Aggregators call for new approaches to responsible lending

In February, ASIC stated that it considered it “timely” to review and update its guidance (in place since 2010) in light of its regulatory and enforcement work since 2011, changes in technology, and the release of the banking royal commission’s final report.

ASIC added that its review of RG 209 will consider whether the guidance “remains effective” and will seek to identify changes and additions to the guidance that “may help holders of an Australian credit licence to understand ASIC’s expectations for complying with the responsible lending obligations”.

The Australian Finance Group (AFG), Connective, Loan Market and Mortgage Choice have joined the Finance Brokers Association of Australia (FBAA) and the Mortgage & Finance Association of Australia (MFAA) in calling for greater clarity surrounding expense verification and the “reasonable enquiries” required to fulfil their obligations.

However, despite a consensus regarding the need for further clarity, the broking groups proposed contrasting solutions to address their concerns.

In its submission, AFG echoed the sentiments of the FBAA and the MFAA, calling for more guidance under a principles-based approach but urging the regulator to steer clear of prescriptive measures.

“We submit that RG 209 should remain a principles-based approach whilst providing as much guidance as possible without being prescriptive, particularly for owner-occupied home loans, which are at the greatest risk of causing substantial hardship,” AFG stated.

The aggregator claimed that a prescriptive approach would “create a barrier for eligible consumers to access credit who might otherwise be eligible on a different analysis”.

However, in contrast, Mortgage Choice backed a “prescriptive approach” to responsible lending guidance applied to all credit licensees.

“Whilst acknowledging that principles-based guidance does provide a degree of flexibility and a capacity for licensees to adopt practices relevant to their specific businesses, the degree of variation throughout the industry in terms of meeting responsible lending obligations has resulted in a significant level of uncertainty, confusion and frustration,” Mortgage Choice noted in its submission.

“We submit that many of these outcomes can be remedied by adoption of more prescriptive guidance with application of specific and unequivocal minimum standards that must be met by all licensees, irrespective of their business activities.”

Similarly, Loan Market proposed moving towards “standardisation of lender requirements and approach” to remove “inconsistencies”.

“This has caused confusion, delay and additional costs to the brokers in the servicing of clients and ultimately the finalisation and completion of loan applications,” Loan Market stated.

The broking group continued: “Loan Market considers that lenders working in conjunction with the regulator should set clear and consistent expectations on what is the minimum requirements, the periods that they should obtain the supporting documents, and set a common standard for assessment and presentation of income and expenditure details.”

Alternatively, Connective has proposed that prescriptive measures be applied to some credit products and urged ASIC to ensure that requirements recognise the differing responsibilities of licensees within the credit process.  

“For certain products and consumer profiles, RG 209 should prescribe specific enquiries and verifications as a base requirement or safe harbour,” Connective noted.

“However, it is critical that these base requirements recognise the different roles a credit licensee can play in the credit process (i.e. a finance broker that merely provides credit assistance should have different requirements to a bank that is providing the credit and has access to more tools in order to complete its assessment).”

Connective has also called for greater borrower accountability in the credit process, stating that “it is not a one-way street”.  

“With responsible lending also comes responsible borrowing,” the aggregator noted.

“Consumers should also be held to account for their financial decisions – it cannot just be the responsibility of the licensees – obviously, the consumer profile will govern where that responsibility lies.  

“Licensees cannot be in breach where a consumer acts in a misleading or fraudulent fashion and licensees are not aware of this deception despite taking reasonable steps.”  

ASIC will host public hearings in August to further consult on its proposed changes, with stakeholders invited to participate in the hearings to be drawn from the groups or individuals who provided a written submission to ASIC in the first round of consultation.

The hearings will be held in Sydney and Melbourne.

[Related: Associations call for ‘clarity’ on expense verification]