mortgage insurance, but this costmay be passed on to the borrower only if a lender’s LVR is exceeded — forexample, when the LVR reaches 60% or 80%. Non-securitised loans can also becovered by mortgage insurance; but, again, it will depend on a lender’s riskparameters whether the cost is passed on.

LMI should not be confused with mortgage protection insurance, which aborrower may choose to take out. Mortgage protection insurance pays off themortgage if something happens to the borrower and they cannot make payments.




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5 Lending products

This part of the topic looks at the range of lending products available designed tomeet client needs. While it is not possible within the scope of this topic to explore

each of the product offerings of different lenders, it is possible to examine themain loan product groups and their characteristics.

Today, there are a large number of different loan products on the market, eachwith its own characteristics and features. Loan providers can apply flexibility inthe way they package and market their products to further expand the range ofproduct options.

The lending products discussed are broadly grouped into consumer and businesslending products.

Consumer lending productsThere are numerous products on the market targeted at helping people meettheir personal financial needs. These range from credit cards and overdrafts topersonal loans and mortgages. For the purposes of study, these have beendivided into two different groups: personal lending and core property mortgageproducts.

Personal lending

Types of personal lending product, their purpose and characteristics, advantages

and disadvantages are detailed below.

Overdrafts

When the amount of money withdrawn from an account is greater than theamount available in the account the excess is known as an ‘overdraft’ and theaccount is said to be ‘overdrawn’.

The usual purpose of an overdraft facility is to fund temporary personal cash flowrequirements, although the facility can be put in place on a permanent basis, andfunds drawn if and when required.

The advantage of a permanent overdraft facility is that funds are available to fillany cash shortfall when required, without the need to apply for a loan at the time,as approval has been arranged in advance. In a sense, an overdraft can beconsidered to be a ‘line of credit’, although this term is commonly applied tohome equity loans, discussed later in this topic.

Interest rates for such facilities are relatively high but vary from provider toprovider. The rate can also vary depending on whether it is a permanentoverdraft or temporary facility. Temporary overdrafts usually incur a higher rate ofinterest. Interest is only changed on the amount drawn down at any particulartime and ceases once the amount is repaid.





In addition to the interest paid on the amount borrowed, fees apply. Though feesvary between providers, they may include the following components:

• establishment fee

• loan servicing fee

• other banking fees, such as ATM charges.

The loan servicing fee, if applicable, may be based on a sliding scale and mayrange from $0 upward, depending on the amount of the debt at a certain point intime.

Some of the other features of overdrafts are listed below:

• A limit is set on the total amount that can be overdrawn at any time.

• There are usually no minimum repayments required. (However, note that

interest continues to accrue and compound until the overdraft is repaid.Therefore, cautious and judicious use of the facility is essential.)

• Overdraft facilities are normally linked to one or more of the client’s workingaccounts.

The use of overdrafts has become less common with the advent and proliferationof credit cards which serve a similar purpose.

Credit cards

A credit card gives the borrower the ability to buy goods or services now and pay

for them later. It is a revolving line of credit to enable day-to-day purchases andrepresents an approval by a bank or company to use their money. Credit cardissuers are usually banks, even though the card may bear another companyname or logo. The name of the issuer appears somewhere on the card.

Trade names such as Visa and MasterCard are not actually card issuers. Theyare termed ‘membership associations’. Banks use them for their paymentprocessing services, policy setting and marketing assistance. Many differentlenders package their own cards and different terms of credit using the logo andservices of an association membership.

Common credit cards are:

• Visa

• MasterCard

• American Express.

The range of credit cards available and the facilities they offer are extensive. Alsoextensive is the range of fees and charges that can be incurred, especiallythrough ill-considered use by the consumer.

This topic will not attempt to cover all credit card variables available; however,following is a summary of some of the combinations and options available:




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No fee card — There is no annual fee for these cards and they usually provide anumber of interest-free days. That is, no interest is payable on the debt until thedue date, which will fall on a particular date each month. However, these cardsnormally attract a very high rate of interest on amounts not paid by the due date.

The provider may also make it a condition of retaining the no annual fee statusthat a minimum amount is purchased each year. It should be noted that mostcredit card providers charge the merchant, from which goods or services arepurchased, a percentage of the price paid by the consumer. This rate usuallyvaries with the volume and value of transactions for each merchant — the greaterthe volume and value, the lower the percentage charged.

Low rate cards — These cards incur an annual fee, but the interest charged onthe outstanding amount is usually lower than the no fee cards. These cards alsonormally offer a number of interest-free days.

Reward cards — These cards are linked to one of the many rewards schemesavailable, where points are allotted to the consumer for purchases made on thecards. For each dollar spent on the card, the client is awarded a certain numberof ‘points’. Usually, one dollar spent equals on reward point; however, this canvary. Once a specified number of reward points are accumulated, the client canexchange the points for the ‘reward’, which may be an airline flight, shoppingvoucher or merchandise.

Fees are charged and vary depending on the type of scheme, but they can berelatively high in some cases.

Store cards — Some large department stores or groups issue their own credit(or store) cards that operate in a similar way to other credit cards. They may alsooffer ‘rewards’ and options, such as fee or no annual fee cards, depending on

whether or not the consumer wishes to participate in the rewards or otherschemes.

Most of the other facilities applicable to other credit cards are also applicable tostore cards. It should be noted that most store cards are only designated as suchbecause they bear the name of the store or group. The credit provider is usuallya financial organisation, not the store or group. Therefore, the credit contactassociated with the card is with the credit provider, not the store. Consumersshould be made fully aware of who they actually have a contract with, and theconditions of that contract, especially in relation to the interest rates that arechanged for outstanding balances, and other fees.

Personal loans

A personal loan is a pre-determined loan of a fixed amount borrowed from a bankor other lender by an individual, generally for a specific purpose. There are manypurposes for which personal loans are approved. The more common ones areconsolidation of other debts, the purchase of cars and paying for travel, but otherpurposes might include paying for medical and dental expenses.

Personal loans may be unsecured or secured. If they are secured, the securityusually consists of the item being purchased, which in most cases is a car orother vehicle.

Depending on the provider, there may be flexibility to choose between a variablerate loan or a fixed rate loan, and fixed repayments or variable repayments.





A personal loan can have many advantages for the borrower. For example, ifused for consolidating a debt, several outstanding credit card debts, whichusually attract a high rate of interest, can be combined into one personal loan,typically at a considerably lower rate of interest.

Although the interest rate on a personal loan is typically lower than credit carddebt, it is still higher than other forms of loan such as home equity lending.Secured personal loans usually attract a lower rate of interest than unsecuredloans.

When fees and charges are factored into the interest rate equation, the rate canbe quite high. For example, the effect of establishment fees and loan servicingfees, if applicable, can increase the interest rate from 15% p.a. to 18% p.a. Thisis why the client is advised to review the comparison rate which takes account ofsuch fees and changes. Comparison rates are discussed in more detail in Topic3 in this subject.

There are usually minimum and maximum amounts which can be borrowed usinga personal loan facility.

Other fees and changes

As well as the establishment fee and loan serving fee, other fees may beapplicable. These include:

• guarantee fee (for adding a guarantor to the loan)

• settlement cheque fee*

•

Late payment fee.* Most providers offer at least the first cheque free, but may charge for subsequent cheques. Multiple cheques

may be required and drawn to consolidate a number of existing debts into one loan.

Consumer leases

A consumer lease is a form of finance obtained through a credit provider for theacquisition of items such as cars and more expensive consumer goods such astelevisions, computers and whitegoods.

Under a consumer lease arrangement, the consumer does not immediately own

the product, but rather they lease it for an agreed regular payment and for anagreed time. At the end of that time, the consumer usually has several options.For example, they may have the option to:

• pay an additional amount (usually agreed in advance) to buy the product, andtherefore acquire ownership

• hand the item back to the provider

• upgrade the product (and the lease) to a newer model of the product

Consumer leases are attractive to some consumers because they allow them tohave and use the product they desire or need without having to pay the full price

upfront. At the end of the lease period, they have options about what they can do.There are a number of areas of caution of which consumers need to be aware.




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These include the following:

• The consumer does not own the product when they start making leasepayments. Many consumers believe they own the product once they takepossession. This is not the case. The ownership remains with the credit

provider until they make the decision to pay whatever amount is required atthe end of the lease period.

• Leasing is an expensive option. The total amount paid is high compared tobuying the item outright at the start and often higher than other forms of credit.

• Defaulting on a payment can have severe consequences. Because theconsumer does not own the product, it may be repossessed even if onepayment is missed.

Consumer leases should be distinguished from business or commercial leaseswhich are often taken out for the acquisition of equipment (including cars) needed

to carry on a business or commercial enterprise. These types of commercialleases are often attractive to business because of their potential for taxdeductibility of lease payments, and because they mean the business can retaincapital for other purposes.

The NCC and consumer leases

The NCC applies to consumer leases except in the following circumstances:

• leases for a period of four months or less, or for an indefinite period

• leases where goods are hired by an employee in connection with the

employee’s remuneration or other employment benefits.Under the NCC a consumer lease must be in writing and contain at least thefollowing information, if ascertainable:

• a description or identification of the goods

• the amount or value of any amount to be paid by the lessee before thedelivery of the goods

• the amount of any stamp duty or other government charge payable by thelessee

•

the amount of any other charges payable not included in the rental and adescription of those charges

• the amount of each rental payment to be made by the lessee, the date of thefirst rental payment and the dates on which subsequent rental payments aredue or the interval between rental payments

• the number of rental payments to be made by the lessee, and the total amountof rental payable

• a statement of the conditions on which the lessee may terminate the lease

• a statement of the liabilities (if any) of the lessee on termination of the lease.





Core property mortgage products

Core property mortgage products (home loan products) make up a largeproportion of all lending in Australia. Home loan products are packaged byproviders in such a way as to meet the many and varied needs of consumers.

They are usually distinguished in terms of features or characteristics such as:

• interest rates

• method of calculating the interest — variable or fixed

• portability — the ability to keep the same loan if moving to a new home

• loan term

• fees and charges

• redraw facility — if the borrower has made additional loan repayments they

can access these funds by way of a redraw facility

• top-up — the ability to extend the credit limit on an existing loan

• offset accounts — the ability to link the mortgage loan account to a transactionaccount. Funds in the transaction account then ‘offset’ the loan account.

