Fsi Glass Steagall Brokers as Agents of Lenders Research Paper

7/23/2019 Fsi Glass Steagall Brokers as Agents of Lenders Research Paper

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Financial System Inquiry under ex CBA Banks David Murray

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Supportive Residents & Carers Action Group Inc

Registered with the Justice Department of Victoria, Consumer Affairs Victoria

We agree with Malcolm Fraser:

We also agree with ex Citigroup chief Sandy Weill:

Ex-Citi chief Sandy Weill urges bank break-up


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Cross linked story withabcnews.go.com

Former Citigroup chairman and chief executive Sandy Weill thinks Wall Street should break up its bigbanks in an effort to regain the publics trust.

What we should probably do is go and split up investment banking from banking, Weillsaid on CNBCsSquawk Boxon Wednesday.Have banks be deposit takers, have banks make commercial loans and realestate loans, have banks do something thats not going to risk the taxpayer dollars, thats not too big tofail.

Weill essentially called for the return of the GlassSteagall Act. The 1933 act separated investment andcommercial banking activities in the wake of a stock market crash and bank failure. It was repealed in1999 during the Clinton administration.

Im suggesting that they be broken up so that the taxpayerwill never be at risk, the depositors wont be atrisk, the leverage of the banks will be something reasonable, and the investment banks can do trading,

Weill said.

The 79-year-old Wall Street legend also called for complete transparency in the banking industry. Thereshould be no such thing as off balance sheet, he said. I want to see us be a leader, and what were doingnow is not going to make us a leader.

We also believe banks should be liable for the frauds they perpetrate.

APPLYING GENERAL CONTRACT AND CONSUMER PROTECTION LAW TO CREDIT DISPUTES

OUTSIDE OF THE UNIFORM CONSUMER CREDIT CODE

RESEARCH PAPER 2:WHEN ARE LENDERS TAINTED BY THE FRAUD OF A FINANCE BROKER?

SUMMARY

This research project investigates the role of general principles of contract law and

consumer protection legislation in regulating the provision of credit to consumers.

While many issues arising in respect to consumer credit contracts are covered by the

Uniform Consumer Credit Code (UCCC) there are inevitably gaps in the legislation.

General contract and legislative principles may supplement the specific provisions of
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the UCCC and thus promote a more effective system of consumer protection regulation

through a multilayered, textured approach. The project aims to provide guidance to

industry participants about alternative legal responses to credit disputes and also toidentify relevant considerations in reforming the existing law.

This paper considers the circumstances in which lenders will be tainted by the fraud of

the finance broker who arranged the transaction. Under general consumer law, because

lenders will generally not have any direct dealings with the borrower, they will not

normally be tainted by any fraud on the part of the broker who represented the

borrower in the transaction. However, in some cases, there may be factors in the loan

application and other documentation provided to the lender that may implicate the

lender in the fraud of the broker.

The funding for this project was provided from the Consumer Credit Fund on the

approval of the Minister for Consumer Affairs. Research assistance was provided by

Alice Zhang and Sarah Mauriks. The author wishes to thank for their contributions the

Consumer Law Action Centre, solicitors at Consumer Affairs Victoria, participants at

the Monash Centre for Regulatory Studies Consumer Research Breakfast and the

delegates at the Credit Law Conference 2007. All errors remain the authors own.


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WHEN IS A LOAN TRANSACTION TAINTED BY THE FRAUD OF A FINANCE BROKER?i

Recent years have seen an increase in the use of financial brokers to mediate between

borrowers and lenders.iiThere are good reasons for a borrower to engage the services of

a finance broker. Borrowers may find it difficult to select between a broad range of

lenders and products. Borrowers may be daunted by the range of choices in the market.

Borrowers may find it difficult to access finance. They may be limited in time orexperience. They may be uncertain how best to complete a loan application or be

unsure about dealing with loan documents. The role of the finance broker is to survey a

range of lenders and finance products and recommend to the borrower the combination

that would best suit the borrowers needs. The broker may also be responsible for

managing the transaction, including submitting the loan application, delivering the loan

documents to the borrower, assisting the borrower in completing those documents and

even answering questions about the loan. Credit providers may also see advantages in

relying on the services of a finance broker. In particular, brokers allow lenders access to

borrowers without the costs associated with a branch presence.iii

Unfortunately, it appears that some brokers who are not properly promoting the

interests of their consumer clients.ivStatutory regulation of brokers is minimal in most

jurisdictions,v although there are current proposals for reform.vi There may be little

direct monitoring of brokers. Certainly, the consumers who engage brokers may be ill-

equipped to fulfil this function. Some of those promoting themselves as able to provide

brokering services may lack the necessarily skills properly to provide this service.


