ASIC has continued its focus on compliance with responsible lending laws with two significant enforcement outcomes in the last 3 months.
On 4 November ASIC accepted an enforceable undertaking from Cash Converters requiring it to refund consumers $10.8 million in fees. Cash Converters also paid a $1.35 million penalty and agreed to engage an independent expert to review and report on its compliance with the consumer credit regime.
The enforceable undertaking arose from concerns that Cash Converters failed to make reasonable inquiries into consumers’ income and expenses and did not take reasonable steps to verify consumers’ actual expenses. Instead Cash Converters applied an internally-generated assumed benchmark that was calculated as a percentage of the consumers’ gross income and had no relationship to the real expenses of the consumer. This resulted in Cash Converters failing to assess loans as unsuitable and entering into unsuitable loans. Cash Converters also failed to keep adequate records of all materials which formed the basis of its assessment.
The enforceable undertaking follows a decision by the Federal Court in September 2016 in response to an action bought by ASIC that found that Channic Pty Ltd, Cash Brokers Pty Ltd and the sole director of both companies, Mr Hulbert, did not assess whether second-hand car loans were affordable or suited to the requirements of consumers’ that largely relied on Centrelink income and lived in the isolated Aboriginal community of Yarrabah. The court found that Mr Hulbert did not inquire or verify the living expenses of the particular consumer, and considered an expenses benchmark to be a “perfectly proper substitute for any inquiry into or verification of a consumer’s actual expenses.” Penalties will be determined at a future hearing.
Earlier this year Nimble was also required to refund $1.5 million to consumers following concerns with Nimble’s reliance on algorithms rather than taking consumers’ financial information into account and a failure to make proper inquiries of consumers’ requirements and objectives. These outcomes demonstrate ASIC’s continued focus on the collection of information about, and verification of, expenses and the collection of information about requirements and objectives.
While ASIC continues to make examples of the smaller players, they are sending a very clear message to all lenders about their expectations in relation to these matters and that they will not tolerate non-compliance. This means that you should collect detailed information about actual living expenses and objectives and requirements. If you rely on benchmarks to verify living expenses, use an appropriately adjusted benchmark. You should also have robust and consistent practices for recording the inquiries you make and the basis for your assessment.
We expect that fines and remediation costs for lenders will grow as ASIC continues to pursue players across the industry, particularly as ASIC seeks the appointment of independent reviewers either voluntarily or as part of an enforceable undertaking. An independent reviewer may uncover broader inadequacies in an organisation’s compliance with the consumer credit regime and result in even greater costs for the organisation.