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Credit risk management prudential standard

Last week, Australian Prudential Regulation Authority published an updated prudential standard on credit risk management for Authorised Deposit-taking Institutions (ADIs).

APS 220 in Credit Risk Management will come into effect in January 2021 and will be expanding its scope to include the credit standards, which the regulator indicated in its official statement is consistent with the Australian Securities and Investments Commission’s guidelines around responsible lending.

The regulator said, “It also incorporates enhanced board oversight of credit risk and the need for ADIs to maintain prudent credit risk practices over the entire credit life-cycle.”

The regulator highlighted that the prudential standard includes Recommendation 1.12 from the Royal Commission report:

APRA should amend Prudential Standard APS 220 to:

  • require that internal appraisals of the value of land taken or to be taken as security should be independent of loan origination, loan processing and loan decision processes; and

  • provide for valuation of agricultural land in a manner that will recognise, to the extent possible:

  • the likelihood of external events affecting its realisable value; and

  • the time that may be taken to realise the land at a reasonable price affecting its realisable value.

ASIC Responsible Lending Guidelines Highlights

  • A stronger focus on the legislative purpose of the obligations—to reduce the incidence of consumers being encouraged to take on unsuitable levels of credit, and ensure licensees obtain sufficient reliable and up-to-date information about the consumer’s financial situation, requirements and objectives to enable them to assess whether a particular loan is unsuitable for the particular consumer.

  • More guidance to illustrate where a licensee might undertake more, or less, detailed inquiries and verification steps based on different consumer circumstances and the type of credit that is being sought. The updated guidance includes new examples about a range of different credit products, including large and longer-term loans, credit cards and personal loans, small amount loans and consumer leases and different kind of consumer circumstances—such as first home buyers, existing customers, strata corporations, high net worth and financially-experienced consumers.

  • More detailed guidance about how spending reductions may be considered as part of the licensee’s consideration of the consumer’s financial situation, requirements and objectives.

  • More detailed guidance about the use of benchmarks as a way to check the plausibility of expenses, as well as additional guidance about the HEM benchmark.

  • Clarity about more complex situations for some consumers—for example, the different situations of consumers, such as income from small business, casual employees, new employees, the gig economy, as well as joint and split liabilities and expenses.

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