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Another problem may be brokers recommending to borrowers the loan which will pay

the highest commission to the brokervii rather than one which best suits the needs of

their client.viiiYet another, often related, problem is fraud on the part of the broker.ixThere are a number of cases in which a broker has mislead borrowers, x ignored the

disadvantageous situation of the borrower,xifalsified information in the borrowers loan

application and encouraged borrowers falsely to represent that their loan is for business

purposes and hence not covered by the protective provisions of the Uniform Consumer

Credit Code.xiiThis behaviour has typically lead borrowers into loans that they have no

capacity to repay.xiii

Broker fraud may impact on lenders and not merely borrowers. If a loan is approved on

the basis of false or incomplete information about a borrower, the risks of default by the

borrower may be much greater than anticipated by the lender. There is also a risk that

the contract between the lender and the borrower may be tainted by the fraud of the

broker, and consequently liable to be set aside by a court. There are few cases in which a

loan transaction has been set aside directly on this basis. Nonetheless, with the rise of

broker facilitated transactions, and as the implications of the sub-prime mortgage crisis

spread,xivit may only be a matter of time before such arguments become more common.

This paper considers three bases on which a loan transaction may be tainted by the

fraud of a broker:

I the broker was the agent of the credit provider,


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II unconscionable conduct on the basis of knowledge by the lender of a special

disability on the part of a borrower or, similarly, the lender having notice of undue

influence in the loan transaction,

III where the loan contract is an unjust contract under s 70 of the Uniform

Consumer Credit Code or the Contract Review Act (NSW).

Parts I to III of this paper consider each of these possible bases of lender liability in turn.

Part IV considers the steps that a credit provider might take to protect itself fromliability.

I BROKER AS AGENT OF THE LENDER

A principal is liable for the acts of an agent acting within the scope of his authority.Thus, a lender may be liable for misrepresentation or fraud by a broker acting as its

agent. A principal is also imputed with the knowledge of its agent.xvThis means that a

lender may be imputed with the knowledge of a broker who is its agent. Such

knowledge may be relevant to establishing unconscionable dealing or involvement in a

transaction induced by undue influence.xvi

Courts have consistently held that a broker is the agent of the borrower not the

lender.xviiNonetheless, agency is a factual inquiry. Thus, it is possible that the facts of a

particular case might establish an agency relationship between broker and lender.xviiiIf


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a broker is found to be an agent of the finance provider, it will be on the basis of actual

or apparent authority. A broker will have apparent authority where it is held out by the

finance provider, the principal, as having such authority.xixIn these circumstances, therepresentation operates as an estoppel and will preclude the principal from denying the

agency relationship it has represented, where relied upon by the other party to the

contract.xx

Importantly, the person dealing with the company in these circumstances cannot rely

upon the agent's own representation as to his actual authority.xxi The relevant

representation must be made by the principal, although this may be found in the

conduct of the principal including by a previous course of de aling or by putting the

agent in a position or by allowing him to act in a position from which it can be inferred

that his actual representation of authority in himself is in fact correct. xxii The holding

out may also result from permitting an agent to act in a certain manner, or by

equipping or arming the agent, or by a failure to take proper safeguards against

misrepresentation by the agent.xxiii

A high standard of evidence will be required to establish that a broker is the agent of a

lender.xxivThe remarks of the High Court in Con-Stan Industries of Australia Pty Ltd v

Norwich Winterthur Insurance (Australia) Ltd, made in relation to insurance brokers, are

applicable in the broker /lender relationship, namely:

There will be rare circumstances in which a broker may also be an agent of the

insurer, but the courts will not readily infer such a relationship because a broker


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so placed faces a clear conflict of interest between his duty to the assured on the

one hand and to the insurer on the other.xxv

Courts have ruled out a number of factors as sufficient to establish an agency

relationship between broker and finance provider. These include: that the broker may

be paid a commission by the finance providerxxvi, that the broker may have possession

of the lenders formsxxvii, that the broker may fill in the particulars on the formsxxviiiand

that the broker conducted all the dealings in relation to the applications.xxix

One of the few cases where an agency argument has been successful is Woodchester

Leasing Equipment v RM Clayton and DM Clayton (t/a Sudbury Sports). xxx The plaintiff,

