New rules will not affect business lending

ASIC's updated guidance on responsible lending, which is due for release in the next few weeks, will clarify that responsible lending requirements do not apply to loans made predominantly for business purposes, regardless of the type of security supporting the loan.

The Council of Financial Regulators released its Quarterly Statement yesterday, confirming that business lending will not be part of the regulatory change.

In February, ASIC released a consultation paper indicating that it intended to tighten its guidelines for responsible lending conduct. It said it was concerned that some licensees were not taking sufficient steps to meet their obligations.

Another reason for the overhaul was 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.

RG 209 does not specify minimum standards. Obligations are scalable, with process left up to the licensee.

Now ASIC is concerned that this approach may not be rigorous enough. It 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."

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.

In its statement regarding business lending, the Council of Financial Regulators said: "Council members stressed that the flow of credit is fundamentally important to the functioning of the Australian economy and discussed the concern that lenders' risk appetite for some types of lending may have swung too far towards caution."