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Responsible Lending guidance

The same week the Government announced the reintroduction of mandatory comprehensive reporting back into parliament, the Australian Securities and Investments Commission (ASIC) has released an updated version on their responsible lending guidance.

In an official statement, ASIC Commissioner Sean Hughes said, “ASIC conducted extensive consultation on this important issue. The public hearings and submissions highlighted the areas where industry sought clarification from ASIC. We have listened carefully to all stakeholders and addressed areas where we consider updated guidance would help. We hope that today’s guidance will assist industry to more-confidently make responsible lending decisions and to facilitate good lending outcomes for consumers.”

The hearings to which Commissioner Hughes referred took place in Sydney and Melbourne in mid-August.

Previously, the conduct regulator lost their test case against Westpac following the first day of hearings on new guidance of he the responsible lending rules. Justice Nye Perram ruled that the bank had not breached the National Consumer Credit Act by using the Household Expenditure Measure (HEM) as a reasonable measure to assess a borrower’s ability to repay their loans.

However, at the hearings, both Commissioner Hughes and ASIC Deputy Chair Karen Chester acknowledged issues in using the HEM in the context that it would be difficult to establish a prospective borrower’s total expenses and that it would also prove difficult to establish the difference between discretionary and non-discretionary spending.

At the time, Hughes said, “ASIC took on the case against Westpac because of the need for judicial clarification of a cornerstone legal obligation on lenders; therefore, ASIC refers to this case as a ‘test case’. As a regulator, it is our role to test the law and its ambit. The obligation to assess loan applications builds on the requirement for banks to make inquiries about a borrower’s financial circumstances and capacity to service a loan and to verify the information that borrowers give banks.”

ASIC’s RG209 also highlights this gap:

The HEM figures do not include spending on a range of items that are commonly part of a consumer’s overall outgoings. When you compare the consumer’s estimates to HEM, it is important that you only use the estimates of spending on the kind of items that are included in the benchmark figure, and not a wider estimate of their total expenditure (otherwise the comparison is unlikely to give you useful information about whether the estimate of the consumer’s ‘basic’ expenditure is realistic).

The key changes highlighted in the regulator’s statement:

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