Table 9 lists the types of core property mortgage products along with theirdistinguishing characteristics. The products, including their advantages anddisadvantages are described in more detail in the following sections.

Table 9 Core property mortgage products and their characteristics

Core propertymortgage products

Characteristics

Variable rate loans The loan is subject to interest rate movements

Fixed rate loans The interest rate has been fixed for a period of time

Capped rate loans The interest rate has a ‘ceiling’ set

Discounted variablerate loans

Same as a variable rate loan except i t has a discount to the standard variablerate for a certain period of time

Low start loans Low initial loan repayments increasing over the term

High start loans High initial loan repayments decreasing over the term

Split or combinationloans

Part of the borrowing is on a variable interest rate and part of the borrowingis on a fixed interest rate

Home equity loans Revolving line of credit

Consolidation loans Two or more loans consolidated into one to make managing loans easier andin most cases reduces the loan repayments required

Low-doc and no-docloans

Little or no documentation provided to prove a steady income stream.

Equity release products Ability to release home equity without the obligation to make regularpayments

Equity financemortgages

Boost borrowing capacity or reduce repayments in return for relinquishing aportion of any capital gain




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There are a number of products that make up the basic core of all mortgage loanproducts. The products discussed here are presented in generic terms. Eachorganisation will combine, package and market products slightly differently toproduce their individual products. The activities in this topic will help to identify

your organisation’s product range and features.

Variable rate loans

These are Australia’s most popular type of home loan. The interest rate can varythroughout the term of the loan, going up or down, in accordance with prevailingeconomic conditions.

Loan terms can vary, with maximum terms typically up to 30 years, depending onthe age of the borrower.

Table 10 Advantages and disadvantages of variable rate loans

Borrower Lender

Advantages If interest rates drop, repayments alsodrop.

Generally extra or additionalrepayments from the principal can bemade without adjustment. Thus, theloan can be paid off faster.

Lenders can pass on all changes in thecost of funding to the borrower.

Disadvantages If interest rates rise, repayments alsorise. This means the borrower mustmake larger payments.

These loans are more difficult to sell ina rising interest rate environment.

Fixed rate loans

A fixed rate loan means that the borrower’s interest rate and repayments arefixed for a set period, usually one to five years. Most fixed loans automaticallyrevert to a variable loan at the end of the term, unless the borrower decides to‘roll’ the loan over for another fixed term (at a new fixed rate).

Table 11 Advantages and disadvantages of fixed rate loans

Borrower Lender

Advantages Fixed rate mortgages afford the

borrower some certainty about howmuch their regular repayments will be.When rates rise, borrowers areguaranteed that their interest rate, andconsequently their repayments, will notgo up, at least for the duration of thefixed term.

Fixed rate mortgages have premium

interest rates. Lenders are selling riskmanagement as a service toborrowers.

Disadvantages The interest rate does not drop ifvariable rates drop.

It may not be possible to pay extraamounts off the principal withoutincurring a financial penalty.

There may be financial penalties forchanging from a fixed rate to a variableloan, or changing lenders, before thefixed term is over.

The lender could end up with a loanthat provides comparatively low profit ifinterest rates were to increasesubstantially during the period the loanis fixed.





Capped rate loans

A capped rate loan has an interest rate ‘ceiling’ set. The rate cannot exceed thisceiling during the period of the capped rate. The interest rate can move below the ceiling.

Rates are normally capped for one year or less and then revert to the normalvariable rate. These loans are designed to attract new loan business.

Table 12 Advantages and disadvantages of capped rate loans

Borrower Lender

Advantages If interest rates increase, the mortgageinterest rate will not rise beyond thelender’s ceiling or cap.

If rates decrease, the interest rate willprobably fall in line with market rates.

Capped loans provide an incentive toborrowers, while minimising the lender’sexposure.

Disadvantages Capped loans are generally onlyoffered as a ‘honeymoon’ rate to newclients.

There is no guarantee that the variablerate the loan reverts to will be lowerthan other lenders’ rates. There areexit penalties for early repayment.

If interest rates rise significantly abovethe imposed ceiling, a lender may face aloss on the transaction.

Discounted variable rate loans

This product is almost the same as a variable rate loan except that it offers adiscount to the standard variable rate for a certain period of time, usually one

year. This rate is sometimes referred to as a ‘honeymoon’ rate.

If the standard variable rate decreases, the discounted rate decreases by thesame margin. For example, if the standard rate is 10% and a discount of 2% isgiven, the borrower’s rate is 8%. If the standard rate drops to 7%, then theborrower’s rate also drops proportionately to 5%. A discount may also apply forthe full term of the loan, although the loan will generally lack features such asrepayment redraw and interest offset.

Table 13 Advantages and disadvantages of discounted variable rate loans

Borrower Lender

Advantages A reduced interest rate often equatesto lower repayments, with the borroweralso having the ability to makeadditional repayments without penalty.

Discounted variable loans give anincentive to borrowers, whileminimising the lender’s risk.

The ‘cost’ of the discounted portion ofthe loan can be easily calculated.

Disadvantages Penalties for discharging the loan early(generally within the first five years)can be very high.

Because the National Credit Codeplaces limitations on exit fees, lendersmust be careful not to breach theCode.




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Low start loans

Low start loans allow for low initial repayments, which increase over the term ofthe loan.

Table 14 Advantages and disadvantages of low start loans

Borrower Lender

Advantages Attractive to borrowers with low incomes,or large financial commitments, whoexpect their income to increase duringthe term of the loan.

Allows lenders to target a specificborrower market.

Disadvantages Very little principal is paid off in the earlyyears, so total interest payments aregreater than a standard loan over the lifeof the loan.

Repayments increase by a certainpercentage each year while generallyincomes do not increase at the same rate.

Because these loans are offered tolower income earners, there may be agreater risk of borrowers’ default.

Higher level of delinquencies/losses(e.g. Home Fund).

High start loans

The reverse of a low start loan applies — repayments will decrease over time.

Table 15 Advantages and disadvantages of high start loans

Borrower Lender

Advantages Attractive to borrowers who haveaccess to higher income in the early

stages of the loan, thereby reducingthe loan principal earlier.

Allows lenders to target a specificborrower market.

Disadvantages If the borrowers lose some of theirincome in the early stages of the loan,they may have trouble meeting thehigher initial payments.

New loans are needed to replace theserapidly repaid loans, so as to maintainthe lender’s loan portfolio.

Split or combination loans

Split (or combination) loans allow borrowers to take up part of their loan at avariable rate and part at a fixed rate.

Table 16 Advantages and disadvantages of split or combination loans

Borrower Lender

Advantages Offers borrowers the chance tominimise risk in times of rising interestrates by having a portion of their loanwith a fixed interest rate. This gives ablend of repayment flexibility andinterest rate security.

The same advantages as for fixed rateand variable rate loans.

Disadvantages The variable interest rate portion of theloan is still vulnerable to increases ifrates go up.

If interest rates drop below the fixedrate, borrowers are still compelled tomake repayments at the higher rate forthat portion of the loan.

The same disadvantages as for fixedrate and variable rate loans.





Home equity loans (line of credit)

A home equity loan is a line of credit secured by a registered mortgage over aresidential property. Most home equity loans operate like an overdraft facility.Funds drawn from the facility can be used for lifestyle and investment purposes.

Table 17 Advantages and disadvantages of home equity loans

Borrower Lender

Advantages When the loan is established,borrowers can use the money, asneeded, for whatever purpose theychoose.

Interest rates are lower than otherforms of credit such as credit cards.

Allows lenders to provide loans forpurposes other than real estateinvestment, secured with a mortgage.

Disadvantages Easy access to money for anypurpose. However, a maximum limit is

established on the loan account,usually within an acceptable lendingratio, and therefore borrowers arerarely able to extend beyond theirpayment capacity.

Debt is not reduced over time, leavingborrowers with an ongoingcommitment.

Reduction in the value of the assetmay lead to amount advanced not

being fully recovered.

Consolidation loans

These loans allow borrowers to combine or consolidate several loans into onesingle rate loan secured by mortgage. For example, the borrower may alreadyhave a home loan, but also be paying higher interest rates on a car and personalloan, and a credit card debt. By consolidating all these loans into the home loan,the overall interest rate is reduced.

Table 18 Advantages and disadvantages of consolidation loans

Borrower Lender

Advantages Consolidation of several of theborrower’s debts means a lower overallinterest rate and cheaper monthlypayments.

Allows lenders to provide loans forpurposes other than real estateinvestment, which are secured with amortgage.

Disadvantages Loans that would have normally beenpaid off in a short period, for example,five years with a personal loan, are notfinalised until the mortgage is repaid.

Consolidation loans can present morerisk to the lender. Although somepeople consolidate loans forconvenience and ease of payment,others rely on the smaller regularrepayments to carry them throughperiods of financial difficulty.If circumstances deteriorate, the lendermay have to deal with a defaultsituation.




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Low-doc and no-doc loans

Low-doc and no-doc loans were initially designed for those in business who couldnot supply two years of trading and financial results. To be eligible for one, anapplicant had to supply an ABN. Low-doc loan applicants had to provide a

statement that their earnings were a certain amount, while no-doc loan applicantssimply required a Statutory Declaration that they could ‘afford’ the loan. Theseloans were available to both individuals and private companies.

Under the new credit regime, no-doc loans to consumers are no longer possible,due to the requirement that lenders make reasonable enquiries about theapplicant’s financial position and objectives. There is also a requirement that thelender make reasonable enquiries to verify the information provided.

Because the extent to which lenders need to identify and verify an applicant’sfinancial position and objectives is scalable, low-doc lending is still possiblewhere, for example, the stated income is supported by the applicant’s accountant

or a loan with a low loan-to-valuation ratio (LVR) is being made to anexperienced consumer.

Every lending organisation will have its own policies and procedures with regardto low-doc and no-doc loans. It is expected that the policies and procedures willincorporate a process to counsel and advise clients of the risks associated withthese types of products if incorrect or inaccurate information is provided.

