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On 9 December 2019 the Australian Securities and Investments Commission (ASIC) released updated guidance to Australian Credit Licence (ACL) holders in Regulatory Guide 209 Credit licensing: Responsible lending conduct (RG 209) setting out updated views on what the responsible lending obligations under Chapter 3 of the National Consumer Credit Protection Act 2009 Cth (NCCP Act) require, and steps ACL holders can take to minimise the risk of non-compliance with their obligations.
This is the first in a series of three articles exploring what’s new in the latest RG 209, focusing on when credit licensees may undertake more, or less, detailed inquiries and verification steps before making an unsuitability assessment, based on different consumer circumstances and the type of credit that is being sought. The second article in this series covers key new examples ASIC includes in their updated RG 209, and foreseeable changes to a customer’s financial situation. The third article discusses ASIC’s more detailed guidance about consumer spending reductions and apportionment, and the use of benchmarks.
Scope of responsible lending
Responsible lending obligations apply when a person engages in ‘regulated conduct’, by (if you are a broker) “suggesting or assisting a consumer to apply for a credit product, or an increased credit limit, or suggesting the consumer remain in a credit product” (RG 209.6(a)) or (if you are a lender) “entering into a credit product with a consumer, increasing a credit limit of an existing credit product, or making an unconditional representation to the consumer that you consider they will be eligible to enter into a credit product or increase a credit limit” (RG 209.6(b)). Regulated credit is credit to individuals and strata corporations for residential, personal, domestic or household purposes or to purchase or improve residential investment property (RG 209.4 and National Credit Code s5).
Before engaging in regulated conduct, under the NCCP Act lenders and brokers must gather certain information about the consumer through reasonable inquiries and verification of information, to assess whether a credit product or credit limit increase is unsuitable for a client. Licensees are prohibited from engaging in regulated conduct in relation to unsuitable credit products and credit limit increases.
Under what ASIC now describes as the ‘prescribed test’ a credit product will be unsuitable if entered into or increased in circumstances where: (a) the consumer will be unable to comply with their financial obligations under the credit product (by, for example, making their repayments as they fall due for the loan term (RG 209.8(a)); or (b) the consumer will only be able to comply with their financial obligations under the product with substantial hardship (RG 209.8(a)) (being something more than merely a situation that is hard to bear (RG 209.192)); or (c) the product will not meet the consumer’s requirements or objectives (RG 209.8(c)).
When determining for themselves what inquiries and verification steps are reasonable, ASIC suggests lenders and brokers should have regard to what the particular obligation is intended to achieve and what consumer harm it is intended to address, the circumstances of the individual consumer, and whether the credit product involves a higher risk of harm to the consumer if unsuitable. What is ‘reasonable’ may also be impacted by the broader professional and regulatory environment in which the lender or broker operates (for example, comprehensive credit reporting, technology and innovations) (RG 209.23).
Reasonable requirements and objectives inquiries
The new RG 209 emphasises the need for information to be sufficiently specific so that a licensee understands what is important to the consumer in relation to the credit product, citing recent case law to substantiate their views (at RG 209.52, including ASIC v The Cash Store (in liquidation)  FCA 926, and ASIC v Channic Pty Ltd (No 4)  FCA 1174). ASIC now also discusses affordability of the credit product as being an important requirement for most consumers, as many consumers may need to reduce their current expenditure to afford the repayments on a loan including spending reductions and lifestyle changes that will need to align with their requirements objectives (RG 209.57).
ASIC provides more insight to brokers and lenders about the level of inquiries that may be needed before engaging in regulated conduct in relation to a continuing credit contract such as a credit card. Whereas under the previous RG 209 dated 5 November 2014 (at paragraph 209.37), the market generally interpreted ASIC’s guidance to mean there was less need to understand a customer’s requirements and objectives before taking out a credit card as a credit card has no particular purpose, ASIC now expands on its guidance by clarifying that there may be a need to understand the various different purposes of a credit card (for example, a customer may want a basic, low cost card, or access to additional benefits like loyalty schemes, or to transfer the balance on existing cards) (RG 209.55 and 56).
