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Financial System Inquiry under ex CBA Banks David Murray

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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Financial System Inquiry under ex CBA Banks David Murray

Cross linked story with abcnews.go.com


Former Citigroup chairman and chief executive Sandy Weill thinks Wall Street should break up its big
banks in an effort to regain the publics trust.
What we should probably do is go and split up investment banking from banking, Weill said on CNBCs
Squawk Box on Wednesday. Have banks be deposit takers, have banks make commercial loans and real
estate loans, have banks do something thats not going to risk the taxpayer dollars, thats not too big to
fail.
Weill essentially called for the return of the GlassSteagall Act. The 1933 act separated investment and
commercial banking activities in the wake of a stock market crash and bank failure. It was repealed in
1999 during the Clinton administration.
Im suggesting that they be broken up so that the taxpayer will never be at risk, the depositors wont be at
risk, 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. There
should be no such thing as off balance sheet, he said. I want to see us be a leader, and what were doing
now 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 to
identify 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.ii There 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 or
experience. 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.iv Statutory 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 illequipped 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.viii Yet another, often related, problem is fraud on the part of the broker.ix
There are a number of cases in which a broker has mislead borrowers,x ignored the
disadvantageous situation of the borrower,xi falsified 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.xii This 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,xiv it 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 from
liability.

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. xv This 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.xvii Nonetheless, 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.xviii If
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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.xix In these circumstances, the
representation 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 dealing 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.xxiv The 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 formsxxviii and
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 not
contain 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

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KNOWLEDGE OF UNCONSCIONABLE DEALING/UNDUE INFLUENCE

Financial System Inquiry under ex CBA Banks David Murray

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 Act 1974, 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.xxxiv Mason 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.xxxv Mason 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.xxxvii A lender will be
tainted by the undue influence where the lender knew or had reason to believe of the
impropriety.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.xxxix In 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 suffered
from 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?xliii The issue is unresolved. In Elkofairi v Permanent Trustee Co Ltdxliv the
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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 information
relevant 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 Ford the 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.xlvii Harrison 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 provision
exists in the Contract Review Act 1980 (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 to
take 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 Appeall has 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 Act 1980 (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 borrower
has 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 lender
then 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 welladvised 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 suggests
that 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.

Dr 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.
iii

Ministerial 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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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 2629.
Current proposals for reform include prescribed educational standards, requiring brokers to provide

vi

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

ix

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.
x

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

Investments Commission v Skeers [2007] FCA 1551.


xi

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

xii

See 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.


xiv

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

22 | P a g e

Financial System Inquiry under ex CBA Banks David Murray

xv

Permanent 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.
See further below.

xvi

See eg Octapon Pty Ltd v Esanda Finance Corporation Ltd (unreported, NSW Supreme Court, 3 February

xvii

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.
xviii

David Benson Nominees Pty Ltd v Dicksons Ltd and Anor [2005] SASC 97.

Pacific 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.
xix

xx

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

Heydon JJ).
xxi

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

xxii

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

78 (Gibbs, Mason and Jacobs JJ).


xxiii

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

Branwhite v Worcester Works Finance Ltd [1969] 1 AC 552, 573, 587 per Willmer, Danckwerts and Russell
L.JJ.
xxiv

xxv

xxvi

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

23 | P a g e

Financial System Inquiry under ex CBA Banks David Murray

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

xxvii

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

xxviii

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


xxix

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

xxx

[1994] CCLR 87.

xxxi

[1994] CCLR 87.

xxxii

Commercial Bank of Australia v Amadio (1983) 151 CLR 447, 474 per Deane J.
See further G Pearson, The ambit of unconscionable conduct in relation to Financial Services (2005)

xxxiii

23 Companies and Securities Law Journal 105.


xxxiv

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

xxxv

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

xxxvi

Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447, 467 (Deane J). See also Australian

Competition and Consumer Commission v Radio Rentals Limited [2005] FCA 1133, [18] (Finn J).
See further Anthony Duggan, Undue Influence in Patrick Parkinson, The Principles of Equity (2nd ed,

xxxvii

2003); Rick Bigwood, Undue Influence in the House of Lords: Principles and Proof (2002) 65 Modern Law
Review 435.
xxxviii

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

773.
xxxix

xl

[2008] NSWSC 29 (Ford).

Cf Steele-Smith v Liberty Financial Pty Ltd [2005] NSWSC 398.

24 | P a g e

Financial System Inquiry under ex CBA Banks David Murray

xli

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

xlii

[2008] NSWSC 29 [95].

xliii

On 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].

xlix

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

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.
lii

liii

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

lvi

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

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Financial System Inquiry under ex CBA Banks David Murray

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

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