By their nature, low-doc and no-doc loans present the lender with a higherdegree of risk. This additional risk is offset by higher interest rates and, possibly,costs associated with the loan.

Equity release products

Equity release products allow people to access the equity they have in theirhomes whilst continuing to live in the home. Two types of equity release productsare discussed in this section – reverse mortgages and home reversion schemes.

Reverse mortgages

Reverse mortgages (also known as ‘equity tap’ or ‘seniors’ loans’) allow people toaccess the wealth stored in the home (equity) without selling the home andwithout needing to make regular loan repayments.

Reverse mortgages, as the name implies, work in the opposite way to a homeloan. A loan is made using the borrower’s home as security. The principal andinterest are not repaid until the home is sold, which in many cases occurs whenthe borrower permanently vacates the home. For example, if the person dies orsells the home to move to a retirement village.

This type of loan is increasing in popularity with certain groups, particularlyretirees, who no longer have a permanent or sufficient income stream to maintaintheir lifestyle.

It is difficult to estimate the total cost of a reverse mortgage as this depends on anumber of uncertain variables. These include:

• future interest rate movements





• the duration of the reverse mortgage, which is unknown at the time ofestablishment

• future movements in real estate prices.

Risks of reverse mortgages

There are a number of risks associated with reverse mortgages of which both thelender and the borrower must be aware. These include the following:

• The borrower may use all the available credit for living expenses or lifestylepurchases. This may result in a drop in income with no further credit available.This may, in turn, result in the borrower needing to sell the home in order tocover living expenses or to pay for emergencies, such as a sudden illness.

• The borrower may reach the end of their credit limit and not be able to affordto continue to maintain the property. This situation, too, may result in the need

to sell the property.

• The combination of spending money derived from the equity in the home andcompounding interest could mean that all the equity in the home is exhausted. After selling the home there may be insufficient funds left for the borrower tofund satisfactory alternate accommodation, such as that in an aged carefacility.

Table 19 Advantages and disadvantages of reverse mortgages

Borrower Lender

Advantages Allows borrowers to free up the equity

in their homes to maintain or improvetheir lifestyle.

Allows financial independence withoutthe need to sell the home.

No need to ‘downgrade’ the home orrelocate to obtain additional funds.

Allows lenders to provide loans for

purposes other than real estateinvestment, which is secured with amortgage.

Allows targeting of specific market.

Disadvantages Reduces the value of the owner’sestate.

There may be little or no equity leftafter death.

Limits future options, such as the needto move to residential care situation.

May cause family disputes.

May affect Centrelink benefits.

Expenses may be incurred in sellingthe property on the death of theborrower to repay the loan.

Debt may increase at a different ratefrom the increase in value of theunderlying security property.

Home reversion schemes

Home reversion schemes are similar to reverse mortgages in that they enableretirees to remain in their home and access the equity without incurring anobligation to make regular repayments. However, there are significant differencesin the way that these two equity release products operate and consumers willface different risks depending on which option they choose.




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Unlike a reverse mortgage which is based on a charge (i.e. mortgage security),a home reversion scheme is based on a conveyance (i.e. part-sale of the home).The customer receives a discounted payment in exchange for a fixed proportionof the future value of their home. This discount compensates the provider for the

absence of any repayment cash flows over the term of the facility and the rightgranted to the customer to continue to occupy the secured property.

For example, assume a home is valued at $200,000 and the owner wishes toequity release 50% of the value of their home. Although this equates to$100,000, they will only receive a discounted sum. This sum will be affected bythe location of the property and the customer’s age. The discounted sum may bebetween 40-65% of the value or, in this example, $40,000-$65,000.

When the home is sold, the provider of the home reversion scheme will beentitled to the equity release portion of the sale proceeds (i.e. 50% or $100.000 inthe above example).

Home reversion schemes are only currently available in certain post code areasof Sydney or Melbourne, and there is currently only one home reversion schemeprovider in Australia.

As with a reverse mortgage, it is difficult to estimate the total cost of a homereversion scheme as this depends on a number of uncertain variables.These include:

• the duration of the home reversion scheme

• future movements in real estate prices.

Because the home reversion scheme is a real estate transaction rather than a

loan, home reversion customers do not face interest rate risk. The cost of a homereversion scheme will depend on how property values change.

Table 20 Advantages and d isadvantages of a Home Reversion Scheme

Borrower Provider

Advantages Allows borrowers to release the equityin their homes to maintain or improvetheir lifestyle.

Allows financial independence withoutthe need to sell the home.

No need to ‘downgrade’ the home or

relocate to obtain additional funds.

Allows a provider to extend their clientbase to include retirees.

Enables investors that fund theseproducts to access high quality securityrights.

Disadvantages May reduce the value of the owner’sestate.

Limits future options to deal with theproperty offered as security

May cause family disputes.

May affect Centrelink benefits.

There is no regular cash flow receivedthrough ongoing repayments.

The cost of providing the facility mayincrease if property values move at adifferent rate to interest ratemovements.





Advice regarding equity release

Particular care needs to be taken when dealing with and advising on EquityRelease products in order to protect the client and the provider. As with otherproducts, your organisation will have specific policies, procedures and guidelines

in place to ensure such protection, and to ensure compliance with relevantregulation and codes.

Some of the protections may include:

• being fully informed about the client and their financial situation whenassessing the suitability of an equity release strategy

• ensuring that the client is fully informed about how the equity release optionthey have selected works and the potential pitfalls

• encouraging the client to discuss the proposed loan with family members,as they too should be aware of the potential financial risks associated with thetype of product and how it might affect any anticipated inheritance

• encouraging the client to seek independent legal and financial advice, anddiscuss the implications with Centrelink

• ensuring that the client is fully aware of conditions that are normally attachedto such facilities. For example, the need to maintain adequate insurance onthe property, to maintain the property in good condition, and may need toobtain the provider’s approval for other people to live in the home, etc.

ASIC has prepared a number of publications and tools to assist consumers withequity release products. These can be accessed through the ASIC consumer

website, <www.moneysmart.asic.gov.au> and typing ‘equity release’ into thesearch field.

Equity finance mortgages

An equity finance mortgage (EFM) works in conjunction with a traditional homeloan. It can boost a lender’s potential borrowing capacity by up to 25%, or reducethe size of their repayments by up to the same amount. The shared equityportion, which can be up to 20% of the purchase value of a home, is funded bythe ‘equity finance’ part of the mortgage. A borrower pays zero interest on thispart of their loan total; however, in return for trading off that interest, the equity

finance lender is entitled to up to 40% of any future capital gains or will absorb upto 20% of any capital losses on the property as a substitute for a traditionalinterest rate.

Key aspects of an equity finance mortgage include:

• A borrower is allowed to borrow up to 20% of a property’s value.

• There is no annual percentage rate applicable to the equity finance portion ofa loan, unless the borrower is in default.

• Borrowers are not required to make any regular monthly interest repaymentsthroughout the EFM loan, which they can hold for 25 years.

• When a borrower sells the property or repays the EFM for some other reason,they repay the EFM amount they originally borrowed plus up to a 40% shareof any increase in the value of the property.

http://www.moneysmart.asic.gov.au/

http://www.moneysmart.asic.gov.au/




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An EFM can also reduce current monthly mortgage repayments for borrowersrefinancing their existing loan, or allow borrowers to buy a more expensiveproperty than they might otherwise be able to afford.

However, consumer groups have warned borrowers to ensure that they are

aware of the number of fees, charges, terms, conditions and lending criteriaapplicable to an EFM before considering whether it is appropriate to theircircumstances.

Further resources

More detailed information regarding equity finance mortgages can be foundon the EFM website <www.efm.info>.

Comparison rates

To assist prospective consumer borrowers in understanding exactly how muchthey are paying for their loan, the National Credit Code requires that creditproviders supply a comparison rate when they advertise the interest rates of theirloan products. For example, a bank might advertise its home loan interest rate as5.5% p.a. However, when fees and charges are added, the real rate might be6.75% p.a. They must also advertise this figure, which is known as the‘comparison’ rate.

Calculation of the comparison rate is complex. It is determined using a standardformula which takes into consideration factors including the following:

•

amount of the loan• interest rate

• term of the loan

• frequency of repayments

• fees and charges connected with the loan.

Fees and charges do not include government charges such as stamp duty,mortgage registration fees and fees and charges which are not ascertainable atthe time the comparison rate is provided.

Table 21 demonstrates how applying the comparison rate can change theperspective of two loan interest rates.

Table 21 How comparison rate can change perspective of two loan in terest rates

Interest Rate Fees and charges (as a %) Compari son rate

Loan A 6.00% 0.5% 6.5%

Loan B 6.25% 0.1% 6.35%

Using the comparison rate it becomes clear that the loan which at first appears tobe the most expensive is, once fees and changes are taken into consideration,

the cheaper of the two.

http://www.efm.info/

http://www.efm.info/





Other factors

Because the comparison rate does not include government fees and charges,and other changes that cannot be determined at the time, it may not provide acomplete summary of the total cost of a loan.

Consumers also need to take into account factors which may make one loanmore attractive than another, such as free banking services, flexibility ofrepayment arrangements and redraw facilities. For these reasons, consumersshould careful to consider the whole loan package being offered and the pricebeing charged. However, the comparison rate provides an excellent starting pointin determining the most suitable loan for individual circumstances.

When providing the comparison rate, the credit provider is obliged to tell theclient the amount of credit and the term on which it was based. The creditprovider must also include a statement that informs the consumer that thecomparison rate applies to the example or examples only, and that it will differ

under different circumstances.

Apply your knowledge 10: Compar ison of rates

Research the interest rates charged on similar products by three (3)different organisations, your own included if you wish.

Note the interest rate and comparison interest rate quoted for the product.

Which organisation has the biggest difference between the interest ratequoted and the comparison interest rate?