Woodchester Leasing Equipment, was the owner and finance company, and the

defendants, RM Clayton and DM Clayton, were the hirers, who entered into a

consumer hire agreement for a facsimile machine. Prior to the defendants entering into

the agreement, the supplier had made a number of representations to the defendants,

on which the defendant relied in entering the agreement. The agreement did notcontain a cancellation notice. The defendant argued that the supplier was the agent for

the owner. Initially, the hirer had wanted to purchase the machine outright. The hirer

was persuaded by the supplier that leasing would be advantageous. The arrangement

between the finance company and the supplier meant that the greater the monthly

rental negotiated by the supplier, the greater the price paid by the finance company to

the supplier for the goods. If the defendant had purchased the goods outright, the

supplier would have received around 995. On the basis of the monthly rental

negotiated by the supplier with the hirer, the supplier would receive from the finance

company the sum of around 1715.51. Accordingly, it was to the supplier's advantage to

persuade the defendant to lease, rather than to purchase outright. The County Court


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held that at the time the representations were made, the supplier was acting as an agent

for the finance company. This finding was based on the fact that the whole thrust of the

supplier's sales talk was directed not to the virtues of the goods but to the dubious,from the hirers point of view, virtues of leasing.xxxi

It appears that the supplier was treated as the agent for the finance company on the

ground that it had clearly promoted the interests of itself and the finance company over

those of the hirer. In these circumstances, the supplier might be said to have assumed

the role of the agent of the finance company. However, it might be questioned whether

this conduct should have been be enough to constitute the supplier as an agent of the

financier on the basis of apparent authority. While the supplier undeniably preferred

the interests of itself and the financier, there was no holding out by the financier that the

supplier was acting on its behalf as its agent.

For an agency relationship to be securely established between a broker and a lender it is

suggested that more will be required. Evidence will be needed of conduct by the lender

holding the broker out as acting on behalf of the lender. Such holding out might occur

through representations, perhaps in material provided to the borrower, to the effect that

the broker represents the lender or conduct by the lender indicating that the broker has

authority to negotiate and/or approve the loan on the lenders behalf.

II KNOWLEDGE OF UNCONSCIONABLE DEALING/UNDUE INFLUENCE


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The equitable doctrine of unconscionable dealing operates where:

(1) a party to a transaction was under a special disability in dealing with the

other party with the consequence that there was an absence of any

reasonable degree of equality between them; and

(2) the disability was sufficiently evident to the stronger party to make it

prima facie unfair or `unconscientious' that he procure, or accept, the weaker

party's assent to the impugned transaction in the circumstances in which he

procured or accepted it.

Where such circumstances are shown to have existed, an onus is cast upon

the stronger party to show that the transaction was fair, just and

reasonable.xxxii

There are also statutory prohibitions on unconscionable conduct. A primary source for

these prohibitions is in Part IVA of the Trade Practices Act1974, under ss 51AA, 51AB

and 51 AC.xxxiii

In so far as they rest on a notion of conscience, both the equitable and statutory

doctrines require that before a transaction is set aside as unconscionable, the credit

provider know of the borrowers special disability. Something less than direct actual

knowledge may sometimes suffice. In Commercial Bank of Australia v Amadio Deane J

referred to the disability being sufficiently evident to the stronger party.xxxivMason J

described the requirement as being that the dominant party "knows or ought to know" of


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the existence of the innocent party's disabling condition or circumstance and of its effect

on him or her.xxxvMason J descried the knowledge requirement as follows:

... if A having actual knowledge that B occupies a situation of special

disadvantage in relation to an intended transaction, so that B cannot make a

judgment as to what is in his own interests, takes unfair advantage of his

(A's) superior bargaining power or position by entering into that transaction,

his conduct in so doing is unconscionable. And if, instead of having actual

knowledge of that situation, A is aware of the possibility that that situation

may exist or is aware of facts that would raise that possibility in the mind of

any reasonable person, the result will be the same.xxxvi

Undue influence is concerned with the exploitation of a relationship of influence. Thus,

a contract may be set aside where a third party exerted undue influence that affected

the dependent party's mind and judgment in entering the contract.xxxviiA lender will be

tainted by the undue influence where the lender knew or had reason to believe of theimpropriety.xxxviii The doctrine has most commonly been invoked in transactions

involving a third party guarantee but could arise in a loan transaction.

In respect to all of these doctrines, the restriction on relief is likely to be that the lender

lacked the requisite degree of knowledge. In cases involving brokers, the lender may

not have had any actual contact with the borrower and hence may not have any direct

knowledge of any special disadvantage on the part of the borrower or of any undue

influence between the borrower and another party. The point is starkly illustrated by

Perpetual Trustees Victoria Limited v Ford.xxxixIn this case Ford (the borrower) owned a


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house in Wollongong in New South Wales which had been inherited from his mother.

In 2004 the borrower entered into a loan agreement for $200,000 secured by a mortgage

over the house. At the time of the transaction the borrower was almost 58. He sufferedfrom a congenital intellectual impairment and he was illiterate. The borrower was in

receipt of a Disability Pension of $452.70 per fortnight. He had no capacity from his

income or other resources to pay the interest on a loan of $200,000.

