The Federal Court yesterday rejected ASIC’s allegation that Westpac’s automated loan application assessment system was in breach of its responsible lending obligations, ruling that a lender “may do what it wants in the assessment process”.
That is not the last word on the issue of responsible lending, however.
In February, ASIC issued a consultation paper detailing plans to tighten its guidelines for responsible lending conduct. The regulator is concerned that some licensees are not taking sufficient steps to meet their obligations. And it wants to bring the guidelines up to date to take account of developments such as comprehensive credit reporting.
The consultation paper says: “Although the law has not changed since 2010, ASIC considers it timely to review and update the guidance in light of its regulatory and enforcement work since 2011, changes in technology and the recent final report of the Royal Commission.”
One item up for consideration is whether to “more clearly identify the inquiries and steps that we think are important for licensees in complying with their responsible lending obligations.”
That would include guidance on the kinds of information that could be used for verification of the consumer’s financial situation, including a list of forms of verification.
ASIC says: “We have observed since the start of the responsible lending regime instances where licensees have failed to take sufficient steps in order to comply with their obligations.”
As to the steps that need to be taken, ASIC says it may need to state more clearly that it is not sufficient to obtain verifying information but not have regard to it.
Developments in relation to open banking, comprehensive credit reporting and data aggregation services will affect the accessibility and cost of obtaining transaction information are also up for consideration.
With the inclusion of repayment history information in comprehensive credit reporting, ASIC will issue guidelines on how that information should be used.
It says: “The occurrence of repayment difficulties on one product will not necessarily mean that a new credit product will in all cases be unsuitable for the consumer, this information should instead trigger the licensee to make more inquiries to enable them to understand these repayment difficulties and the likelihood that the circumstances would mean that the consumer could not meet financial obligations in future.”
ASIC is also planning to clarify its guidance on the use of benchmarks. It says they can be a useful tool to determine whether the information provided by the consumer is plausible. However, lenders should not default to a benchmark as a substitute for making inquiries.
And it wants lenders to have a better understanding of the rationale for the loan, so they can assess whether a credit contract will meet the consumer’s requirements. It says lenders and brokers often identify a “high-level” purpose for the credit but this does not meet the obligation to inquire about the consumer’s objectives and requirements.
The banking industry is opposed to key parts of the proposed overhaul, criticising it as a move away from principles-based regulation to a more prescriptive approach, and claiming it will disadvantage small financial institutions and new entrants that won’t be able to pay for the technology upgrades required.
The Australian Banking Association submission says: “The ABA supports the retention of a principles-based approach to responsible lending through the legislative provisions contained in the National Consumer Credit Protection Act, as well as in relation to relevant regulatory guidance.
“A principles-based approach focuses regulated entities on developing their own approaches to achieve compliance with responsible lending obligations and shifts their regulatory focus from process to outcomes. We believe a prescriptive approach will not provide a net benefit to customers.”
The ABA says a more prescriptive approach may result in delays in obtaining credit, increases in the cost of credit and limit consumers’ ability to change credit providers.
On the use of benchmarks, the ABA says: “It is against the interests of customers to set policy and regulatory guidance that would unreasonably constrain the ability to use benchmarks and statistical measures to satisfy responsible lending requirements.
“The industry anticipates that over time, new and more comprehensive benchmarks and statistical measures will be developed based on large data sets that ensure accuracy and better predict risks of financial difficulty and default.”
In response to yesterday’s Federal Court ruling, ASIC says it is reviewing the judgment and “will carefully consider the Court’s determination and how this may impact our guidance.”