Organisation 1

Product:

Advertised rate Comparison rate

Organisation 2

Product:


Organisation 3

Product:


The product with the greatest variation between the advertised rate and the comparison rate is:

Product:

Enter text here

Enter text here Enter text here

Enter text here


Enter text here


Enter text here




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Business and commercial lending products

This is a wide range of lending products available for a similarly wide range ofcommercial purposes. Some of the purposes which are encompassed by

commercial lending include:• purchase of commercial property or industrial property (either for owner

occupation or investment)

• import or export of capital equipment and/or stock for a business

• purchase or expansion of an established business

• a new business venture

• purchase of plant and equipment

• provision of working capital

• construction and developments

• rural enterprises.

In fact, commercial loans are available for any genuine business-related need.The range of commercial lending products generally offered to these clientsincludes:

• Overdraft facilities are principally used for working capital needs of a short-term nature.

• Term loans usually cover borrowings for business or commercial property

purchases or major plant and equipment upgrades. There are also market ratecommercial loans which are offered at competitive rates for more complexbusiness clients for specific projects.

• Forward start loan agreements are for business clients wishing to borrowfunds at a set date in the future.

• Bank guarantees pay a nominated beneficiary a defined amount on demand.

• Commercial bill s are suitable for sophisticated business borrowers seeking amore flexible lending product.

• Debtor finance assists cash flow to fund growth for businesses with a

substantial annual turnover.

• Leasing finance is used by business clients to finance plant and equipment,or for the purchase of motor vehicles used in the business.

• Trade finance is for business clients undertaking international trade(exporters and importers).

An overview of commercial lending products available under these categories isset out below.





Bank guarantee

A bank guarantee is a guarantee issued by a bank to pay a nominatedbeneficiary, in a fixed amount and on demand. This product is normally onlyavailable to established clients of high financial standing and integrity.

Bank guarantees are typically used by businesses as a security deposit to theproperty owner of rented premises, in place of cash, and similarly by governmententities for statutory requirements. This facility may also be used by businessesfor their suppliers.

Typical features of bank guarantees include:

• The guarantee should be unconditional, irrevocable, be in Australian dollarsand be drawn in an Australian financial institution.

• The guarantee is secured in the same way as other business products.

Example: Bank guarantee requirement

A long-term client of the bank wishes to move to larger, more modernpremises. The business seeks a long-term lease of five years with a furtherfive-year option. The owner of the new premises has not previously haddealings with this client and seeks a security deposit of one year’s renttotalling $250,000.

In lieu of the business providing a cash deposit, the business can requestthe bank to issue a bank guarantee for $250,000 in favour of the owner.The facility will need to be secured along normal commercial requirements.

The owner will accept the bank guarantee in lieu of cash, as the documentis payable ‘on demand’ with the risk being borne by the bank instead of thelessee.

Commercial bill facility

This product suits borrowers looking for a more flexible borrowing instrument thannormal market rate commercial loans.

Commercial bills are discounted securities. A bank adds their acceptance to thebill before seeking to sell the bill(s) to investors. By adding its acceptance, a banktakes on the liability to the investor for payment at maturity.

Being a discount security, the drawer (borrower) receives a discounted amountfrom the face value on the drawdown date and pays back the face value on thematurity date, the difference being the interest charged.

The size of the facility determines the interest rate on a bill. The borrower is alsocharged an acceptance fee, which varies with the client’s level of credit risk.

Typically, a commercial bill facility funds business needs that are of a capitalnature, or a substantial sum is required.

Typical features of a commercial bill facility include:

• drawn by borrowers, accepted by banks, meaning the bank takes on the riskto repay the buyer at maturity




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• an acceptance fee applies

• terms are usually 90-days

• a fixed rate may be available if structured as a loan for longer periods with

intervening rollover dates.

Example: Commercial bill facility requirement

Top Fashion Designs is a large retail clothing chain of stores. It has 400outlets Australia wide. Strong sales are achieved during the summer andwinter seasons when the business’s cash flow is high. During spring andautumn, sales are not so strong and the business needs to borrow duringthese periods, usually requiring a minimum of $2 million. Therefore, thebusiness needs a flexible facility to draw down in spring and autumn andthe ability to repay the facility during summer and winter.

A commercial bill facility would be the most appropriate product as thefacility can be drawn down during the time of need, for example, a 90-daybill during spring. At the maturity of the bill, that is, at the end of 90 days,the facility need not be rolled over until the business next requires funding.The product would be competitive as it is aligned to a market rate. A marketrate commercial loan does not have this same flexibility.

Debtor finance

Debtor finance is a cash flow product which provides cash for business growth orto support cash flow.

Typical features of debtor finance include:

• the facility may be secured against business assets, such as outstandingdebtors, that do not include real property

• funds can be provided at very short notice if paperwork is in good order

• each business is assessed on factors such as how profitable it is, the qualityof debtors, future prospects.

This kind of financing suits businesses that are growing quickly but haveinsufficient assets available to offer as security.





Example: Debtor finance facility requirement

Beverly Hills Educational Book Productions Pty Ltd produces educationalmaterial for secondary educational needs, that is, for high schools. Thecompany’s annual turnover is $2.5 million. Its main client is the State

Government who purchases the books for all public secondary schoolsacross the state. As a government body, they are slow with payment ofinvoices and funds are generally not received by Beverly Hills EducationalBook Productions until, on average, 70 days after the invoice date. At anygiven time, the State Government has outstanding debts to the company of$380,000.

The company rents its operating premises, and production equipment isfully financed under a lease arrangement. The owners of the company, Maxand Judy Johnston, also rent their home property as all equity has beeninvested in the company.

In this example, neither the company nor its owners have acceptable assets thatcould be provided to the bank as security support for the company’s borrowingneeds. Its main client, however, is considered very safe and reliable for paymentof its debts, though they are slow paying. Therefore, this would represent an idealclient for a debtor finance facility whereby the bank could fund up to 80% of themoneys owed by the State Government, that is, on average $304,000, to assistwith the company’s cash flow and ability to grow further. When the StateGovernment does pay its invoices, the balance, that is, the remaining 20% - onaverage $76,000 - is then reimbursed to the client, less the bank’s fees andinterest charges.

Forward start loan agreement

This type of product suits clients who wish to borrow funds at a date in the future,but want to fix the interest rate for a loan. The benefit of this approach is that theborrower knows in advance what the interest rate will be, hence reducing theirexposure to movements in interest rates until the loan is drawn down.

This involves a separate agreement to the loan. If the loan does not go ahead,the client may be required to pay a fee to break the arrangement.

Typical features of a forward start loan agreement usually include the following:

• large minimum loan amount

• underlying loan is for a fixed term

• two sets of documentation are required - one for forward start agreement andone for the loan.




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Example: Forward start loan agreement requirement

Smith Wholesalers Pty Ltd is constructing new warehouse premises.The construction is being progressively financed by the company’s owncash resources. However, upon completion, estimated in one year’s time,

the bank has pre-approved a $2 million business term loan — with a fixedinterest rate with monthly principal and interest repayments over five years.There is market speculation that interest rates will increase over the next12 months and the management of the company wishes to reduce theirinterest rate exposure and take advantage of the bank’s current five-yearfixed interest rate.

The benefit of the product for this client is that they know what theirborrowing requirement will be in the future and so they will be able tosatisfy their need to lock in the interest rate now even though the loan willnot be drawn down until 12 months time.

Leasing facilities

There are various forms of lease (equipment) finance, many offering the samefeatures. The main differences between products relate to the item beingfinanced and the possible tax benefits. The different types of leasing facilities are:

• Chattel mortgage is a commercial bill of sale facility that can be used by abusiness client to finance equipment used in their business.

• Lease facilit y is used to fund the purchase of plant and equipment used inthe business.

• Commercial hire purchase can also be used to purchase equipment.

• Novated leases are appropriate for salaried employees who are entitled tosalary sacrifice a car. The vehicle does not have to be for business use andthe lease rentals are paid on behalf of the employee from their pre-tax salaryby the employer.

• Revolving lease limit facility, also known as a ‘master lease’, is used to putin place a pre-approved finance lease limit. Master lease documents can thenbe executed by all parties to the transaction and authorised signatories fordrawdowns determined. This facility makes lease drawdowns simpler and isuseful for company borrowers where there are several directors.

Typical features of lease finance include:

• the bank provides 100% finance, meaning that no deposit is required

• the finance is specific to a piece of equipment

• the interest rate is fixed and repayments determined at the start of thearrangement

• the facility can be set up quickly and easily

• tax benefits may be available.





Example: Lease facility requirement

David and Mary have owned restaurants for many years. An opportunityhas come up to purchase a well-known, upmarket restaurant in the heart ofthe city for $300,000. David and Mary have sufficient cash resources to

purchase the restaurant; however, the premises are run-down and therestaurant requires a total refit, which will cost $150,000. David and Marydo not own any residential property; however, they have a long relationshipwith the bank and a good credit history. They have approached the bank forfunding of the $150,000 requirement. Under traditional bank finance, Davidand Mary would probably only be able to borrow up to 25% of the value ofthe business, that is, $75,000, because of the limited security they are ableto offer. Under a lease facility, however, the total cost of the refit could befinanced with the sole security being the financed plant and equipment.There would also be tax benefits for David and Mary as they may be able toclaim the full lease repayments as tax deductions.

Market rate commercial loans

Market rate commercial loans cater for more complex business clients thatrequire market competitive interest rates for specific projects such as acquiring anew business or developing a property. These loans are for business needs of acapital nature, or where a substantial sum is required.

Market rate commercial loans can usually be structured according to the clients’needs, including:

• variable rate

• interest capitalised variable rate

• fixed rate

• interest pre-paid.

Examples of other product features include:

• minimum loan amount (this varies with lender)

• maximum loan term (this varies with lender)

• interest-only payment option available

• scheduled principal reductions available.




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Example: Market rate commercial loan requirement

Shortbread Biscuit Manufacturing Ltd is a large company employing over500 people. They wish to acquire a significant local competitor for $10million. They require a loan of $2 million. Because of the significant cash

outlay towards the purchase, the company is unable to make any principalrepayments for the next five years. Given the large loan amount, theinterest rate offered must be competitive and thus a market rate isrequested. The company would also like to make interest payments threemonths in arrears.

In this example, a market rate commercial loan is more appropriate than abusiness term loan for the following reasons:

• The loan amount is substantial and requires a market-related interest rate tobe competitive.