The loan was arranged by the borrower's son. The purpose of the loan was to purchase

a cleaning business to be operated by the son. The business was purchased in the

borrower's name although Ford did not plan to operate the business and did not have

the skills to do so. The broker who facilitated the transaction never saw the borrower

without the son being present. The broker recommended that the father see a lawyer

about the transaction but, to the knowledge of the broker, this was never done. Within

twelve months of the date of the transaction the borrower had defaulted upon his

obligations under the loan agreement and the lender sought to recover the principal

sum and to take possession of the property. Harrison J found that the loan agreement

was void on grounds of non est factum. xl

In Ford the borrower was clearly suffering from a special disadvantage for the purposes

of unconscionable dealing. It is arguable that the broker ought to have known of this

disadvantage. The borrower had such a severe intellectual impairment that he was

found not to have understood the nature of the transaction he was entering into and

was instead acting under the influence of his son. A conversation of any depth about

the transaction would presumably have indicated to the broker the borrower's

significant lack of understanding about the transaction. However, even if the broker did


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know of the borrowers special disadvantage, the lender did not. The broker was not the

agent of the lender. The lender had no direct dealing with the borrower.xli

For similar reasons, the borrower failed in having the transaction set aside on grounds

of undue influence. Harrison J accepted that the borrower entered into the transaction

as a result of, and under the influence of, his son. The difficulty for the borrower was

that there was 'no evidence that the lender had actual notice of the matters relied upon

as demonstrating undue influence and constructive notice would be insufficient.xlii

In these sorts of cases, knowledge of a special disability or of undue influence may only

come to the lender, if at all, through information passed to the lender by the borrower

or the broker. The primary form of information is likely to be the loan application and

loan documentation. Where this documentation has been completed by the borrower

with the assistance of the broker, it may commonly appear to be normal and the

transaction in order. Nonetheless, it is possible that in some cases the loan

documentation might reveal information that should alert the lender to the fact that the

borrower was unable properly to conserve his or her own interests. Relevant factors in

the loan documentation might include evidence of poor language skills, a disability

perhaps through receipt of a disability pension or obvious misunderstanding of the

nature of the transaction.

Would the sheer improvidence of the transaction be sufficient to attribute to the lender

knowledge of a special disability on the part of the borrower or of undue influence in

the transaction?xliiiThe issue is unresolved. In Elkofairi v Permanent Trustee Co Ltdxlivthe


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borrower was illiterate, had no income, was on an invalid pension and the borrowing

was secured over her only asset. The Court of Appeal of the NSW Supreme Court held

that the borrower was in a position of a special disadvantage. Not all of the informationrelevant to the borrowers position was known to the credit provider. However, the

loan application form failed to disclose any income for either husband or wife. Thus, the

court held that the lender did know that the borrower had no income and that a large

borrowing was secured over the borrowers only asset.xlv The court held that it was

unconscientious for the [lender] to lend a large sum of money to a person with no

income with full knowledge that if the repayments under the loan were not met, it

could sell that person's only asset.xlvi

By contrast, in Fordthe borrower was also on a disability pension and secured the loan

over his only asset. Harrison J did not accept the borrowers argument that while the

lender did not have actual notice of the borrower's disability, it should be held culpable

because it failed to make enquiries that it should in the circumstances have made about

the literacy of the defendant or his intellectual capacity to enter into it.xlviiHarrison J

suggested that the borrowers arguments were stretching too far the notion of the

knowledge required for unconscionable dealing.xlviii Given the borrowers loan

application was completed with the assistance of the broker and the borrowers son,

there was presumably nothing in the loan application and other documents which

revealed the borrowers impairment, such as obvious spelling or comprehension errors.

However, the borrower had no income other than a disability pension and was

mortgaging his home to support the loan. Perhaps the borrower might have argued that

these facts should have raised the possibility of Ford not being able to conserve his own

interests in the mind of a reasonable person.


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III SETTING ASIDE A CONTRACT AS UNJUST ON THE BASIS OF THE BROKERS CONDUCT

Section 70 of the UCCC, and similarly the Contracts Review Act 1980 (NSW) provides

that:

The court may if satisfied on the application of a debtor, mortgagor or guarantor

that, in the circumstances relating to the relevant credit contract, mortgage or

guarantee at the time it was entered into or changed (whether or not by

agreement), the contract, mortgage or guarantee or change was unjust, reopen

the transaction that gave rise to the contract, mortgage, guarantee or change.

Under s 70(7) of the UCCC unjust is defined to include conduct that is 'unconscionable,

harsh or oppressive.

