Financial Institutions and Markets

Author: Andrea Beatty

In a large step towards the long-promised update to its responsible lending guidance, ASIC released a consultation paper setting out its proposed updated guidance and inviting public feedback. Partner, Andrea Beatty and lawyer, Gabor Papdi, review the proposed updated guidance.

On 14 February 2019, the Australian Securities and Investments Commission (ASIC) announced that it is reviewing and planning to update Regulatory Guide 209: Credit licensing: Responsible lending conduct (RG 209) and published Consultation Paper 309: Update to RG 209: Credit licensing: Responsible lending conduct (CP 309).[1] This comes over four years after RG 209 was last revised and follows a number of judicial decisions, ASIC issue-specific reviews, non-judicial enforcement action and a royal commission that have occurred during the intervening period.

In brief, CP 309 suggests the following changes to RG 209 and invites public feedback on them:[2]

• identifying particular inquiries and verification steps that ASIC considers would generally be a reasonable minimum in most circumstances
• clarifying guidance on the kinds of information that can be used to verify a consumer’s financial situation and providing a list of readily available sources of verification
• clarifying guidance on the use of benchmarks in verification of a consumer’s financial situation
• identifying matters to consider when making inquiries about the consumer’s requirements and objectives and in deciding that a particular credit contract meets the consumer’s requirements and objectives, and
• providing additional guidance on specific issues not addressed in the current RG 209: when the responsible lending obligations do not apply, mitigating fraud risks, using negative repayment history information, good practice record-keeping and the content of a written assessment.

Specific guidance on reasonable inquiries and verification

ASIC states in CP 309 that it is considering whether to identify in RG 209 particular inquiries and verification steps that would apply generally to consumer contracts and thereby serve as a de facto minimum level of inquiries.[3] It notes that the issue of whether or not to impose minimum requirements arose during the consultation for the initial release of RG 209, but ASIC at the time decided against setting minimum standards in favour of guidance on the ‘scalability’ of inquiries. ASIC notes the uncertainty associated with its guidance on this issue in the current RG 209 and appears to be open to prescribing a de facto minimum level of inquiries and verification. It would remain open to licensees to perform a lower level of inquiries and verification steps for a consumer if they can demonstrate that it is reasonable in the circumstances to do so.[4]

ASIC’s rethink on this issue provides an opportunity to discard references to ‘scalability’ in RG 209 in favour of a greater focus on what is reasonable in the circumstances. Concepts of ‘scaling up’ and ‘scaling down’ inquiries and verification appear to have distracted licensees from the real question of whether the inquiries and/or verification steps were reasonable in the circumstances, having regard to the particular consumer and credit contract in question.

Updated guidance about verification sources

ASIC proposes to clarify its guidance about the kinds of information that can be used to verify a consumer’s financial situation and provide a more expansive list of forms of verification that it considers to be readily available to licensees in most circumstances.[5] CP 309 includes a list of sources from which information about a consumer’s financial information can be verified.[6] It is more extensive than the list presently in Table 4 in RG 209 and groups sources by the kinds of information that they can be used to verify – income, living expenses, existing debts/liabilities and the consumer’s overall financial situation. The updated list of sources would have a greater focus on a consumer’s expenses and their balance sheet, rather than just their income. Notably, reports from data aggregator services are also identified as potential source against which information about the consumer’s expenses can be verified.

CP 309 also expresses ASIC’s view that what amounts to ‘reasonable steps’ to verify information will change over time, as new forms or sources of information become available to licensees. It flags incoming mandatory comprehensive credit reporting and open banking (i.e. the consumer data right) as affecting what will constitute reasonable inquiries in future (it is not expected to reduce the amount of information about a consumer that is to be positively confirmed). If a form of verification is reasonably available to a licensee, ASIC will expect them to have regard to it.[7]

In updating RG 209, ASIC also proposes to include guidance that licensees are expected to use the information they collect for verification purposes, and not just collect it for its own sake. Also, where a verification source provides information about multiple aspects of a consumer’s financial situation, such as their income, expenses and other liabilities, licensees will be expected to use the source to verify all those aspects of the consumer financial situation. For example, bank statements are often collected to verify a consumer’s after-tax income, but they also contain information about the consumer’s expenses and other liabilities. Under the new guidance, ASIC would make clear that a licensee who collects bank statements cannot use it to verify income only and ignore the information in them about the consumer’s expenses.

As with the earlier commentary in relation to proposed specific guidance about inquiries into a consumer’s requirements and objectives, the verification sources identified by ASIC are likely to become de facto minimum standards. Again, ASIC proposes to indicate in its guidance that it will take an ‘if not, why not’ approach: if a licensee chooses not to use a readily available source of information, ASIC expects them to be able to justify why they did not do so.[8]

Benchmarks

Recognising the controversy and confusion surrounding the use of benchmarks in verification, ASIC also proposes to clarify its guidance in the updated RG 209. The proposed updated guidance would stress that benchmark values do not provide any positive confirmation about a consumer’s actual income or expenses, but can be a useful tool to help determine whether information provided by the consumer is plausible.[9] This reflects the position in Channic[10] that using a benchmark value in place of a consumer’s declared expenses does not amount to reasonable inquiries or steps to verify, but rather is done as a substitute for reasonable inquiries and steps to verify. The updated guidance is influenced significantly by ASIC’s reviews into home loan markets, which found that some credit providers used benchmark values in place of consumers’ actual expenses and that a significant number of broker-originated home loans had the consumer’s declared expenses equal to the benchmark amount used by the lender.[11] In updating its guidance on the use of benchmarks, it is hoped that ASIC will dispel current uncertainty about the appropriate use of benchmarks.