•

The company wishes to make quarterly interest payments, an option which isusually not available for a business term loan.

Overdraft facilities

This offers an approved line of credit attached to a business cheque account.

A business overdraft facility assists with funding the short-term cash flowrequirements of businesses, mainly the timing difference between payingexpenses and purchasing inventory until income is received from its clients.

Typical features of a business overdraft usually include the following:

• ongoing line of credit with on-demand drawing of funds

• choice of repayment amounts and frequency, provided the balance remainswithin the approved limit

• maximum loan amount is usually only restricted by the business’s capacityto repay

• may be for short-term usage (with a specific clearance date) or it may beongoing.

Example Business overdraft requirements ABC Pty Ltd sells computers to business clients. The inventory ispurchased four times per year from a supplier in Melbourne. ABC Pty Ltdoffers its clients 30 days terms of trade for payment following installation.

In this example, the company has a high cash outflow at the time of purchasinggoods from its supplier with a timing difference, or gap, until it receives paymentfrom sales from its clients.

This ‘gap’ can be funded from the company’s own cash resources, however,given the purchase of supplies occurs four times per year, the purchase amountwould be substantial and most businesses would not carry sufficient cash

reserves to self-fund this part of the operations.





In this example, the company has a high cash outflow at the time of purchasinggoods from its supplier with a timing difference, or gap, until it receives paymentfrom sales from its clients.

This ‘gap’ can be funded from the company’s own cash resources, however,

given the purchase of supplies occurs four times per year, the purchase amountwould be substantial and most businesses would not carry sufficient cashreserves to self-fund this part of the operations.

Term loans

Variable or fixed interest rate loans are offered for business borrowings, such asthe purchase of major assets.

Typically, a term loan to a commercial client funds business needs of a capitalnature or where a substantial sum is required. Business term loans can be

secured by property and/or the assets of the business.

Typical features of commercial term loans include:

• minimum loan amount is required (this varies with lender)

• maximum loan amount generally depends on the security provided and abilityto repay

• no additional repayments are allowed on fixed rate loans

• lump sum repayments are usually allowed into a variable rate facility

• various repayment options are available

• interest-only payments are usually available.

Example Business term loan requirement

Hardy’s Retail Store Pty Ltd wishes to purchase the commercial premisesfrom which it operates. The purchase price is $3,000,000 and the businesswishes to contribute $1,500,000 towards the purchase. Net impact on cashflow is nominal as the client is replacing current rental expense of $140,000p.a. with an estimated interest expense of $150,000 p.a. The residualamount required to fund the purchase ($1,500,000) is still substantial and

the business will therefore require long-term funding. The directors of thebusiness are conservative in nature and would like the comfort of fixing theinterest rate for five years.

A business term loan at a fixed interest rate will therefore be the mostappropriate product in this example.

Trade finance

This product is available to clients who are exporters and importers. Funds canbe borrowed to assist in financing the production of goods or to manage cashflow between the time of shipping, and receiving payment.




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Trade finance is available in various currencies, which is useful in managingcurrency risk. The interest rate on these arrangements is fixed and may bedetermined by each client’s level of credit risk. Trade finance is a short-term formof financing.

Typical features of trade finance usually include:

• maximum term for each transaction is often 180 days

• the interest rate is fixed for the term

• facility is generally available in the major currencies

• the facility is available for international trade purposes only.

Example Trade finance facility requirement

Tim’s Toyworld imports toys, games and novelty items on a revolvingquarterly basis from a main supplier in Taiwan. There are regular imports of$US100,000 per quarter. Payment terms are in USD and due approximatelysix weeks after the arrival of the goods in Australia. Tim’s Toyworld closelymanages its currency exchange risk by taking a forward exchange facility atthe time of arranging its import requirements. Once the stock arrives in Australia, it generally takes three months to sell the goods through Tim’sToyworld retail outlets. How would this facility work for this client?

• The bank would issue a letter of credit in USD in favour of theTaiwanese supplier. This is to confirm that Tim’s Toyworld has the abilityto pay the supplier, thus providing assurance to the Taiwanese supplier

that they can send the goods to Australia prior to payment.

• A forward exchange facility is put in place at the time of issuing the letterof credit, thus allowing the exchange rate to be predetermined now withpayment due in approximately six weeks time.

• When payment for the letter of credit is required, that is, in six weekstime, the funds are debited to a short-term import facility during the timeit takes Tim’s Toyworld to sell the goods and generate sufficient funds torepay the facility.

As this is a revolving facility, there may be different exposures to differentparts of the facility — that is, some exposure to an outstanding letter of

credit, some exposure to a forward exchange facility, and some exposureto an outstanding balance within the short-term import facility, and all at thesame time. This aspect would normally be managed by the internationaldepartment of the bank which would also manage the exposures to ensureeach individual transaction is repaid in full within an overall maximum termof 180 days.





Apply your knowledge 11: Ident ifying business/commercial lendingproducts

Identify the most appropriate product(s) for the borrowing needs in thefollowing scenarios:

a. A company requires a loan of $350,000 to undertake renovations to thepremises it owns and operates from. The company is able to repay theloan monthly over 10 years and prefers to have a variable interest rate.Security for the property will be a mortgage over the commercialproperty plus directors’ guarantees.

b. A business is entering into a new five-year lease for the premises fromwhich it operates and is required to provide a security deposit to theowner of the premises.

c. A sophisticated business client anticipates a long-term borrowingrequirement of $1 million within the next 18 months, but would like to

lock in a fixed interest rate today.

d. A company is expanding operations into a different state and itsprojected cash flow has led the business to forecast it will requireshort-term funding every three months of $100,000 for 30 days at atime.

e. A company wishes to refinance a facility from another bank of $800,000,with interest pre-paid yearly in advance.

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f. The company seeks to purchase the specialised cooling warehouse for$500,000 and has offered residential security for the loan.

g. The company needs to provide the overseas supplier with letters ofcredit in EUR, which then need to be post-financed.

h. The business requires a fleet of 20 vehicles, but does not want to outlaythe cash for them. It seeks 100% funding, and wants to maximise taxbenefits.


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Loan packaging and choice

There are a number of elements that combine to make up a loan. Some of theseelements are the interest rate, the way interest is charged, the loan term and the

flexibility of repayments.The way these elements are combined by organisations is called ‘packaging’ andit determines product offerings. In many cases, it is difficult for clients to easilyidentify which product is best suited to their needs. The role of the lender is tohelp clients understand the features and benefits of the various packages.

Apply your knowledge 12: Who are my clients?

This activity asks you to research the client base of one of the lenders inyour local area.

You may not be able to obtain all the information requested but provide asmuch as you can.

You can make assumptions and ‘educated guesses’ if necessary.

Use the questions below, and any others you can think of, to profile theorganisation’s clients.

• What group or groups do they fall into (for example, first home buyers,investors, commercial borrowers)?

• What geographic areas do the consumer clients come from?

• What geographic areas do the commercial clients service?

• What are the clients’ main occupations or business groups?

• What features are they looking for in their loan products?

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Insurance products

When providing loans to both individual and business clients, there are a range ofinsurance products available to mitigate against any unforeseen circumstances.

The circumstances of every person, family and business are different, therefore,their specific insurance needs will vary. While it is outside of the scope of thistopic to undertake any in-depth study of insurance products, there nonethelessneeds to be a broad understanding of these products and what they insureagainst to enable lenders to identify when to advise clients to seek independentadvice from a qualified adviser with regard to their specific insurance needs.

The following section, with information in tabled format, is provided as a guideonly to the main types of insurance cover, which may be required by individualsand businesses.





Insurance for ind ividuals

Table 22 and Table 23 summarise the main types of insurance which should beconsidered by an individual, depending on their circumstances.

Table 22 Home, contents and vehicle insu rances

Insurance Cover provided

Building (home) Provides protection against damage to, or destruction of, residential buildings,including flats, units and townhouses. It generally includes other structures on theproperty such as garages, carports, sheds, fences and decks. Usually, this is theminimum insurance required by a lender when the security comprises property.

Contents Covers loss or damage to domestic goods or property owned, or being purchasedby, the person insured. Building (home) and contents insurance are often combinedin the one policy.

Legal liability Legal liability refers to the insured’s responsibility to pay compensation for causinginjury, illness or death to another person, and loss or damage to property owned byanother person.

Legal liability insurance usually forms part of building and contents insurancepolicies.

Domesticworkers’compensation

Covers injury to domestic workers such as babysitters, cleaners and gardeners.

Domestic workers’ compensation might be included in building and contentsinsurance or taken out as a separate policy.

It does not cover people who are considered to be ‘employees’ who must becovered by a regulated workers’ compensation policy.

Owner-builder Protect owner-builders from losses while the building is under construction.

This cover may be optional under a standard building policy or it may need to betaken out as a separate policy.

Landlord Provides landlords with extra protection against, e.g. malicious acts and theft by thetenants, or financial loss if the tenant fails to pay their rent.

Landlord insurance may be available as an option under building insurance ortaken out as a separate policy.

Boat andcaravan

Covers owners for the loss of, or damage to, pleasure craft such as boats andcaravans.

These polices also usually cover the owner for property and personal liability.


Motor vehicle Compulsory third party insurance (CTP)

Covers the insured against claims by a third party, such as a passenger orpedestrian, for personal injury. This insurance is compulsory in all states of

Australia.Comprehensive cover

Covers damage to the insured’s car, and to other people’s property, if the car isinvolved in an accident and the driver of the insured’s car is covered by the policy.

Also covers damage to the insured’s vehicle caused by fire and theft. It may includea range of optional or additional benefits.

Third party property damage (TPPD) and third party property damage, fire and theft(TPPD F&T) can be taken out as separate insurances if the client does not wish tobe comprehensively insured.




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Table 23 Personal insurances


Life cover Provides a lump sum payment in the event of the death or terminal illness ofthe insured.

Consumer creditinsurance

Provides protection for people with personal loans, mortgages, credit carddebt and other forms of loan contracts.

It is a way for the borrower to ensure that loan repayments are met in casethey become ill, disabled or injured and cannot work.