Section 70(2) provides that in making a determination pursuant to s 70(1) the court must

have regard to the public interest and all the circumstances of the case and may in

addition have regard to the specified factors which include:

(j) whether the credit provider or any other person exerted or used unfair

pressure, undue influence or unfair tactics on the debt, mortgagor or guarantor,

and if so, the nature and extent of that unfair pressure, undue influence or unfair

tactics.


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Under s 70(4) in determining whether a contract or a provision of a contract is unjust,

the Court shall not have regard to any injustice arising from circumstances that were

not reasonably foreseeable at the time the contract was entered into. A similar provisionexists in the Contract Review Act1980 (NSW) found under s 9(4).

It is uncertain whether this section precludes relief except in circumstances where the

fraud of a broker would have been reasonably foreseeable to the lender at the time the

contract was made. Duggan and Lanyon explain that there are two possible

interpretations of the provisions;

It could be read as referring only to circumstances arising after the date of the

contract and before the action is bought. Alternatively, it could be read as

referring back to the circumstances mentioned in s 70(1) in other words, to

circumstances existing at the time the contract was made. If it is the first

construction, the provision serves the function [consistent with the Peden Report

on which the Contract Review Act is based], namely of allowing the courts totake account of developments after the contract was made, provided they were

reasonably foreseeable by the credit provider at the retime.. If it is given the

second construction, the provision serves the quite different function of limiting

the Act to cases where the circumstances on which the complaining party relies

were known to, or reasonably foreseeable by, the credit provider at the time of

contracting.xlix

Duggan and Lanyon explain that the New South Wales Court of Appeal lhas adopted

the first construction in the context of the Contracts Review Act 1980 (NSW). The


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Victorian Supreme Court has adopted the second construction in the context of the

Credit Act 1984(Vic).li

Duggan and Lanyon comment that:

The Victorian Supreme Courts approach reflects a concern to avoid the

reopening of transactions where the credit providers conscience was not

affected. The trouble is that, however attractive this concern might be as a matter

of principle, it appears to be inconsistent with legislatures intention.lii

If the view preferred by Duggan and Lanyon is adopted, then under the UCCC s 70 and

the Contracts Review Act 1980 (NSW) a contract can be found unjust on the basis of the

conduct of a finance broker even where the credit provider had no knowledge of that

conduct.

The second step in assessing whether to grant relief under the UCCC or Contracts

Review Act1980 (NSW) is to consider whether the discretion should be exercised. Courts

have held that the state of a lenders knowledge will be relevant to the exercise of the

courts discretion to grant relief under the relevant legislation, liii although absence of

knowledge of the circumstances of injustice does not preclude a claim for relief.liv

As already discussed in relation to unconscionable dealing, in some cases a lender may

be treated as having knowledge of a brokers fraud though information revealed about

the transaction in the loan application and other documents. Would this consideration

preclude relief in respect to a loan contract being granted to a borrower affected by


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broker fraud in circumstances where the lender does not have knowledge of the fraud?

On the one hand, it might be said that if the lender does not have knowledge of the

brokers fraud it would be unjust to visit the consequences of that fraud on the lenders,

because as we have discussed, the conscience of the lender will not have been tainted.

In Ford Harrison J considered the transaction was outside the scope of the Contracts

Review Act as the loan was for business purposes. In terms of whether the contract was

unfair, while the lenders lack of knowledge of the borrowers disability did not bar

relief under the Contracts Review Act, Harrison J took the view that the contract was not

relevantly unjust.lv

On the other hand, it might be argued that such a result is not unfair because lenders

will usually be better placed than borrowers to monitor the conduct of the finance

brokers with whom they deal. Borrowers will commonly have approached a broker

because they are inexperienced in the credit market. By contrast, lenders may have an

ongoing working relationship with the brokers with whom they deal, experience in the

market and, through the payment of commission, some power to impose standards of

acceptable conduct on brokers. The lender has greater expertise and market power than

the borrower. Accordingly, it might be argued that the lender should, in fairness, have

responsibilities for monitoring the conduct of the brokers on which it relies or at least

take active steps to assess the genuine suitability for the borrowers of the finance

product recommended by the broker. If this second perspective is accepted, then factors

relevant to the courts discretion to grant relief might include whether the lender had

put in place procedures either to monitor brokers or to take some steps to verify

information given in applications submitted through a broker.


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Whatever the attractions of this approach, it does not sit altogether easily with the

jurisdiction to relieve against an unfair contract. It effectively places a duty of care on a

lender to assess the suitability of a loan for a borrower, a task for which the borrowerhas engaged a broker. To the extent that lenders are well placed to monitor the conduct

of brokers, any requirement to do so should be imposed directly rather than through

the device of an unjust contract.

