On 14 February 2019, the Australian Securities and Investments Commission (ASIC) issued Consultation Paper 309 (CP 309) with its plans to consult on and amend Regulatory Guide 209 Credit Licensing: Responsible Lending Conduct (RG 209) to update its guidance on responsible lending. This follows the release of Commissioner Hayne's Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry earlier in the month. Although the Final Report did not recommend any changes to the Responsible Lending Obligations, it was clear that greater compliance with existing obligations was expected and for the regulator to enforce it more readily.
The updates contemplated in CP 309 are clearly intended to offer a greater degree of certainty to licensees aiming to meet ASIC’s expectations for complying with the responsible lending obligations. The paper suggests a move towards a more prescriptive, as opposed to principles based framework for licensees in determining whether or not it will be 'suitable' to lend to customers.
CP 309 also appears to suggest a move beyond responsible lending as it is currently applied, to a framework that perhaps more closely aligns with the provision of personal financial product advice. Personal advice attracts the FOFA reforms such as a best interests duty (and the safe harbour steps) as well as detailed disclosure requirements in the form of a Statement of Advice (SOA). The guidance ASIC is heading towards or at least considering appears to carry across similar principles to the world of lending.
Safe harbour provisions?
In a similar manner as the safe-harbour steps for the best interest duty, ASIC suggests identifying and prescribing particular 'inquiries and verification steps' to provide certainty to licensees looking to comply with its responsible lending obligations to take such reasonable inquiries and steps as is required by the relevant circumstances. Advantages of a more prescriptive regime (as noted in a previous consultative process) include predictability and consistency for industry as well as a greater understanding of what to expect for consumers. During the earlier consultation it was concluded that minimum standards were too inflexible and could encourage lenders to only ever take the minimum steps. It would appear that ASIC is proposing to overcome this by requiring lenders to demonstrate why they considered the lower degree of inquiries or verification steps to be carried out.
Readily identifiable circumstances
In CP 309, ASIC also suggests that if information is held which may provide an indication as to whether a loan is suitable or whether the customer's responses require further investigation, this could be considered 'readily identifiable circumstances', and could comprise reasonable steps that a licensee is required to take to inquire or verify a customer's suitability. Although ASIC notes that this guidance was previously provided (ASICs previous guidance only related to the different levels required of a lender and assistance provider) this level of detail being suggested would potentially require a greater degree of individual attention by the lender and may even require a customised approach for each customer. Many online applications or 'one size fits all' processes may be inadequate to catch the nuances that are suggested as relevant to identify unsuitability (for example 'buy now pay later' customers being more likely to be operating at the margin of their disposable income).
This approach suggests raising the bar for the level of inquiries that are considered reasonable for a large bank with multiple customer relationships and various accounts held, and a complex set of rules to help determine what factors indicate suitability and which can be explained and dismissed.
ASIC also suggests that until such a time that this information is more widely accessible (i.e., with open banking), what is reasonable for one lender (with access to that information) will not be reasonable for other lenders or smaller lenders with no existing relationship. This possibly offers an unlevelled playing field with a lower (or higher) threshold to what will be considered by ASIC as sufficient responsible lending for the same customer to a different lender.
There was already uncertainty, in particular by Banks with potential access to large amounts of customer information, of the degree to which additional information should be investigated to form part of the reasonable inquiries or verification steps required for responsible lending. This paper appears to consider shifting the onus on those with more readily accessible information even further, on the basis that the more readily accessible, the more reasonable it is to expect the lender to take it into account in their considerations.
Reliance on Mortgage Brokers
The Final Report based its recommendations in relation to Mortgage Brokers in part on the failure of brokers to carry out appropriate responsible lending (as credit assistance providers). In CP 309, ASIC suggests that reliability of those providing customer information to lenders (as a broker would) should be questioned if:
- the lender was aware that the broker was under investigation for fraud or was suspected of misconduct;
- the loans from that broker had higher arrear rates; or
- there were higher levels of complaints about that broker.
If so, it becomes reasonable to question the reliability of the information and for another source of information to be considered.
ASIC also suggests that blank responses should not be accepted, as they do not sufficiently indicate consideration of the question being asked and do not necessarily equate to a 'nil' or negative response.
Reliance on Benchmarks
The Final Report expressed its lack of confidence in the reliance on benchmarks as a measure of expenses. ASIC in CP 309 clarifies that benchmarks like the Household Expenditure Measure (HEM) are useful tools to gauge the reliability of a customer's responses, but that they in no manner represent reasonable steps, positive confirmation or verification of a customer's expenses. These comments clearly represent ASIC's view however the outcome of its case against Westpac's use of benchmarks remains outstanding and will likely play a factor in any final guidance issued on their use.
Importantly, ASIC also proposes a number of safeguarding measures for the use of benchmarks generally, including to make appropriate adjustments for variables that apply in its application (e.g., demographics etc.), adding a reasonable buffer, carrying out periodic reviews and to ensure relevancy to the customer.
Statement of Advice?
Restatement of the customer's requirements and objectives was also a topic raised, with ASIC proposing a process similar to the requirements of the safe harbour provisions for the best interests duty and the disclosure requirements of a statement of advice to demonstrate that a customer's needs were understood and also met. This may require identification of specific features and benefits that were required by the customer as well as describing the (multiple) credit products that were considered in order for them to be met. Of note, while this documented process may prove too onerous on lenders to immediately agree to, it would also provide some degree of protection from a later claim that reasonable steps were not taken to investigate the appropriateness of the credit provided.
When should responsible lending not apply?
ASIC has also proposed to introduce guidance of its view on where the responsible lending obligations should not apply. Although only minimal information is provided about this proposal and no substantive examples are given, ASIC states that it is seeking feedback on situations where licensees (or providers of unregulated credit?) consider that Responsible Lending is not legally required. It remains to be seen whether the proposed guidance will sufficiently clarify matters for those seeking to then rely on it (for example through a no-action letter from ASIC).