Income protection Provides the insured with compensation, in the form of a regular incomebenefit, if they are sick or injured and are unable to work.

Trauma Provides a lump sum payment in the event that the insured suffers andsurvives a major medical condition such as a heart attack or stroke.

Total and permanentdisability

Provides a lump sum payment if the insured suffers an illness or injury whichresults in them being totally and permanently disabled.

Business insurance

Table 24 summarises the main types of insurance which should be considered bya business. Many business risks can often be covered in one ‘umbrella’ businessinsurance policy.

Table 24 Business insurances


Key person insurance Provides financial protection for the business in the event of the loss of a

person who makes a significant contribution towards the profitability of thebusiness.

Fire and damage (fireand perils)

Covers loss or damage to buildings, business contents and stock against fireand other events such as water damage.

Business interruption Covers the business for loss of profit or gross rental as a result of damagethat interrupts or interferes with business.

Accident damage Covers the business premises, stock and contents of the business againstaccidental loss or damage.

Burglary Theft of stock or contents resulting from forced entry to the businesspremises.

Money Loss of money from the business premises, or when in transit between thebusiness premises and a bank or the client’s home.


Public liability Covers claims for compensation for personal injury or death of anotherperson, or damage to their property, while on the business premises.

Product liability Covers claims for compensation for personal injury to another person, ordamage to their property, as a result of defective product produced or soldby the business.

Machinery or electronicequipment breakdown

Sudden and unforseen breakdown of business machinery or electronicequipment that calls for immediate repair or replacement.

Professional indemnity Indemnifies professionals, such as architects, lawyers, engineers, doctors,accountants and financial advisers, for their legal liability to clients andothers who rely on their advice.





6 Self-management and professionaldevelopment

Effectively managing your personal and professional performance involvesfactors such as setting realistic targets and goals, organising your activities in anefficient way, and achieving a balance between your work and personal life.Thispart of the topic looks at how developing an honest understanding of yourself canhelp you to achieve more in your life and to gain greater personal fulfilment. Thisability is examined in the context of aligning your personal goals with the goalsand expectations of your organisation.

Setting life and work goals

When we consider successful people in any field of endeavour, we usually find

they all have one thing in common. That is that they all have a clear vision ofwhere they are going — they have specific goals. The need to have clearlydefined and measurable goals is also one of the keys to organisational success.

Why set goals?

Having clearly defined goals helps you to focus on what is really important in yourlife. Goals can be long-term and short-term. Someone who has thought abouttheir life and what they want from it will have one or more long-term goals, and anumber of short-term goals leading to the long-term ones.

Goals help you prioritise all the competing issues you need to deal with every dayand concentrate on the ones that really make a difference. They also provide thebasis for decision-making. If we have clear goals we can use them to establishthe criteria against which decisions are made. This makes decision-making andlife in general, a little easier.

Setting goals is not always easy; however, the time and effort spent in goalsetting and planning will bring significant benefits.

Keep in mind that as your life changes, your goals will also change. Goals arenot, and should not, be static. We need to constantly reassess our goals toensure that they are still current and relevant.

Apply your knowledge 13: Establ ishing li fe goals

If you have not already done so, spend some time thinking about yourfuture and the things that matter to you. You might like to think about goalsin terms of the key areas of your life, for example:

• family

• career

• financial

• educational

• social




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• physical health

• spiritual/humanitarian.

Write down one (1) or two (2) goals you would like to achieve in each area.

Remember, these are your goals at this time of your life and may changeover time.

Life area My goals

Family

Career

Financial

Educational

Social

Physical health

Making your goals SMART

People might have goals but they can often be vague and ‘fluffy’. For example:

One day I‘m going to Europe to see all those places I’ve read aboutand seen on TV and at the movies.

Phrased in this way there is no commitment. Another way to state this goal is setout below.

Starting next pay day I will begin saving all my spare money in ahigh-interest earning account so that in two years time I will have$10,000 put aside to pay for a month-long holiday in Europe.

The goal is now better stated because it is framed in a SMART way. It is:

Specific Objective statements that state exactly what is to be achieved.

Measurable The objective should be measurable.

Act ion-orientated The statement has action verbs and is a complete sentence.

Realistic The objective is attainable while still presenting a challenge.

Timely A specific time is set by which the objective is to be achieved.

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Applying the SMART formula to the revised objective above, we can see why it isSMART.

Specific Starting next pay day I will start saving all my spare money

Measurable … in two years time I will have $10,000 put aside …

Act ion-orientated … I will start saving … I will have $10,000 …

Realistic … in two years time I will have $10,000 …

Timely … in two years time …

Apply your knowledge 14: SMART l ife goals

Now go back to the life goals you developed in ‘Apply your knowledge 1’and rewrite one of them as a SMART goal using the criteria describedabove.

Setting short-term goals

To achieve a major goal in your life, you may need to set some smaller goalsalong the way. For example, your major career goal might be to be generalmanager of your organisation’s finance division. A shorter-term goal might be toachieve the necessary educational qualifications and business experience to fillsuch a role. An even shorter-term goal might be to research which qualificationsare most relevant and how you can obtain the necessary business experience.

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Apply your knowledge 15: Matching short term goals to long termgoals

Choose a long-term professional or personal goal.

Now think about the shorter-term goals you need to achieve on your way tothe main goal, and put a time frame on achieving those goals.

Long term goal:

Sub-goals Action required By when

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Setting work goals

People who are successful professionally apply the goal-setting and planningprocess to their work life as well as their personal life.

To do this, you need to consider the alignment of goals and the values thatunderpin those goals. That is, our personal, work-team and broaderorganisational goals and values should complement each other. In this way thedesired outcomes are more easily reached.

Organisational aims and goals flow from the organisation’s mission statementand strategic plan. Problems can arise if your goals and values are in conflict withthose of the organisation.

Figure 9 Alignm ent of personal and organisational goals and values

Alignment

Corporate mission

Strategic

imperatives

Organisational

goals and values

Team goals

Individual goals

Personal goals

Managing yourself and your time

Self-awareness

Time management techniques can be taught, but effectively managing yourself

and other people requires self-awareness. By objectively assessing yourcompetencies, values, needs and the way you do things you can gainself-awareness.

Once you achieve self-awareness, you can determine your goals and prioritiesand start constructing a work and personal lifestyle that is consistent with yourreal needs. Inconsistency between your real needs and your goals can lead tofeelings of stress and a lack of fulfilment.

Figure 10 demonstrates how self-awareness is at the core of self-management.




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Figure 10 Relationship between self-awareness and self-management

Source: Adapted from Developing Management Skills, Whetten and Cameron 2004.

The Johari Window

Self-awareness is about understanding how others see you and how you seeyourself, and identifying the similarities and differences between those two views.

There may be components of your own behaviour that you can identify easily,but there are probably parts of which you are unaware.

The Johari Window provides a way of thinking about the different parts of your‘self’. According to Johari, we all have an open self, a hidden self, a blind self andan unknown self, as demonstrated in Figure 11.

Figure 11 Johari’s view of ‘self’

Known to self Not known to self

Known to others Open self Blind self

Not known to others Hidden self Unknown self

The theory suggests that, as the size of one ‘self’ changes, the size of the other‘selves’ will change in response.

Following is a brief explanation of the various Johari ‘selves’.

Open self

Your open self is all that you and others know about your behaviour, attitudes,likes, dislikes and potential reactions. Your open self is related to your abilityto understand yourself and communicate with others. A larger open self requires

higher levels of communication and more willingness to let others get to know you.





Hidden self

Your hidden self is what you hide from others. A person with a large hidden selfcould be seen as unwilling to disclose, while someone with a small hidden selfmight be seen as disclosing too much. Most of us fit somewhere between the two

extremes, revealing certain things but keeping other things hidden.

Blind self

Your blind self refers to all of the things that other people know about you but thatyou cannot see yourself. Most of us have come across people who appear to beoblivious to their (good or bad) habits and behaviour — these are usually peoplewith a large blind self.

Working at being a good communicator and establishing close relationships canhelp to reduce a large blind self.

People who fear their blind self may continually seek reinforcement orreassurance.

Unknown self

Your unknown self is that part that you, nor other people, are aware of.The unknown self might be revealed in extreme circumstances or clinically,through psychological analysis or hypnosis.

The theory states that you cannot change the unknown self, but be aware that itdoes exist in you and in others.

Developing self-awareness

Achieving an adequate level of self-awareness helps you to develop personaland business relationships that are satisfying and beneficial. When you havereached an adequate level of self-awareness you are accepting of your owncharacter traits and are more able to express your needs to others.

The Johari Window theory suggests ways to help you develop these abilities:

• Be self-questioning. Who better to ask questions about yourself than you?Questions such as: ‘What do I want to get out of this relationship?’ ‘What

direction do I want to take in my career?’ and ‘What obstacles am I putting inmy way?’

Asking these sorts of questions of yourself will mean that you can becomeaware of any necessary goal changes before anyone else.

• Listen to feedback. People can provide you with valuable feedback in everyinteraction. This feedback can help you to see yourself as they see you.Feedback may be in what they say to you or in the way they behave towardsyou. Take note of feedback and give it careful consideration and analysis. Avoid ‘knee-jerk’ reactions — that is, trying to change after every criticalcomment.

• Ask others about yourself. You can seek information about yourself fromothers to try and reduce your blind self. Do not overuse this strategy as youmight be seen to be anxious and needing reassurance.




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• Increase your open self. By increasing the amount you are willing to revealabout yourself, you may also learn more about yourself. By doing so, you mayalso open up new opportunities to develop relationships that will be of benefitnow and in the future.

More on the open self

The theory says that we are at our most creative when our open self ismaximised. Increasing the open self can lead the way to a character change.Two ways to increase the open self are:

• decrease the hidden self through self disclosure. This can seem threateningas we must be willing to share our problems with others. In putting our feelingsat risk we may become hurt or offended. However, if we do not reveal ourhidden self, we cannot get honest feedback and advice on how we mightchange.

• obtain feedback to decrease the blind self. This strategy poses the samechallenges and threats as decreasing the hidden self. However, again, if weare not aware of a problem that may be affecting others we cannot take stepsto adjust.