IV WHAT STEPS MIGHT A FINANCE PROVIDER TAKE TO AVOID BEING TAINTED BY THE FRAUD

OF A BROKER?

Given the risks associated with broker fraud, both financial and legal, it may be prudent

for lenders to put into place processes for monitoring brokers and loan applications

submitted by them. For example, lenders might take steps to identify the factors which

indicate either broker fraud, or the presence of a borrower who is unable to conserve his

or her own interests. Lenders might insist borrowers have independent advice about

the transaction and /or that the loan documents be signed in the presence of the

solicitor and returned to the solicitor by the solicitor not the broker. Lenders might

require some independent verification of the borrowers assertions of income and

assets.

Lenders might also try to protect themselves against being tainted by the fraud of a

broker by attempting to contract out of any such liability. For example, a lender might

include in the loan documentation signed by the borrower an assertion that the

borrower has not relied on any statements about the loan provided by the broker or a


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statement by the borrower acknowledging that the broker is not the agent of the lender.

While much will depend on the circumstances, it seems doubtful that such statements

would be successful. If the broker has in fact been held out as the agent of the lenderthen a contractual disclaimer will not negate that holding out. Similarly, if the broker is

the primary source of information about the loan then it may be difficult for a lender to

distance itself from information, provided by the broker.lvi

It might further be argued that attempts by a lender to disclaim responsibility for fraud

by a broker may be void as an unfair term under s 32W of the Fair Trading Act (Vic).

This legislation does not apply to contracts regulated by the UCCC but might apply to

credit contracts outside such legislation. Of relevance is, s 32X(g) provides that a term

which has the object or effect of limiting the consumers right to sue may be unfair

because of that fact.

CONCLUSION

The cases of broker fraud raise the need for care on the part of lenders who rely on

brokers to facilitate loan transactions. Broker fraud may lead a lender into a transaction

that is significantly more risky than the lender originally realised in a financial sense

and also possibly in a legal sense. Generally, a lender will not have any knowledge of

the broker fraud so as to be tainted by that conduct. However, in some cases there may

be sufficient information in the documents provided to a lender by the broker or

borrower to implicate the lender in the wrongdoing. Lenders may therefore be well-

advised to develop procedures for monitoring broker facilitated transactions and


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verifying the information presented in relation to such dealings. There is also clearly a

case for stronger regulation to protect borrowers in their dealings with brokers.

However, the inexperience of borrowers who may use the services of brokers suggeststhat they may not be in a good position to monitor the conduct of brokers to ensure

compliance with regulatory requirements. Legislative incentives, should also be

provided to lenders engage in this process of monitoring.

iDr Jeannie Marie Paterson, Senior Lecturer, Faculty of Law, Monash University.

The funding for this project was provided from the Consumer Credit Fund on the approval of the

Minister for Consumer Affairs. Research assistance was provided by Alice Zhang and Sarah Mauriks. The

author wishes to thank for their contributions the Consumer Law Action Centre, solicitors at Consumer

Affairs Victoria, participants at the Monash Centre for Regulatory Studies Consumer Research Breakfast

and the delegates at the Credit Law Conference 2007. All errors remain the authors own

ii The Ministerial Council on Consumer Affairs, National Finance Broking Legislation Regulatory Impact

Statement (2004) p 7 reports that, while there are no precise figures on the value of loans facilitated by

brokers, in 2003 brokers were said to account for account for 23% of home loans with banks, credit unions

and building societies ($76 billion) in the Australian Prudential Regulation Authority (APRA), Report on

Broker Originated Lending(2003). The Australian Government Treasury, Financial Services and Credit Reform

(Green Paper, 2008) p 3 cites a report titled Australian Mortgage Industry Volume 7 published by

Fujitsu and JPMorgan in March 2008 stating that the proportion of broker originated home loans has risen

to above 37 per cent in 2007.

iiiMinisterial Council on Consumer Affairs, National Finance Broking Scheme Consultation Package(2007) p

5.

iv See the House Standing Committee on Economics, Finance and Public Administration, Inquiry into

Home Loan Practices and Processes (2007) ch 4.


