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New responsible lending rules in the making

According to the 2014 Regulatory Guide to Chapter 3 of the National Consumer Credit Act 2009:

The key concept is that credit licensees must not enter a credit contract or consumer lease with a consumer, suggest a credit contract or consumer lease to a consumer or assist a consumer to apply for a credit contract or consumer lease if the credit contract or consumer lease is unsuitable for the consumer.

The 5-year-old Regulatory Guide was intended to set out ASIC’s guidelines for compliance and essentially, this meant:

  • To make reasonable inquiries about the consumer’s financial situation, and their requirements and objectives;

  • To take reasonable steps to verify the consumer’s financial situation; and

  • To make a preliminary assessment (if you are providing credit assistance) or final assessment (if you are the credit provider or lessor) about whether the credit contract or consumer lease is ‘not unsuitable’ for the consumer.

Back in 2014, the Regulatory Guide stressed that the primary obligations for lenders was not to sell an unsuitable product to consumers. Unfortunately, the Hayne Royal Commission showed that few financial institutions made more than a cursory effort to ensure their products were appropriate for consumers to whom they were being sold.

This has led to the development and inclusion of the corporate regulator’s product intervention powers into the Corporations Act and the National Credit Act, the consultation period of which closed earlier this month.

This week, ASIC held public hearings at the Wesley Conference Centre in Sydney to update their responsible lending obligations and regulatory guidance.

Key takeaways from Monday’s hearings

The Commonwealth Bank of Australia was first cab off the rank and addressed concerns with regards to:

  • the difficulties of identifying the difference between discretionary spending and non-discretionary spending when it comes to considering a consumer’s total expenses;

  • where the baseline for the minimum level of inquiry will fall; and

  • scalable inquiry for consumers with a known history.

Next up was the Bank of Queensland (BOQ). The Bank:

  • expressed concerns that there was too much latitude for subjectivity in the consumer-inquiry process, which permitted other lenders to adopt lower standards when attempting to define regulatory expectations in a bid to gain a non-competitive advantage;

  • called for a minimum standard of inquiry; and

  • also called for scalability in inquiry for those regarded as high risk and for those who have a good repayment history. This would also include customers who sit above the Household Expenditure Measure (HEM) and those who are below the Household Expenditure Measure HEM.

Attendees then heard from small banks. First up was Athena Home Loans. The bank:

  • expressed concern that an industry overreaction might result in a ‘financial strip search’;

  • noted it was looking for forward to application platform interfaces (API) that will come with the consumer data right (CDR) that passed through parliament recently, but expressed concerned that incumbents might this process uncomfortable; and

  • noted it was looking forward to the value that will be brought by comprehensive credit reporting (CCR).

Financial Legal Right Centre took the floor to:

  • note its concerns around calls for scalability by the previous banks, stating that while there is no need to collect data that has already been collected, there should be less data collected;

  • state that those who have good payment history areas are often the ones who can find themselves in financial hardship;

  • note its difficulties in understanding the definition of financial hardship as those that fallen below the Household Expenditure Measure (HEM);

  • challenge lenders’ assumptions that the borrower’s situation will change after the loan, leading to spending reduction;

  • ask for guidance around troublesome products included in the guidance; and

  • note its concerns with debt consolidation.

Ilion Data solutions:

  • promised a more-wholistic approach to consumers’ complete financial situation;

  • noted that Comprehensive Credit Reporting (CCR) can be useful, but it is still early days;

  • reported that software for data-driven solutions will be cheaper than labour; and

  • welcomed the consumer data right (CDR).

Tic Toc Online:

  • asked how holistic assessment of consumers’ financial situations will look and noted that technologies to do the job of looking at credit data and transactions already exists;

  • noted that people typically underreport their expenses;

  • disagreed with the previous banks about their use of aggregators and suggested that aggregated views can be misleading; and

  • Noted that the market is divided by data aggregation; however, with the advent of the consumer data right (CDR), it is now a consumer right.

Australian Retail Credit Association

  • wanted clearer definition around ‘financial hardship’—whether there would be an objective measure or whether it would relative to the accustomed standard of living for consumer;

  • thinks that the guidance should have lenders focus on things that are material;

  • noted that lenders should not collect too much data on borrowers whose history is known to the lender;

  • stated the importance of working out changes in consumer spending, post-loan; and

  • divided expenses into fixed expenses, variable non-discretionary and variable discretionary.

Westpac bookended the day, and:

  • asked not so much for prescription but rather for more case studies and certainty;

  • stressed the information they get from their brokers is of the same quality that they collect themselves; and

  • said that complex loans tend to come through mortgage brokers, while proprietary loans tend to be less complicated.

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