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Responsible lending: where is the legal line?

by Paul O’Shea6 minute read

The responsible lending obligations of finance brokers may not be as onerous as those on credit providers, but the NCCP still requires them to conduct “preliminary assessments” of whether a proposed credit contract is unsuitable.

The credit assistance provider must have regard to the consumer’s purpose and whether their financial circumstances may allow them to achieve their purpose. While the level of inquiry and verification of the circumstances of a consumer are ‘scalable’, and there is no doubt that the obligation on credit assisters is not as great as on credit providers, there seem to be some matters which are not negotiable.

For instance, the obligation to ascertain whether a particular product meets the consumer’s needs and objectives is particularly important for finance brokers. Also, the Financial Ombudsman Service considers the collection of basic proofs of income – such as payslips for PAYG workers or tax returns and bank statements for the self-employed – as mandatory.

However, what is not so clear is at what point a proposed contract becomes unsuitable. Some credit assisters and providers rely on benchmarks such as the Henderson Poverty Line as a base measure, before adding a buffer margin. If, after taking out existing debt repayments and the proposed repayment obligations, the consumer is left with less than the benchmarked income and buffer, this, according to some assessment protocols, will render the proposed consumer contract unsuitable.

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ASIC itself, in its Regulatory Guide 209.65, suggested that benchmarks can be useful for determining whether a consumer will experience substantial hardship. Benchmark indicators may include whether a consumer’s disposable income is:

• below a level where they do not have funds to meet their realistic living costs and those of their dependents

• below the Henderson Poverty Index, plus a certain margin

• below a maximum applicable level of government benefits

Recently, however, a senior ASIC official has warned against the use of benchmarks as a substitute for individual assessment of a consumer’s position. ASIC deputy chairman Peter Kell, in a speech to the MFAA national convention in May, said credit assisters and credit providers should have “discrete processes to make inquiries about, and take reasonable steps to verify, consumers’ variable expenses”. He went on to say:

In other words, don’t just rely on a benchmark figure, be it the Henderson Poverty Index or a variation of it – take the time to understand your customer’s individual circumstances. If a consumer has a hard time estimating what they spend, perhaps you need to discuss with them how much they save and where they might make any additional savings needed to afford any proposed loan repayments…

The Financial Ombudsman Service also has said that while some providers in the high volume/low value sector of the industry may use generic data (such as the Henderson Poverty Line) to assess living expenses, this is probably only prudent if the provider “considered the consumer had underestimated their financial expenditure”. In other words, to “mark up” the consumer’s disclosed living expenses.

Brokers are unlikely to be involved in high volume/low value loans. They are, therefore, more likely to be expected by regulators such as ASIC to make highly individualised assessments of their clients when considering the suitability of particular products. It may be useful to refer to generic benchmarks but not to rely on them.

The Federal Court, in the case of ASIC v The Cash Store Pty Ltd and Assistive Finance Australia Pty Ltd in August 2014, found that the Cash Store, as a credit assister, had not complied with its responsible lending obligations under the NCCP to make adequate preliminary assessments.  One of its shortfalls was failing to adequately assess and document the purposes of the loans so as to assess whether they met the needs and objectives of consumers.

This was a payday lending business – one of the high volume/low value types of providers to which the Financial Ombudsman Service refers. Yet the court still found that the responsible lending obligations of the credit assister in making preliminary assessments required individual assessments of the client’s needs and objectives and how the proposed loan would meet them.

This case is salutary for all credit assisters and credit providers. Finance brokers should particularly take heed when making their preliminary assessments lest they be held to have crossed the line.


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Dr Paul O'Shea, director and principal solicitor, O’Shea Lawyers

Dr Paul O’Shea has conducted some of the leading cases in consumer credit law. He has advised governments, consumer groups and industry. Dr O’Shea has published widely and conducted many seminars for the Queensland Law Society, state and federal governments and private agencies in Australia, Singapore, Thailand, Brunei and China, and is currently a member of the Investment, Life Insurance and Stock Broking Panel of the Financial Ombudsman Service. He also has advised other industry dispute resolution schemes and has been a member of the Banking and Finance Committee of the Queensland Law Society for more than 15 years. He is the author of The Legal Environment of Business, published by Thomson Reuters, and his most recent publication is a chapter on 'Regulatory Powers' in the 2013 Federation Press book Consumer Law and Policy in Australia and New Zealand.

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