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v In most Australian states, consumers may engage the services of a broker without being aware of the

qualifications of the broker, the fee charged by the broker the commission offered to the broker or the

range of financial products surveyed by the broker before making a recommendation: see the Ministerial

Council on Consumer Affairs, National Finance Broking Legislation Regulatory Impact Statement(2004) pp 26-

29.

vi Current proposals for reform include prescribed educational standards, requiring brokers to provide

more information about their services and requiring brokers to have a reasonable basis for any credit

recommendation. See further the Ministerial Council on Consumer Affairs, National Finance Broking

Scheme Consultation Package (2007).

vii. Most brokers are paid a commission by the lender based on the value, and in some cases, the number

of loans placed with the lender: The Ministerial Council on Consumer Affairs, National Finance Broking

Legislation Regulatory Impact Statement(2004) p 11.

viii The Ministerial Council on Consumer Affairs, National Finance Broking Legislation Regulatory Impact

Statement(2004) pp 20-1. See also the Australian Government Treasury, Financial Services and Credit Reform

(Green Paper, 2008) p 6 reporting that there has been evidence in the United States that increased broker

commissions for selling sub-prime loans played a role in the recent sub-prime crisis.

ixFraud in the equitable sense is not confined to deceit but may include victimisation which can consist

either of the active extortion of a benefit or the passive acceptance of a benefit in unconscionable

circumstances: Hart v OConnor [1985] AC 1000, 1024 per Lord Brightman.

xSee eg Commissioner for Fair Trading v Rowland Thomas & Ors [2004] NSWSC 479;Australian Securities and

Investments Commission v Skeers[2007] FCA 1551.

xiSee eg Perpetual Trustees Victoria Limited v Ford[2008] NSWSC 29.

xiiSee Neuendorf v Rengay Nominees P/L & Anor [2003] VCAT 1732;Benjamin v Ashikian[2007] NSWSC 735.

xiii See Permanent Mortgages Pty Ltd v Michael Robert Cook and Karen Cook [2006] NSWSC 1104; Perpetual

Trustee Co Ltd v Khoshaba[2006] NSWCA 4.

xivR Foreman, Subprime mortgage crisis: a legal perspective (2007) 45 Law Society Journal 55.


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xvPermanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd(2001) 50 NSWLR 679, 696-98 (Handley

JA), not affected on this point by the decision of the High Court (2003) 214 CLR 514.

xviSee further below.

xviiSee egOctapon Pty Ltd v Esanda Finance Corporation Ltd(unreported, NSW Supreme Court, 3 February

1989, 27-8 (Coles J); Custom Credit Corporation Ltd v Lynch[1993] 2 VR 469; Esanda Finance Corporation Ltd v

Spence Financial Group Pty Ltd [2006] WASC 177; Perpetual Trustees Victoria Limited v Ford[2008] NSWSC

29.

Similarly, a dealer of cars or equipment has been held not to be the general agent of a hire purchase

company: see eg Branwhite v Worcester Works Finance Ltd[1969] 1 AC 552, 577-578 (Lord Upjohn);Morelend

Finance v Westendorp [1993] 2 VR 284; Custom Credit Corporation Ltd v Lynch[1993] 2 VR 469.

xviiiDavid Benson Nominees Pty Ltd v Dicksons Ltd andAnor [2005] SASC 97.

xixPacific Carriers Ltd v BNP Paribas(2004) 218 CLR 451, 463 (Gleeson CJ, Gummow, Hayne, Callinan and

Heydon JJ). Also Crabtree Vickers (1975) 133 CLR 72; Flexirent Capital Pty Ltd v EBS Consulting Pty Ltd

[2007] VSC 158.

xxPacific Carriers Ltd v BNP Paribas(2004) 218 CLR 451, 463 (Gleeson CJ, Gummow, Hayne, Callinan and

Heydon JJ).

xxiFreeman and Lockyer (a firm) v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480, 505 per Diplock LJ

xxiiCrabtree Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 133 CLR 72,

78 (Gibbs, Mason and Jacobs JJ).

xxiiiFlexirent Capital Pty Ltd v EBS Consulting Pty Ltd[2007] VSC 158, [203] per Whelan J.

xxivBranwhite v Worcester Works Finance Ltd[1969] 1 AC 552, 573, 587 per Willmer, Danckwerts and Russell

L.JJ.

xxv(1986) 160 CLR 226, 234 per Gibbs CJ, Mason, Wilson, Brennan and Dawson JJ.

xxviOctapon Pty Ltd v Esanda Finance Corporation Ltd(unreported, NSW Supreme Court, 3 February 1989,

27-8 per Cole J); Custom Credit Corporation Ltd v Lynch[1993] 2 VR 469.


