The use and regard to expenditure benchmarks is “an area that is ripe for further guidance from ASIC”, and will be a focus of the updated RG 209 guidance next month, the financial services regulator has suggested.
Speaking at the parliamentary joint committee on corporations and financial services hearing on its oversight of the Australian Securities and Investments Commission (ASIC) and the Takeovers Panel on Tuesday (19 November), chairman James Shipton and commissioner Sean Hughes revealed some of the specific issues that will be addressed in its upcoming revised guidance on responsible lending.
The chair told the parliamentary joint committee that there was a need for “more contemporaneous” guidance around responsible lending, particularly given the increasing number of online lenders, the upcoming open banking scheme and increased data, the evolution of business practices, updates to technology, and automatisation of systems.
Commissioner Hughes elaborated that the “greater use of technology and technological tools to verify borrow information in real time” and have it “fully verified using technology solutions within 58 minutes” was an advancement that was not available when the National Consumer Credit Protection Act (NCCP) was written 10 years ago.
Another area that required updating was around expense benchmarks used to verify borrower expenses – such as the Household Expenditure Measure (HEM) – particularly given the fact that some categories of expenses are not included in HEM, such as certain medical costs, superannuation contributions and mortgage repayments.
Commissioner Hughes said: “We are not requiring lenders to scrutinise how many cups of coffee you are having, whether you are going to an expensive gym and all those things. That is not what our guidance requires.
“What our guidance is suggesting (and I emphasize suggesting) is that lenders could have regard to unusual patterns and expenditure, which take a borrower outside normal patterns for that person.”
He continued: “There are some categories of expense that require a lender to go above and beyond the standardised benchmark. So, this is something we’ve recognised through the consultation process that we have undertaken. It’s been something that all the submissions have commented on, and we think it’s an area that is ripe for further guidance from ASIC.”
Mr Hughes later told the committee that another area ASIC will be “zeroing in on” will be the level of enquiries needed for refinances, among other activities.
He said: “[W]hat we do want to preserve, as part of our guidance in the next version, is the concept of scalability. And this is something that other submitters [to the consultation] have commented on as well.
“So for instance, if I use the example of a borrower who is seeking to refinance an existing loan that retains the same overall credit headroom – perhaps swapping out another security, taking advantage of lower interest rates – we would say that, if all other things haven’t changed and the borrower’s capacity to repay the loan remains the same and their income seem stable, that would not require a lender to do the forensic detailed examination of how many cups of coffee, or gym memberships, etc., they have that might be required in other instances.”
Other areas that the new guidance will reportedly clarify include detailing situations where the responsible lending guidance does not apply (such as small-business lending) as well as when the guidance does apply outside of mortgages (such as for credit cards and unsecured personal loans).
However, Mr Shipton emphasised that ASIC’s new guidance will be “principles-based” rather than dogmatic, and “provide discretion by financial institutions and lenders, to be able to exercise their good professional discretion in determining these areas”, given that there is “always going to nuance” and “unique situations” in providing finance.
He continued: “There will never be able to be a set of rules or guidance written which will be able to precisely convey and allow for every precise circumstance. That’s why principles-based guidance is important. That’s what we’re going to, that’s what we’re going to be aiming to do.”
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.
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