More inquiries should also be made of consumers who will obtain no or limited benefit from the loan (RG 209.85(c)), which aligns with the updated Banking Code of Practice dated 1 July 2019 (BCOP) according to which lenders must not approve a loan to a co-borrower where there is no substantial benefit to that co-borrower from the loan, unless the lender has taken various steps (BCOP ss 54 and 55). ASIC further guides brokers and lenders to make more inquiries about a customer’s requirements and objectives where the consequences for the consumer if they do not understand the credit product or obligations are likely to be relatively serious for them, particularly if the credit product is more complex or has options that may impact the ultimate cost to the consumer; or the licensee can see the customer has difficulty understanding the terms (RG 209.85).
On the other hand, ASIC says it may be reasonable for a lender or broker to decide that fewer inquiries about a consumer’s requirements and objectives are needed where consumers or strata corporations had already taken out similar credit products used in a way consistent with their requirements and objectives, or the licensee had previous dealings with the consumer and reasonably believes the consumer has an appropriate level of experience or understanding in relation to financial matters (RG 209.86(a), (b) and (c)).
Reasonable financial situation inquiries and verification
ASIC now frames a credit licensees’ obligation to make enhanced financial situation inquiries and verifications in terms of the risk or likelihood that a consumer will be harmed by taking on the new financial obligations under the credit contract, and considers the risk of overestimating income or underestimating expenses are higher where the consumer’s obligations will take on a proportionately significant part of the consumer’s available income (RG 209.87).
ASIC provides “red flag” examples which it says should trigger further inquiries, including where there is no available income left outside the consumer’s estimated expenditure plus their new financial obligations, or the consumer recently ended multiple loans, or had an increasing net debt position, regulatory overdrawn savings or reversed direct debits, or payment delinquencies on essential utilities, among other flags (RG 209.88).
While ASIC also describes home loans as potentially requiring more inquiries given the larger commitment over a longer term secured against residential property, it also notes that there may be other consumer circumstances that indicate the consumer is at a lower risk of the loan being unsuitable (RG 209.90), which presumably would include refinances into what ASIC now call ‘like for like’ or ‘lower cost’ products (RG 209.109).
Importantly for licensees, ASIC clarifies a long held industry view that fewer financial situation inquiry and verification steps may be reasonable where the consumer has a comfortable surplus available after the new financial obligations are added to the consumer’s reasonable estimate of their current outgoings, which indicates a potentially new streamlined set of consumers who may require less verification for licensees (RG 209.87 to 209.89). ASIC also says that in the absence of “red flags” that a consumer may be in higher risk financial situation, it may be reasonable to obtain less information or take fewer steps to verify information in relation to a personal loan or credit card contract (RG 209.91 and 92).
In relation to consumers switching ‘like for like’ loans or to a lower cost product, ASIC responded to some licensee feedback to CP 309 by agreeing that if the consumer is currently meeting repayments at the same or higher level than proposed loan, a licensee (most relevantly here, a broker) may determine the consumer’s ability to meet financial obligations under the new product by confirming those repayments have previously been comfortably met over a reasonable period of time (which ASIC suggests is 12 months). This could be verified through loan statements, rather than requiring information about income and outgoings from the consumer to determine their ability to service the loan. In addition, ASIC believes a credit history report would be needed to ensure there are no other indicators of financial difficulty, as well as confirmation that the consumer’s financial situation has not changed significantly including any recent or foreseeable changes, and confirmation that the new product meets the consumer’s requirements and objectives (RG 209.109 and 209.110).
This opens up an opportunity for digital brokers in particular to achieve a more positive experience and outcome for consumers simply wanting a better deal than they are currently on, including the potential for brokers to help customers negotiate lower rates with their existing lender without triggering disproportionately onerous responsible lending inquiries and verifications with the consumer.
