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Financial Incentive Disclosures (NSW)

Thursday 27, Aug 2020


Fair Trading Act NSW – Disclosure Obligations

Commission/Referral Arrangements & Prejudicial Terms

1. NSW Legislative Changes

Members should be aware amendments to the Fair Trading Act 1987 (NSW) (the ‘FTA’), which commenced on 1 July 2020, which imposes obligations on all brokers doing business with NSW consumer clients to both inform clients of potential contract terms to their disadvantage and to disclose financial incentive arrangements with suppliers. 

The prejudicial contract terms disclosure should not impact members who provide client contracts as they are already required to comply with the Unfair Contract Terms obligations under the ASIC Act and the Australian Consumer Law (ACL).

The financial incentive disclosure obligation is also consistent with existing broker obligations under secret commissions laws (e.g. Crimes Acts) or the National Consumer Credit Protection Act (NCCP Act) to disclose payment arrangements to clients. 

To help businesses adapt, NSW Fair Trading has indicated it will take an educational approach to compliance and enforcement focused on educating businesses and raising consumer awareness. This approach will apply for six months from 1 July 2020 to 31 December 2020, so members have time to update their operational practices, should changes be necessary.

2.  Consumer Definition

2.1 Consumer Definition & Threshold

Under the FTA, the definition of ‘consumer’ is the same as in the Australian Consumer Law (ACL), which is Commonwealth legislation.  This means business clients who meet the criteria are also considered ‘consumers’, particularly those involved in transport services, as the following excerpt shows. 

Australian Consumer Law (s3)

(1) A person is taken to have acquired particular goods as a consumer if, and only if:

(a) the amount paid or payable for the goods, as worked out under subsections (4) to (9), did not exceed:

(i) $40,000; or

(ii) if a greater amount is prescribed for the purposes of this paragraph - that greater amount; or

(b) the goods were of a kind ordinarily acquired for personal, domestic or household use or consumption; or

(c) the goods consisted of a vehicle or trailer acquired for use principally in the transport of goods on public roads.

There is a comparable ‘consumer’ definition where services are involved.

2.2  Threshold increase

As a consequence of the Treasury Laws Amendment (Acquisition as Consumer – Financial Thresholds) Regulations 2020 (Financial Threshold Regulation), the current dollar value threshold under the ACL will rise from $40,000 to $100,000 on 1 July 2021.  Consequently, members need to be aware that in less than 12 months’ time, many business customers will meet the ‘consumer’ test so these disclosures must be made to a broad range of clients.

3.            Disclosure Obligations

3.1  Prejudicial Terms Disclosures

The first obligation (FTA s 47A) is more directed to suppliers of goods and services.  However, given brokers provide a service, members must take reasonable steps to make clients aware of any terms or conditions associated with their service that may substantially prejudice the client’s interests. This includes broking contract terms which:

  • limit the broker’s liability
  • permit the client’s data to be disclosed to a third party in a form that may enable that person to be identified by the third party
  • require the client to pay a fee for an exit fee, balloon payment or similar

However, as noted above, compliance with Unfair Contract Terms legislation should mean members’ broker services contracts do not contain any prejudicial terms.  

3.2  Financial Incentive Disclosures

Under the new section 47B of the FTA, as intermediaries, brokers must take reasonable steps to make consumers aware of any commission, referral fee or any other payment arrangements where they receive a financial incentive from a supplier of goods or services (e.g. a financier).   It is the broker, not the person paying the financial incentive, who must comply with this obligation.

This means clients will need to be informed that an incentive arrangement exists.  Brokers, however, do not need to disclose the nature or value of the financial incentive, except where required under other legislation (e.g. the NCCP Act), but they do need to take steps to ensure the client is informed of the arrangement before commencing work on the client’s behalf.

4.  National Impact

The NSW disclosure reforms affect not only NSW brokers, also affect brokers based outside New South Wales who are dealing with NSW clients.  Section 5A of the NSW FTA says that the Act is intended to have extraterritorial application as far as the State’s legislative powers permit.  Consequently, the Act extends to broking conduct anywhere in Australia that affects a person in New South Wales.

5.  Operational Impacts

5.1  Early Disclosure

Before a NSW broker or a broker undertakes any work on behalf of a NSW client, s/he must take reasonable steps to ensure the client is aware of the financial incentive arrangement and any potentially prejudicial broking contract terms.  Brokers, however, should already have removed any prejudicial contract terms under Unfair Contact Terms legislation and addressed Secret Commission laws.

Members can consider a range of ways to ensure clients are aware of any financial incentive arrangement, such as:

  • including a disclosure on quotations provided to the client
  • directing client attention to appropriate signage if in an office
  • when online, disclosing relevant information on the same page as the broker’s service description or online application
  • when online, having the disclosure appear in a pop-up box

5.2  Reasonable steps

Fair Trading NSW suggests the best way to know reasonable steps have been taken is to check directly with the customer. There are several ways this could be done, such as verbal confirmation, initialling a contract, or checking a box on a web-form.

6.  Summary

All members should review their broking contracts and remuneration disclosure arrangements to ensure their NSW clients are not subject to prejudicial contract terms and are aware of financial incentive arrangements such as commission prior to undertaking any work for those clients.

While the current NSW obligations apply to both consumer and businesses who purchase goods or services to the value of $40,000, members should take a best practice approach and make these disclosure to all clients, given the threshold change to $100,000 will come into effect from 1 July 2021.

All members who comply with Unfair Contract Terms legislation and Secret Commissions laws will have minimal changes, if any, to make.

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