Consumer Action Law Centre (Consumer Action) and Financial Rights Legal Centre (Financial Rights) say ASIC’s overhaul of its responsible lending guidance is a welcome announcement in the wake of the devastating consumer harm exposed during the Banking Royal Commission.
Too many lenders, including banks, finance companies, payday lenders, and consumer lease providers have not effectively complied with legal obligations to ensure they do not provide borrowers with unsuitable loans. ASIC’s updated responsible lending guidance make existing laws clearer, easier to enforce and will help to hold lenders to account.
The first major overhaul since 2014, the newly revised guidance provides clarity about:
- A list of red flags for consumer harm, which require more detailed inquiries and verification steps by a lender. For example, if a consumer’s savings account is regularly overdrawn or they have had payment difficulties on essential utilities, the lender must do more to ensure a loan is responsible.
- Information that is likely to be needed to inquire about the consumer’s requirements and objectives. For example, a credit limit should be driven by the consumer’s requirements, not what the lender wants to lend.
- The approach to higher-risk credit products, such as consumer leases. The guidance clarifies that lease providers’ use of Centrepay can cause pressure on other payments.
- Clarification that a lender’s ‘credit risk’ differs from responsible lending legal requirements.
- Guidance on refinancing for ‘mortgage prisoners’ who are locked into high interest loans.
- More information about the risks of using benchmarks. For example, the guidance clarifies that relying on the Household Expenditure Measure (HEM) benchmark will not give a full picture of a person’s overall outgoings.
Consumer Action CEO Gerard Brody welcomed ASIC’s announcement and underscored the importance of lenders following the guidance as intended, rather than trying to get away with doing the bare minimum.
“Every day at Consumer Action we see the harm caused by loans that have been lent to Australians irresponsibly, loans that should have never been given to people in the first place” says Brody. “This revised guidance from ASIC will make our existing laws easier to enforce and will play an important role in protecting people from being exploited by banks and other lenders,” he said.
“The revised guidance says that lenders should not assume that borrowers can cut their expenditure or make lifestyle changes to meet loan repayments. Rather, lenders should be obtaining additional information to ensure repayments are affordable and discussing the situation with borrowers”.
“What also matters is a fair outcome if a consumer is given an irresponsible loan. We will continue to engage with the external dispute resolution scheme, the Australian Financial Complaints Authority (AFCA) on this.”
Financial Rights CEO, Karen Cox says, “This is a welcome update to ASIC’s approach to responsible lending oversight, with more individualised guidance and use of specific examples that flesh out real life scenarios – many of which we see every day with our clients on the National Debt Helpline.”
“While ASIC have not gone as far as we would have liked on some points, they have made it clear that a lot of current lending practices are not up to scratch, nor do they meet the community or regulator expectations. The days of using the HEM benchmark as a substitute for genuine inquiry and communication with a potential borrower are over.”