While ASIC also specifically addresses switching with existing lenders to a new credit product with that same lender but with more favourable terms (RG 209.111), ASIC’s guidance that less inquiries may be needed relates to a lender assessing their consumer for another internal product having more knowledge and information about their customer, and not a broker suggesting such a switch or that a customer should remain in their existing product with that lender. The current market has seen the rise of brokers recommending or assisting customers to remain in their existing lender credit product but with a negotiated reduced rate, or switching to a new credit product with that same lender, and therefore it is important that ASIC’s guidance could equally apply to brokers who have enhanced knowledge and information about the customer.
ASIC further describes that in assessing refinances to ‘like for like’ or lower cost credit products, less weight may be given to matters outside the consumer’s repayment history under their existing loan, and goes even further to say that it is “likely a refinance will be suitable where the consumer has regularly made payments on the home loan when they fall due, the amount of the repayments will reduce following a refinance to a lower interest rate, and there have been no adverse changes to the consumer’s circumstances.” This is incredibly helpful guidance by ASIC and positive for the broker industry in particular. Again, the other indicators like financial stress and stability should still be considered and that it meets the consumer’s requirements and objectives (RG 209.244 to 248).
In terms of verification of the financial situation of customers refinancing into a ‘’like for like loan, it does appear that at the very least ASIC views bank statements and a credit report as being necessary verification of a customer’s financial situation prior to the licensee engaging in regulated conduct, which includes for brokers making a suggestion that a customer take out a new credit product or remain in an existing credit product.
ASIC’s Report 643 (dated 9 December 2019) makes a brief reference to ASIC’s appeal against the Federal Court’s decision in ASIC v Westpac (Liability Trial)  FCA 1244, which ASIC is now appealing in relation to the decision by Justice Perram that (at 82) a lender “…may do what it wants in the assessment process…” under the NCCP Act. Although this appeal has not yet been heard, it is still important for lenders and brokers to review ASIC’s updated RG 209 against their current policies and procedures to adjust to ensure ASIC’s revisions have been properly considered. Further, the Australian Financial Complaints Authority (AFCA) and Australian Banking Association both issued a statement confirming they support the updated RG 209 and AFCA confirmed that its approach to responsible lending will be fully aligned to ASIC's guidance. Given consumer disputes with licensees will be judged by AFCA according to ASIC’s revised guidance, lenders and brokers should ensure their own standards reflect that guidance also.
About Leonie Chapman
After completing her Bachelor of Laws and Bachelor of Commerce in 2002, Leonie went on to work both in private practice and as senior in-house lawyer supporting specialist lenders and large financial institutions. Having achieved a Master of Laws in 2009, Leonie’s main focus since co-founding LAWYAL in July 2013 has been on the regulation and compliance for banking and financial institutions, including licensing and compliance, negotiating and drafting lender, aggregator, broker and referrer agreements, distribution and loan servicing or outsourcing arrangements, loan and security documentation (including regulated), drafting policies and procedures, and advices covering compliance with all applicable laws including NCCP Act, Privacy Act, AML/CTF Act, SPAM Act, Competition and Consumer Act and aspects of the Corporations Act.
About LAWYAL Solicitors
LAWYAL Solicitors is an incorporated legal practice that offers quality and affordable legal advice online for Australian financial institutions, companies and small-to-medium enterprises. We provide an alternative to hiring permanent in-house counsel at high fixed costs, or engaging external law firms with large overheads and billable hours.
LAWYAL offers legal services in the following areas: banking and finance, consumer credit and mortgage lending, privacy and AML, trade practices and unfair contract terms, intellectual property and trade marks, business and commercial, regulatory reform and compliance, contract, Corporations Act, ASX Rules and Corporate Governance, and outsourced-in-house legal support.
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