The financial services regulator has released its updated guidance on responsible lending obligations, which includes a section on how they apply to broker-introduced loans.
Following its consultation on updating Regulatory Guide 209 (RG 209), the Australian Securities and Investments Commission (ASIC) has now released its 96-page updated guidance on responsible lending conduct.
The much-anticipated guidance, Regulatory Guide 209: Credit licensing: Responsible lending conduct, aims to provide greater clarity and support to lenders and brokers in meeting their obligations and reflects ASIC’s view of the current state of the law.
ASIC has also included a section on the scope of responsible lending, explaining the areas that are not subject to responsible lending obligations – such as small-business lending irrespective of the nature of the security used for the loan.
Releasing the guidance, ASIC commissioner Sean Hughes said: “ASIC conducted extensive consultation on this important issue. The public hearings and submissions highlighted the areas where industry sought clarification from ASIC.
“We have listened carefully to all stakeholders and addressed areas where we consider updated guidance would help. We hope that today’s guidance will assist industry to more confidently make responsible lending decisions and to facilitate good lending outcomes for consumers.”
While the guidance is still principles-based “to support flexibility for licensees”, it provides more detailed guidance around when a licensee might undertake more, or less, detailed inquiries and verification steps based on different consumer circumstances and the type of credit sought.
The guidance has also been updated to reflect technological developments, including open banking and digital data capture services. RG 209 notes that the cost and ease of access to transaction information will be improved over time, which should improve lenders’ overall view of a consumer’s financial situation.
Moreover, it provides more examples for different kinds of consumer circumstances – such as first home buyers, existing customers, strata corporations, high-net-worth and financially experienced consumers.
As well as this, the guidance provides more detailed guidance about the use of benchmarks as a way to check the plausibility of expenses, as well as additional guidance about the Household Expenditure Measure benchmark, which has been a topic of much debate and several court cases. For instance, the Westpac v ASIC case, in which Justice Perram ruled in favour of Westpac, is cited in several cases in this guidance.
In the updated guidance, ASIC outlines that, while a broker’s assessment is classed as a “preliminary” assessment, this “does not diminish a broker’s responsibilities with regard to making reasonable inquiries and undertaking reasonable verification of the information they can access”.
However, ASIC said it “recognises that a broker may not have access to some information that is available to a lender (e.g. credit reports and data arising from a banking relationship) and that their assessment does not also take into account the commercial risk of being the lender”.
It continues: “It may be reasonable for a broker to make more detailed inquiries about the consumer’s requirements and objectives in relation to obtaining credit – part of the service offered by brokers is to identify lenders and products for the consumer, help the consumer to make a decision about which to apply for and then assist the consumer to apply…
“As brokers assist consumers to make an application to lenders, it is reasonable for brokers to have regard to the kind of information the selected lender requires. However, the broker still needs to be satisfied that the information obtained is sufficient to enable the broker’s assessment of whether the credit product is unsuitable for the consumer, as well as meeting the selected lender’s preferences about documentation.”
The guidance goes on to emphasise that, when making an assessment that a credit product meets a consumer’s requirements and objectives, brokers should match the consumer’s stated requirements and objectives with a credit product that is “not unsuitable”.
However, it explicitly states that, should a broker provide a preliminary assessment that records the consumer’s objectives and requirements as being “to obtain credit to purchase a home” – and not include any description or analysis of the consumer’s requirements and objectives in respect of the proposed credit – this would be classed as insufficient. ASIC states that this is because it would suggest that any credit product that enables the consumer to purchase a home would be not unsuitable, and that the consumer is therefore indifferent to matters such as price or term, or features such as redraw facilities or offset accounts.
In relation to offset accounts, ASIC provides the following example: A broker provides credit assistance to a consumer in relation to two similar home loans: a home loan with no offset account and a home loan with an offset account but a higher interest rate.
The consumer’s objectives are to:
“In assessing the suitability of these two home loans, the broker will need to assess whether the likely savings from using the offset account are less or more than the additional costs from the higher interest rate. For example, if the home loan is to be provided on the assumption that the consumer will reduce some of their spending, then this would need to be taken into account when assessing the forecast savings from the offset account,” the guidance reads.
The updated guidance also includes a section called “using information provided by a broker”, which specifically outlines how lenders should use broker-introduced data.
For example, ASIC notes that brokers are required to make inquiries, verification steps and assessments to meet their own obligations to reduce the chance they will suggest or assist with an unsuitable credit product; not merely to support the lender’s ability to make a final assessment.
As such, it states that lenders “need to form [their] own view on whether information that is provided to [them] by a broker, or any other third party that is involved in the application, is reliable and up to date”.
To do this, ASIC advises that lenders should have in place “processes ... to ensure the reliability of any information collected by third parties”. It suggests this could be done by lenders by:
The updated RG 209 guidance goes on to outline that lenders should not rely on broker-introduced information if, despite having appropriate processes in place, they have reason to doubt the reliability of the information.
Examples given for these cases include:
In these instances, ASIC says it would be reasonable to not have regard to the introduced information and take additional steps to confirm it.