On 14 February 2019, the Australian Securities and Investments Commission (ASIC) announced that it is reviewing its guidance on responsible lending conduct, Regulatory Guide 209 Credit licensing: Responsible lending conduct (RG 209). While a review of RG209 has been on the cards for some time, the release of Consultation Paper 309 is timely in light of the Royal Commission into the Misconduct in the Banking, Superannuation and Financial Services Industry’s Final Report (RC Final Report), the ACCC’s Residential Mortgage Products Price Inquiry and the (albeit delayed) launch of Open Banking. ASIC has released Consultation Paper 309: Update to RG 209 (Consultation Paper) seeking feedback from stakeholders on the proposed updates by 20 May 2019.
Responsible lending obligations
Credit licensees must comply with the responsible lending conduct obligations in Chapter 3 of the National Consumer Credit Protection Act 2009 (Cth). Although credit licensees must ultimately make an independent decision as to how best meet their responsible lending obligations, having clear guidance from ASIC in an updated version of RG 209 is critically important to this process.
ASIC’s proposed updates to RG 209
The Consultation Paper proposes updates to RG209 in three broad categories:
• General approach:
ASIC is considering whether to identify particular inquiries and verification steps which ASIC considers that licensees should reasonably take in order to comply with their responsible lending obligations. While it will still be open to licensees to consider lower levels of inquiries and verification as reasonable in certain circumstances, under the proposed update they will have to demonstrate why that is the case.
• Updating and clarifying existing guidance on:
- the kinds of information that should be used for verification of a consumer’s financial position and what constitutes reasonable steps in that verification process;
- the role of expense benchmarks such as the Household Expenditure Measure (HEM) in the process for verifying a consumer’s financial position; and
- reasonable inquiries about the consumer’s specific requirements and objectives to ensure that the features, benefits and costs of the loan meet those requirements.
• New guidance on:
- areas where responsible lending obligations do not apply (e.g. small business lending);
- the role of responsible lending in mitigating fraud risk;
- the appropriate use of repayment history information;
- maintaining records of inquiries made and verification steps taken; and
- content of a written assessment to ensure that a consumer is able to understand what information the licensee has taken into account.
The HEM benchmark
The use of expense benchmarks (and the HEM in particular) has received attention in various forums over the past few years. While it is recognised as a useful benchmark, there are consistent views among regulators that it should not be used as a substitute for a consumer’s actual living expenses:
- ASIC found in Report 445: Review of interest-only home loans (REP 445) that some credit providers defaulted to benchmark figures instead of making inquiries into customers expenses and quoted the Melbourne Institute on the development of HEM that it “represents an extremely conservative estimate of what modern Australian families consume, excluding expenditure on housing”;
- APRA states in Prudential Practical Guidance APG223: Residential mortgage lending (APG223) that “Although these indices are extensively used, the might not always be an appropriate proxy of a borrower’s actual living expenses. Reliance solely on these indices generally would not meet APRA’s requirements for sound risk management. APRA therefore expects ADIs to use the greater of the borrower’s declared living expenses or an appropriately scaled version of the HEM or HPI indices”; and
- the RC Final Report states that: “while the HEM can have some utility when assessing serviceability—that is to say, in assessing whether a particular consumer is likely to experience substantial hardship as a result of meeting their obligation to repay a line of credit—the measure should not, and cannot, be used as a substitute for inquiries or verification”.
Clarifying the role of benchmarks
RG 209, in its current form, acknowledges the utility of benchmarks, but is also cautions that benchmarks are not “a replacement for making inquiries about a particular consumer’s current income and expenses, nor a replacement for an assessment based on that consumer’s verified income and expense.”
ASIC therefore has considered it appropriate to include the following guidance in the Consultation Paper:
• benchmarks can be useful as a tool to test the plausibility of consumer-provided information, but do not give positive confirmation;
• reliance on benchmarks to test information provided may involve a higher risk that the information is not accurate, particularly with some expenses;
• whether reference to a benchmark figure is a reasonable step for the licensee to have taken will depend on the circumstances; and
• licensees should take steps to limit the risk that the expense figure used understates the consumer’s actual expenses.
This guidance will no doubt be helpful, particularly as it clarifies the limits that should apply to the reliance on benchmarks (ie, they cannot be treated as positive confirmation of expenses). However, a question remains as to whether it strikes the right balance between providing sufficient clarity to facilitate compliance and a degree of flexibility to account for a range of different scenarios. Arguably, there would be further room to move in terms of providing greater clarity, including by way of providing more examples. Such greater clarity is particularly important in a post Royal Commission environment where compliance with responsible lending obligations is likely to continue to be the subject of scrutiny by ASIC and other regulators.