Granted, the Combined Industry Forum and other credit groups have been addressing conduct issues in lending. But with Treasury and ASIC working fast to revise responsible lending and introduce a best interests duty, credit providers will need to keep up with the accelerating pace of change or risk being left behind.
Responsible lending is in the headlines all the time. But for something so frequently discussed, especially in terms of its impact on Australia’s economy, it’s a pretty misty concept.
Uncertainty is due in part to a perceived lack of clarity from regulators and inconsistent application of requirements across lenders. The industry is still eagerly awaiting the Combined Industry Forum’s definition of the Customer First Duty. (See The 'Not Unsuitable' vs the 'Customer First Duty".)
Meanwhile, ASIC is currently undertaking a review of RG209 – Credit licensing: Responsible lending, in light of:
- The new Open Banking regime
- Advancements in technology
- Changes to comprehensive credit reporting
- And, of course, the findings of the Hayne Royal Commission and ongoing work it had commenced beforehand.
ASIC has also been fighting what it terms a “test case” in the Federal Court, where it alleged Westpac breached its responsible lending obligations by using the Household Expenditure Measure (HEM) as a benchmark from which to automatically approve loans for thousands of applicants.
In August 2019, the Judge presiding over the case found in favour of Westpac, citing the ambiguity around the responsible lending laws. “With knowledge of the consumer's declared living expenses, one may well be able to discern that a consumer will have to trim their sails if the loan proceeds,” Judge Perram said in his judgement.
ASIC’s consultation and public hearings on responsible lending have revealed the exact nature of the compliance and operational challenges credit organisations have been facing.
What we’ve gleaned across submissions and hearings is that the industry would like more guidance from ASIC on:
- Scalable inquiry and assessment processes, including how software tools, Open Banking and comprehensive credit reporting might contribute to the mix
- Identifying red flags
- More standardised classifying of expenses and application of benchmarks to loan serviceability checks
- The extent to which post-loan “belt tightening” on the part of the borrower can be assumed, as raised in the Westpac case
- What constitutes making a suggestion versus a recommendation.
On top of that, there’s the bi-weekly commentary from various industry pundits who talk about the negative economic impacts of both tighter and lighter lending laws.
On the one side, making laws too lax means higher loans, pushing the borrowers into financial stress (or at the very least, substantially impacting their household spending) and thereby putting pressure on economic growth.
On the other, more stringent lending laws will lead to a decrease in demand for credit, particularly in the small business market, which again slows economic growth.
That’s right - both sides of the debate are putting forward plausible arguments as to why the economy will be worse off under both a tougher and more relaxed lending environment.
So, what are credit and credit assistance providers to do?
- It’s important to understand the context in which the current focus on responsible lending has emerged. Consider what factors led to increased focus on the gathering, verifying and analysing of information, product selection, and processes around serviceability checks. Where are regulators likely to go next?
- Be clear about what the rules actually say and to whom they apply. For example, the small business sector has been unintentionally caught up in personal lending restrictions, when, in fact, many of the responsible lending obligations do not apply to this part of the economy.
- Develop best practice guidance for your own organisation from a position of knowledge. Empower your team with a clear approach to responsible lending, based on a balanced view of all the issues and a focus on customer outcomes.
Ensure you’re getting information from the right sources and sharing it across your teams. Partner with a learning provider who understands what you need now and can continue to deliver when conditions change. Engage your teams in discussions of industry news and regulatory changes, especially how they impact them and your business.
Did you know? Your Australian Credit Licence CPD should include both product and industry developments related to credit, and also compliance training, including in relation to new regulatory requirements of the credit regime. For example, compliance training would need to encompass the responsible lending obligations. (RG 206.66)
Contact us for your Responsible Lending Corporate Training solution. +61 2 9233 2000