Responsible lending guidance debate

The banking industry is opposed to key parts of ASIC's proposed overhaul of its guidance on responsible lending conduct, 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.

In February, the regulator issued a consultation paper, outlining changes to its guidelines on responsible lending, Regulatory Guide 209. The paper outlined plans to tighten guidelines for responsible lending conduct.

ASIC says it 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.

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

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."

In response, 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 NCCP 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.

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.

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."

ASIC wants lenders to have a better understanding of the rationale for a 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 ABA says it is concerned that ASIC's proposed clarification of guidance on understanding a consumer's requirements and objectives "implicitly shifts this to a 'suitability test' and introduces an element of subjectivity that could be characterised as akin to a standard required for providing financial advice."