Improving your performance

Self-management also involves self-improvement and the first step toimprovement is monitoring your existing performance against agreed criteria orstandards, and then identifying ways to improve.

The criteria or standards might be agreed with your managers, colleagues, teammembers or other stakeholders. They might be stated in key performanceindicators (KPIs) or other measures derived from competency standards, jobanalysis, business targets or budgets.

Feedback on your performance is essential to self-evaluation. Formal feedback iscritical and usually a part of the performance review process.

However, informal feedback and ongoing communication with managers andteam members should not be ignored. If communication channels are kept openthere should be no surprises when the time for formal feedback comes.

Apply your knowledge 16: Matching short term goals to long termgoals

In the spaces below:

• List the ways you get formal feedback about your performance at work.How often do you get that feedback?

• List the ways you get informal feedback. How often does this occur?

• List some of the feedback you have received in the last 12 months andthe actions you have taken as a result of the feedback.





a. I get formal feedback about my performance in these ways and at thesetimes:

b. I get informal feedback about my performance in these ways and atthese times:

c. Summarise at least some of the feedback you have received in the last12 months and outline the steps you have taken in response to thisfeedback.

d. If you have not received any feedback over the last 12 months, take thetime to seek some feedback now. Speak to your manager, colleaguesand/or team members. Ask them how they think you are performing. Askthem what your strong points are or areas where you might improve.Once you have received their feedback, decide what you can do toimprove. List these in the table below:

Feedback Actions I have taken or will take

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7 Effective time management

With the pace of change and the demands of work and personal life being asgreat as they are, you need to use the limited time available to best advantage.

Unless you do this, you are at a significant personal and professionaldisadvantage.

There are a number of theories about time management, some of which arediscussed in this unit. However, time management is really a matter ofestablishing the discipline required to manage yourself.

Benefits of effective time management

Apply your knowledge 17: Ident ifying the benef its of t ime management

In the space provided below, list at least four (4) benefits to you personallyand professionally of effective time management.


Common time wasters

We all waste time now and then, and this is not always a bad thing. Some wastedtime, or time spent on less important things, can help us to relax and take some‘time out’ before tackling more complex issues.

However, some wasted time is destructive and frustrating, especially when youare distracted from attending to really important issues.

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Apply your knowledge 18: Ident ifying time wasters

Caroline works in the customer service section of Big Bank Australia. Sheis senior member of staff and has a number of tasks to deal with every day,

such as logging and monitoring customer enquiries, cross-sales targets tomeet, staff training, answering complex customer queries and dealing withcustomer complaints.

She has good working relationships with her colleagues and makes herselfavailable to help them with their work (and sometimes personal) problems.Some of Caroline’s colleagues are frequent visitors to her desk with oneproblem or another.

Caroline sees maintaining good relationships with her colleagues as beingas being very important and always manages to find the time to helpeveryone with their problems. The downside of this is that she often falls

behind with her other duties. This means she needs to work late at timesand she often feels stressed.

Think about Caroline’s situation then answer the questions below.

1. Caroline has an effective relationship with her colleagues. However, theway she deals with issues raised by her colleagues could havedetrimental effects. List some of the possible effects this could have onCaroline’s work and personal life.

2. In what ways can Caroline change her current work style to help her to

overcome stress, but still maintain good relationships with hercolleagues?

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3. Given your response to the above question, what would be yoursuggested way for Caroline to implement the desired changes?

Check your answers to this activity with the suggested answers at the backof the module.

Apply your knowledge 19: Ident ifying time wasters

Think about the way your own time is wasted — by you and by otherinfluences (also consider the processes and systems you need to deal withat work). Write your conclusions below.

Self-generated time wasters Imposed time wasters

Self-imposed time pressures

We all suffer imposed time pressures in our day-to-day lives. Such pressures canbe:

Boss-imposed time pressures

These are activities which must be completed. The consequences of notaccomplishing these are severe.

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System-imposed time pressures

These are activities or requests which come from our peers and colleagues.The consequences of not achieving these are not so severe but we may stillsuffer if these things are not done.

Self-imposed time pressures

These are activities that we initiate or agree to do ourselves. If you find yourselfsaying things like, ‘I can do that for you’, ‘Why don’t I do that, it will be quicker’ or‘I think I’d better do that, I know the process’, you are initiating activities whichcan impact heavily on your time. The consequence of not doing these is stress.

If this happens too often, you will soon be carrying too many activities, with aresultant loss of discretionary time that you need to reduce stress and becomemore productive.

The first step in ensuring that you have sufficient discretionary time, and aretherefore as productive as possible is to avoid self-imposed time pressures.

If you already have too many self-imposed activities, think about what you shoulddo — for yourself and for others.

Keep in mind that helping to develop team members is an important role. Youshould be providing them with help in the form of training, coaching, mentoringand confidence building to take responsibility. This may involve training yourselfto ‘let go’ a little, even relinquishing some control. Only by doing this will youprovide yourself with more discretionary time to devote to other activities and, inthe end and most importantly, become more productive.

Time management theory

Stephen Covey identified four different ‘generations’ of time management theoryin his book The Seven Habits of Highly Effective People (Covey 2004):

1. First generation — checklists

2. Second generation — diaries and calendars

3. Third generation — prioritising and goal setting

4. Fourth generation — self-management.

Many time management theories and strategies focus on the first and secondgeneration with the assumption that being better organised, and doing thingsfaster and smarter will make us more time efficient. This is partly true, but is notthe whole story.

What also needs to be considered is whether we are spending our time on thethings that will generate the greatest benefit.




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The Pareto Principle

The Pareto Principle, or 80/20 rule, was developed by a 19th-century economistand philosopher, Vilfredo Pareto. The principle states that the majority of resultsachieved by any work group or individual are achieved by a relatively small

number of items of work. Hence the 80/20 rule — 80% of the results come from20% of the items or effort.

This idea is very useful when prioritising work and other issues and can be seento apply in a variety of situations, for example:

• 80% of system failures arise from the same 20% of causes

• 80% of client complaints arise from 20% of the whole process

• 80% of your most constructive work is performed in 20% of your day.

Apply your knowledge 20: The Pareto pr inciple and my work

Think about how the Pareto principle applies to you and your work. List anexample below.

Time management matrix

The matrix in Figure 12 is a model to help us focus our attention on importantissues that are based on the four quadrants (I–IV) identified by Covey.

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Figure 12 Covey’s time management matrix

URGENT NOT URGENT

I MP

ORT A NT

Quadrant I Quadrant II

ACTIVITIES

Crises

Pressing problems

Deadline-driven projects

Reactive activity

ACTIVITIES

Prevention

Relationship building

Recognising new opportunities

Building health and fitness

Planning, recreation

Learning new skills

Pro-active activity

DO DECIDEN O

T I MP ORT A NT

Quadrant III Quadrant IV

ACTIVITIES

Interruptions, some calls

Some mail, some reports

Some meetings

Close pressing matters

ACTIVITIES

Trivia, busy work

Some mail

Some phone calls

Time wasters

Escapist activities, e.g. T.V.

DELEGATE DUMPSource: The Seven Habits of Highly Effective People, Covey 2004.

How the four quadrants affect you

Figure 13 demonstrates the likely results of spending most of your time in anyone of the quadrants of the time management matrix.

Figure 13 Results of the four quadrants of time management

Quadrant I Quadrant II

Stress

Burnout

Crisis management

Always putting out fires

Vision, perspective

Balance

Discipline

Control

Fewer crises

Quadrant III Quadrant IV

Short-term focus

Crisis management

Reputation as changeable/directionless

See goals and plans as worthless

Feel victimised, out of control

Shallow and broken relationships

Irresponsibility

Being dependent on others

Seen as not credible

‘Urgent’ and ‘important’

Two factors to consider about any activity are its urgency and its importance.




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If a matter is urgent, it requires immediate attention. For it to be important meansthat the activity has an impact on results and outcomes. If something isimportant, it contributes to your high priority goals.

Apply your knowledge 21: Urgent and important

Michael is a loan officer with Big Bank. He has been working on assessinga loan proposal for a number of days. The proposal is from one of thebank’s valuable customers who wishes to purchase a new home. Michaelhas yet to write a loan submission to his credit manager seeking approval.

He has been stalling on preparing the loan submission as the client’sincome is complex and he doesn’t really know how to analyse this todetermine if the client can afford to purchase the property. The propertygoes to auction at 3.00 pm today and the customer is anxious to find outwhether he is able to bid at the auction or not. Michael has spoken to the

customer this morning and promised to give him an answer before midday.

It is now 10.00 am and Michael receives a call from his son’s school to saythat his son has been in an accident and has been taken to hospital. He isadvised to go to the hospital as quickly as possible.

Analyse Michael’s situation then address the questions below.

1. What should Michael do immediately in relation to the outstanding loanproposal?

2. What should Michael have done differently to avoid the currentpredicament?

3. List some of the possible consequences if Michael is unable to providehis valuable client with a decision in time to bid at the auction.

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4. If the client does not receive a response from the bank in time, do youthink the client would blame Michael or Big Bank? Explain your reasons.

Check your answers to this activity with the suggested answers at the backof the module.

Because we usually need to react to urgent matters immediately, they can be adisrupting influence on our time management. Often, urgent matters can be

avoided with advance planning and consideration, at other times they areunavoidable.

Important matters are not necessarily urgent and therefore you can demonstratemore initiative in their completion. By not attending to important matters in atimely and planned way you can easily reach the situation of having to deal with amatter that is both urgent and important.

Apply your knowledge 22: You and the time management matr ix

Think about the activities you undertake and the issues you need to dealwith at work over a week or two. Plot them on the time management matrix

below.

Quadrant I

Urgent and important tasks/issues:

Quadrant II

Less urgent and important tasks/issues:

Quadrant III

Urgent and less important tasks/issues:

Quadrant IV

Less urgent and less important tasks/issues:

You will have seen that the ideal place in the matrix in which to spend mostof your time is Quadrant II.

1. Where is most of your time spent?

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2. What strategies can you think of to move yourself to Quadrant II?