A consequence of updating the guidance around benchmarks in RG 209 will be to confirm that they can be legitimately relied on by licensees, albeit for the limited purpose of gauging the likely reliability of information provided by consumers. This should provide some comfort to the consumer credit industry in light of the criticism of reliance on benchmarks in the Final Report of the Royal Commission Into Misconduct in the Banking, Superannuation and Financial Services Industry.[12]

Specific guidance about inquiring into consumers’ requirements and objectives

In CP 309 ASIC flags an intention to update the guidance about what constitutes reasonable inquiries into a consumer’s requirements and objectives in relation to a credit contract to reflect its findings and recommendations in Report 493: Review of interest-only home loans: Mortgage brokers’ inquiries into consumers’ requirements and objectives (REP 493). In REP 493, ASIC considered the quality of a significant number of sampled mortgage brokers’ inquiries into the consumer’s requirements and objectives to be deficient, as the loan files failed to record the consumers requirements and objectives or recorded them at a very general level (e.g. to acquire a particular asset or to refinance at a lower rate) without it being apparent how an interest-only loan met those requirements (as opposed to a principal and interest loan). The proposed updated guidance will require licensees to make sufficient inquiries into a consumer’s specific requirements and objectives to enable them to demonstrate how the specific features of a loan or lease – especially non-standard features such as an interest-only period or substantial final payment – meet those requirements and objectives.

The proposed updated guidance will also require licensees to clearly document the steps that they take to inquire into a consumer’s requirements and objectives and to reconcile the loan/lease product features against those requirements and objectives. Those procedures will also be expected to resolve and record the outcome of conflicting requirements or objectives and to provide for further communication with a consumer to ensure that they are aware the costs and risks of non-standard or contingent product features. If it appears that some features of a product do not meet the consumer’s objectives, the proposed guidance will expect the licensee to communicate with the consumer to explain this to them and determine whether the consumer would consider the loan or lease to be unsuitable as a result.

Additional guidance on specific issues not in the current RG 209

When responsible lending obligations do not apply

Curiously for a guide about how to apply the responsible lending obligations in the NCCP Act, ASIC proposes to include in the updated RG 209 guidance about situations in which the responsible lending obligations do not apply. ASIC states in CP 309 that this is in response to anecdotal feedback that lenders are applying responsible lending processes when not required to, such as in small business lending. This seems to imply that it is undesirable for lenders and brokers for ‘non-consumer’ loans to collect information and consider whether or not the loan is suitable for the borrower – otherwise, why discourage lenders and brokers from doing so? At the least, it suggests that regard is being had to recent media commentary blaming enforcement of responsible lending obligations (together with tightened prudential standards and the recent royal commission) for causing a credit squeeze resulting in a fall in dwelling prices.[13]

Fraud risk and responsible lending obligations

In CP 309, ASIC signals an intention to include in the updated CP 309 guidance about dealing with the risk of loan fraud – the provision of fraudulent information in support of a loan application, whether at the initiative of a consumer or intermediary – in the performance of responsible lending obligations, including risk factors that would provide cause for further verification. The proposed guidance set out in CP 309[14] largely reflects the views set out in ASIC’s civil penalty proceeding[15] against ANZ Banking Group for responsible lending failures in its Esanda vehicle finance division, but ASIC invites feedback on the kinds of risk factors and guidance that licensees would find helpful.

Using repayment history information

ASIC proposes to include guidance in the updated RG 209 discouraging licensees from using negative credit history too harshly, emphasising that past repayment difficulties on one product do not necessarily mean that a consumer will be unable to meet their obligations on a new credit product.[16] Its stated objective for including this guidance is to, with widespread comprehensive credit reporting likely in future, discourage credit providers from implementing decision rules that automatically reject applicants with missed repayments or hardship indicators in their credit reports. Instead, ASIC wishes for licensees to perform additional inquiries to understand the cause of the past repayment difficulties and how they have been managed.[17] Whilst refusing to lend to consumers with less-than-perfect credit histories does not contravene the responsible lending provisions, including guidance on how to treat negative repayment histories and hardship indicators will provide comfort to credit providers that they can continue to lend to such consumers.

Record-keeping and written-assessments

ASIC also proposes to include in the updated RG 209 new ‘best practice’ guidance about the kinds of information licensees should record for the purpose of enabling them to demonstrate, if required to, compliance with inquiry, verification and assessment obligations. The proposed guidance mirrors ASIC’s recommendations in REP 493, with licensees to record to a consumer’s file all information collected that is material to unsuitability, develop tools to guide information collection and verification and to prepare concise narrative summaries about a consumer’s requirements and objectives how the credit product recommended or entered into meets those requirements and objectives.

In relation to written assessments, which a licensee may be required to give to a consumer under section 120 or 133 of the NCCP Act, ASIC proposes to include in the updated RG 209 additional, specific guidance about what they should contain. CP 309 contains a sample written assessment template setting out the kinds of information that ASIC expects to be collected and the way in which the assessment can be structured[18] – discrete identification of the information about the consumer’s requirements, objectives and financial situation, whether the loan or leases satisfies these and whether the consumer has the capacity to make payments under the loan or lease – so that a consumer can understand why the loan or lease has been assessed as not unsuitable of them and the licensee can demonstrate compliance with the obligation to assess whether or not the contract is unsuitable.