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xxviiBranwhite v Worcester Works Finance Ltd[1969] 1 AC 552, 575 587 per Willmer, Danckwerts and Russell

L.JJ.; Custom Credit Corporation Ltd v Lynch[1993] 2 VR 469; NMFM Property Pty Ltd and Ors v Citibank Ltd

(No 10)(2000) 107 FCR 270, 396; Perpetual Trustees Victoria Limited v Ford[2008] NSWSC 29.

xxviiiBranwhite v Worcester Works Finance Ltd[1969] 1 AC 552, 575 (Willmer, Danckwers and Russell L.JJ_;

Custom Credit Corporation Ltd v Lynch[1993] 2 VR 469.

xxixSteele-Smith v Liberty Financial Pty Ltd[2005] NSWSC 398,[104] (Palmer J).

xxx[1994] CCLR 87.

xxxi

[1994] CCLR 87.

xxxiiCommercial Bank of Australia v Amadio(1983) 151 CLR 447, 474 per Deane J.

xxxiiiSee further G Pearson, The ambit of unconscionable conduct in relation to Financial Services (2005)

23 Companies and Securities Law Journal105.

xxxivCommercial Bank of Australia v Amadio(1983) 151 CLR 447, 474 per Deane J.

xxxvAustralian Competition and Consumer Commission v Radio Rentals Limited [2005] FCA 1133, [21] (Finn J).

xxxviCommercial Bank of Australia Ltd v Amadio(1983) 151 CLR 447, 467 (Deane J).See alsoAustralian

Competition and Consumer Commission v Radio Rentals Limited [2005] FCA 1133, [18] (Finn J).

xxxviiSee further Anthony Duggan, Undue Influence in Patrick Parkinson, The Principles of Equity (2nded,

2003); Rick Bigwood, Undue Influence in the House of Lords: Principles and Proof (2002) 65 Modern Law

Review 435.

xxxviiiBank of New South Wales v Rogers (1941) 65 CLR 42; Royal Bank of Scotland v Etridge (no 2) [2002] 2 AC

773.

xxxix[2008] NSWSC 29 (Ford).

xlCf Steele-Smith v Liberty Financial Pty Ltd [2005] NSWSC 398.
http://www.lexisnexis.com.ezproxy.lib.monash.edu.au/au/legal/search/runRemoteLink.do?service=citation&langcountry=AU&risb=21_T3069051472&A=0.3393688145348267&linkInfo=AU%23urj%23ref%25BC200502553%25&bct=Ahttp://www.lexisnexis.com.ezproxy.lib.monash.edu.au/au/legal/search/runRemoteLink.do?service=citation&langcountry=AU&risb=21_T3069051472&A=0.3393688145348267&linkInfo=AU%23urj%23ref%25BC200502553%25&bct=A


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xli[2008] NSWSC 29 [92] (Harrison J).

xlii

[2008] NSWSC 29 [95].xliiiOn the issues raised by asset based lending and unconscionable conduct, see further Research Paper 3.

xliv[2002] NSWCA 413.

xlv[2002] NSWCA 413, [56] (Beazley JA).

xlvi[2002] NSWCA 413, [59] (Beazley JA).

xlvii[2008] NSWSC 29 [86].

xlviii[2008] NSWSC 29 [92].

xlixAnthony Duggan and Elizabeth Lanyon, Consumer Credit Law (1999) p 339, [9.2.7].

l West v AGC (Advances) Ltd (1986) 5 NSWLR 610; Antonovic v Volker (1986) 7 NSWLR 151; Beneficial

Finance Corp Ltd v Karavas(1991) 23 NSWLR 256, 277 (Meagher JA); St George Bank Ltd v Trimarchi[2004]

NSWCA 120, [36] (Mason P); Perpetual Trustee Co Ltd v Khoshaba[2006] NSWCA 41, [117] - [119] (Basten

JA).

li Custom Credit Corporation Ltd v Lupi [1992] 1 VR 99; Morlend Finance Corporation (Vic) Pty Ltd v

Westendorp [1993] 2 VR 284; Custom Credit Corporation Ltd v Lynch [1993] 2 VR 469.

liiAnthony Duggan and Elizabeth Lanyon, Consumer Credit Law (1999) p 340, [9.2.7].

liiiCollier v Morelend Finance (Vic) Corporation Pty Ltd(1989) ASC 55-716; Beneficial Finance Corporation Ltd v

Karavas(1991) 23 NSWLR 256; Nguyen v Taylor(1992) 27 NSWLR 48; Perpetual Trustee Co Ltd v Khoshaba

[2006] NSWCA 41, [77], [119].

liv Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41, [77] (Spigelman CJ) and [119] (Basten JA);

Elkofairi v Permanent Trustee Co Ltd[2002] NSWCA 413.

lv[2008] NSWSC 29 [102].

lviSee also Bowler v Hilda Pty Ltd(1998) 153 ALR 95, 109.


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We are also appalled at bankers thumbing their noses at Fos, threatening to withdraw from it unless Fos

sides with the banks, and failing to pay its fees. We are also appalled at Fos chinese walls the

chinese walls only go to show why Glass Steagall requires a complete separation of banking.

Yours

Supportive Residents & Carers Action Group Inc

Fsi Glass Steagall Brokers as Agents of Lenders Research Paper

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