Moving to Quadrant II

In order to move to Quadrant II you need to address five important criteria thatdeal with the way you manage yourself:

• alignment

• balance

• Quadrant II focus

• people

• flexibility.

Al ignment

There should be alignment, unity and integrity between your:

• vision and mission

• roles and goals

• priorities and plans

• desires and disciplines.

In your planning there should be room for your personal mission and goals —you should refer to these constantly.

Balance

Your health, family, professional career and personal development must beincluded. True effectiveness requires balance. Life is more than just your ‘worklife’.

Quadrant II focus

You need to focus on prevention in preference to prioritising the particular crisesyou need to deal with each day.

This can be done by organising on a regular basis, then adapting and prioritisingas the need arises.

If you can organise on a weekly basis, this provides balance and context fordecision-making.

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People and flexibilit y

Dealing with time leads to efficiency. Dealing with people leads to effectiveness.

There are times when schedules will need to be put aside for people. You need

to accept this reality to avoid feelings of guilt if a schedule is not followed.

Apply your knowledge 23: Analysing my work tasks

In this activity you will analyse the tasks you perform on a day-to-day basisand identify if you can apply the theories and ideas discussed so far in thisunit to find better ways of doing things.

The ‘better ways’ might include doing things in a different order, doingthings differently, not doing them at all or gaining additional knowledge andskills to deal with certain tasks.

Firstly, list your daily tasks below:

Now for each of the tasks you have listed, consider the following:

Efficiency How effectively and efficiently am I doing this?

Competency How skilled am I to carry out this task? Do I need to improve my skillsand knowledge in certain areas?

Focus and relevance Is this something I am employed to do? Is it a core task? If not, whyam I doing it?

Systems and tools Do I have the systems support and tools to carry out this task?

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After you have considered each of your tasks against the dimensions listedabove, consider what you can do to improve the way you carry out thosetasks. List your conclusions below:

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8 Stress in the workplace

We all have to put up with some degree of stress in our lives. Without somestress we would be less than human and would probably not achieve our full

potential.

It is generally recognised that there are two types of stress — good stress andbad stress.

Good stress can be motivating. We have probably all experienced some stressin our lives that has made us a better person in some way. Perhaps taking on ourfirst part-time job as a teenager or learning to drive was stressful. These are,quite understandably, stressful situations, but in dealing with these situations wehave become more mature individuals and learned useful skills.

Generally, useful stress is stress where we, or someone close to us, benefits in

some way — situations where we see a positive outcome.Bad stress is stress that often results when we feel powerless to change asituation, or feel that nothing positive will come from it.

Stress is only partly a result of the situation itself. It is also caused by our attitudeto the situation.

Our individual predispositions and genetic make-up result in a wide range ofpersonality types, some of which are particularly vulnerable to stress.

What are the effects of stress?

Stress is the unwelcome result of not being able to keep up with all thechallenges and pitfalls of life today. We all experience it for one reason oranother.

The way you handle stress can be one of the major factors that influences andpotentially limits your ability to demonstrate managerial competencies, andachieve your career dreams.

Stress can have both physical and psychological effects on us. Some of thoseeffects are:

Physical

• increased blood pressure

• increased metabolism (for example, faster heartbeat, faster respiration)

• increased cholesterol and fatty acids

• increased production of blood sugar for energy

• increased stomach acids.




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Psychological

• tension

• anxiety

• conflict

• addiction.

You might respond to a situation with both psychological and physiologicaltriggers in your body, that is, you might feel panic - psychological effects - andnausea - physiological effects. How you respond is determined by your skills,knowledge, abilities, experience, psychological make-up, physiology and supportnetwork.

What situations can cause stress?

Everyone is different and people react differently to similar situations.

Some typical work-related situations that can cause stress include:

Our personal lives can also cause us stress that can carry over to our work life.Some examples are:

• illness in the family

• relationship problems or break-ups

• financial problems.

• unsafe working conditions

• change in the workplace

• troubles with the boss or others at work

• meeting deadlines

• long working hours

• boredom.

Controlling stress

Work can involve a diverse range of stressors: tight deadlines, change, efficiencydemands, people problems, isolation, lack of support and insufficient resourcesto mention just a few. You will know best which factors cause stress for you.

Sometimes you will have little control over factors within your work environmentand your only option is to try to manage your responses to these stressors.Someoptions include:

• better planning so you can be more in control of events

• relaxation exercises to allow time to ‘switch off’

• good time management to balance the urgent and important tasks

• delegation as an effective way of cutting your workload





• eating well and drinking lots of water

• open dialogue as a communication technique to reveal assumptions andinsights

• a willingness to accept the inevitable.

Employee assistance programs

Many workplaces have employee assistance programs in place. These programsprovide confidential counselling and assistance to employees in many areas oftheir personal and work life, including stress management. Some programs evenextend to members of the employee’s family.

Apply your knowledge 24: What s tresses me and what can I do about

it?

In the table below, list the factors that cause unhealthy stress in your life.Give each some thought and decide what, if anything, you will do abouteach factor.

Once you have decided on a course of action, give yourself a target date toaim for.

Stress factor Action I can take Target date for action





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9 Professional development

To keep ahead in the business world, we need to be committed to a program oflifelong learning. We need to be constantly aware of the opportunities for ongoing

professional development and many employer organisations have implementedsuch programs.

Apply your knowledge 25: Organisat ion’s professional developmentinitiatives

What professional development programs and opportunities has yourorganisation implemented? If you don’t know, speak with your manager,training or human resources department about what is available.

In the space below, list possible areas of development. Briefly describewhat, if any, programs or opportunities your organisation provides in theseareas.

Program or oppor tunit y Developmental area addressed

(e.g. Leadership, professional competence)

e.g. Certificate IV in Financial Services e.g. Industry and professional competence

Other development options

Other ways in which we can stay in touch with trends and developments, include:

• joining a professional association appropriate to your area of work

• subscribing to a professional journal or newsletter

• finding yourself a workplace mentor

• volunteering for any strategic work committees where you might be able tocontribute

• enrolling in a further education program appropriate to your career plan.






Networks and associations

Establishing networks and joining, and being involved in, professionalassociations are excellent ways to keep up to date with current and futureindustry developments. Networking can also be very useful in your planned

career development.

Groups of people with common interests can support each other in many ways.They can help to keep each other up to date with new developments in theindustry: new products, services, processes, training programs, etc. Belonging toand using networks may help you to solve a problem, or help you to solve aproblem for someone else. People with common interests and problems can alsohelp to support each other emotionally when difficulties arise.

Networking should be planned. It takes commitment and ongoing effort to keep anetwork going, and the same applies to getting the most out of belonging to aprofessional association. It is one thing to join a network or association, but full

value will not be achieved without effort.

Networks can be formal or informal. Formal networks are the type you join,sometimes at a fee, which conduct regular meetings or get-togethers.Professional associations may fall into this category.

Informal networks may include current and ex-colleagues, and friends with similarinterests. There is usually less organisation with these networks, but the informalnature may make it easier to make contact with others when you needinformation or help.

Keep in mind that belonging to a network involved both ‘giving’ and ‘receiving’ -you need to be willing to share what you know, and contribute what you can, tomake a network work for all involved.

The following points will help you to identify and establish network opportunities:

• Identify opportunities — depending on your circumstances, there may bemany network opportunities all around you. On the other hand, you may needto seek them out by searching newsletters, asking colleagues or searching theinternet.

• Make contact — if you have identified a number of possible opportunities, listthem and consider the benefits of each. Also, consider the practicality of each,for example, which will be the easiest for you to maintain? Take care with the

number of networks and associations with which you become involved. Do nottake on more commitments that you can comfortably manage.

Once you have identified one or more networks you want to explore, makecontact. If they are formal networks you may need to apply; joining an informalnetwork may simply be a matter of phoning a friend or colleague.

Remember, that you can start a network yourself. Talk to people, send emailsor establish contact in some other way. People are often very receptive tosuch ideas, but someone has to be the initiator.




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10 Personal development action plan

Appendix 1 is a personal development action plan template. It will help you toidentify areas where you can:

• assess your current situation

• look at where you want to be in the future

• determine how to get where you want to be, both in the short term and in thelong term.

By working through the steps in the template you will build a plan for your futureprofessional development.

It is suggested that you complete the template as you work through the rest ofthe topic. In this way, issues may be highlighted for attention that are not

apparent or obvious at the moment.

Review questions

Access the online review questions and test your knowledge of this topic.Read the key points before you begin.

https://www.kaplearn.edu.au/mod/scorm/view.php?id=1144






1 Appendix

1 Personal Development Action Plan template




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Appendix 1: Personal development act ionplan

Factors to consider when preparing yourdevelopment plan

Notes for my development plan

1. Assess your current work

Examine sources of information about therequirements of your current position. Forexample:

• KPIs

• objectives

• general work competencies

• job description.

2. Assess your current performance

Identify any gaps in your competencies,skills, ability and knowledge by looking at:

• outcomes of performance review

• feedback from others

• your own self-assessment.

3. Consider your future work and life

List your values and goals:

• Ask yourself what sort of work you wantto do in the future.

• Determine the skills and knowledgeneeded for this work.

• Think about your personal goals andvalues — What sort of future do you

visualise for yourself?

4. Your future performance

Identify the gap between your currentsituation and what you need to do toachieve your goals:

• What further education and training willyou need?

• Who would be a valuable mentor toyou?

• What networking opportunities wouldassist you?

5. Future key factors

Try to make some predictions regardingfuture factors which will impact on yourdevelopment plan, such as:

• How will you be able to adapt to thechanging business environment?

• What changes might occur in yourfamily and home life that might have animpact on you?

• What might be your organisation’sexpectations of future performance androles?

• How will you manage your stresslevels?

•

What personal traits may be of benefitin your future work performance?

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Now that you have worked through the template you will probably have somelong-term goals and action points, and some short-term ones.

Some of your major long-term goals may need to be broken up into smaller sub-goals. Follow these steps:

• Consider your long-term and your short-term goals and plans.

• Consider the Pareto principle — what possible actions will have the greatestresults?

• List the three most important issues that you need to address, decide how youwill address them and put a time frame against each of these actions.

Issue How I will address it When I will do it

1.

2.

3.




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