Following consultation, the Australian Securities and Investments Commission (ASIC) has released updated responsible lending guidance for lenders and brokers: RG 209: Credit licensing: Responsible Lending Conduct on the responsible lending obligations that apply to consumer credit.

Separately, ASIC also released a report — Report 643 Response to Submissions — outlining the key issues raised in the 74 submissions to the consultation, and ASIC's response to these issues. 

A high level overview of the changes to the guidance, and the response to the changes is below.

Scope of the guidance

The guidance sets out ASIC's views on what is required in order to comply with the responsible lending obligations in in Ch 3 of the National Consumer Credit Protection Act 2009 (NCCP Act), and the steps lenders and brokers can take to minimise the risk of non-compliance.    

ASIC Commissioner Sean Hughes said that the updated guidance is intended to provide clarification for industry and to 'assist industry to more confidently make responsible lending decisions and to facilitate good lending outcomes for consumers'.  

Technological developments

The guidance has also been updated to reflect technological developments including open banking and digital data capture services.   

What is not covered

In response to feedback received and 'recent public commentary' that has expressed 'mistaken views and concerns about the effect of applying the responsible lending obligations to business lending' ASIC has also included a section identifying the areas that are not subject to responsible lending obligations – such as small business lending irrespective of the nature of the security used for the loan.

'This guidance will make it clear that lending that is predominantly for business purposes, including to individuals who operate a small business, is not regulated (even if the loan is secured over personal assets, such as residential property)' ASIC states.

What has/hasn't changed?

ASIC's 'general approach' to the guidance remains 'principles based' (but is more detailed)

The consultation queried whether the guidance should identify examples of what ASIC would consider to be 'reasonable steps' to determine unsuitability ie identify the particular inquiries and verification steps that ASIC would consider to be reasonable.

ASIC says that it received 'strongly divergent' responses to this query, and in light of this, that the regulator has decided to continue the 'existing principles-based approach'.   However, ASIC has also made changes to 'more clearly articulate the principles that it considers licensees should apply when determining how to comply with their obligations and provided more illustrative examples of how the principles should be applied in individual circumstances'. 

This is intended, ASIC says, to maintain/support 'flexibility for licensees' in their approach.

'Non-prescriptive', more detailed guidance 

Increased emphasis on the purpose of the responsible lending obligations  

Expanded guidance to illustrate where a licensee might undertake more, or less, detailed inquiries and verification steps based on different consumer circumstances and the type of credit that is being sought.

More 'direct' guidance around the treatment of living expenses, and the different types of living expenses on the basis that the regulator considers it  'is important for licensees to understand that consumers will give more priority to some expenses and expenditure than others' and that 'an understanding of current expenditure, and the consumer's views about what is important and likely to be maintained, provides a starting point for assessing whether the credit product is unsuitable for that consumer'.  In taking this approach, ASIC concedes that 'licensees find it frustrating being asked to obtain information to verify expenses when they consider those expenses to have little relevance for the assessment of unsuitability'.  

More detailed guidance about the use of benchmarks as a way to check the plausibility of expenses, as well as additional guidance about the household expenditure measure (HEM) benchmark itself.

• Use of any benchmark is not required: ASIC says that it considers the guidance  'should make it clear that comparison to a benchmark figure (with or without a buffer) as a floor is not required'.
• Where lenders do use the HEM, banks are expected to also take individual circumstances into account.  'We consider that if a consumer provides estimates that are lower than the HEM benchmark, there is a higher likelihood that they have underestimated (as the methodology is based on the majority of households having a higher expenditure). This should therefore trigger additional information-gathering steps.  However, if the lower estimate is confirmed by that additional information, we do not consider it is necessary to then raise the verified amount to a higher floor'.
• RG 209 includes guidance about circumstances where comparison to a benchmark, but not verification, may be a reasonable step to take
• Use of benchmark figures generally: RG 209 notes the importance of only using benchmark figures in a way that is consistent with their design, and in accordance with any instructions for use from the designer and scheduled updates by the designer.
• expanded guidance on how spending reductions may be considered as part of the licensee's consideration of the consumer's financial situation, requirements and objectives.  ASIC says it considers that this will 'be useful to help licensees put in place processes that are appropriate for their business that will enable them to understand the consumer's objectives and requirements, and assess whether the offered credit product will meet those objectives and requirements'.  ASIC adds that it considers it appropriate that licensees determine how they achieve these outcomes.  'We do not consider that it is necessary or appropriate to specify particular processes that should be implemented' ASIC states.  
• clarity about more complex situations for some consumers eg the different situations of consumers such as income from small business, casual employees, new employees, the gig economy, as well as joint and split liabilities and expenses.

[Note: ASIC has published a table comparing the 2014 and 2019 versions of RG 209]. 

Pending appeal?

The Response to Submissions document, makes a brief reference to ASIC's appeal against the Federal Court's decision in Australian Securities and Investments Commission v Westpac Banking Corporation (Liability Trial) [2019] FCA 1244.  It states that 'the decision will be reflected in the revised guidance, along with earlier decisions of the Federal Court'.

[Note: In Australian Securities and Investments Commission v Westpac Banking Corporation (Liability Trial) [2019] FCA 1244 (Wagyu and Shiraz case), Justice Perram found that a lender 'may do what it wants in the assessment process' and is not obliged under the NCCP Act to take into account a prospective borrower's actual/declared expenses when assessing whether a loan will be unsuitable to consumers.  On 10 September, the Australian Securities and Investments Commission announced that it has filed an appeal. See: Governance News 11/09/2019. 

ASIC Commissioner Sean Hughes has since said that ASIC considers the decision 'creates uncertainty' about what is required in order to comply with responsible lending laws.  'If the judgment is to be understood as standing for the proposition that a lender may do what it wants in the assessment process (as His Honour found), then we consider that to be inconsistent with the legislative intention of the responsible lending regime… Put simply, we believe that the judgment left it too unclear what steps are required of a lender. We are seeking clarity by appealing. Notwithstanding our appeal in the Westpac case, we consider that ASIC should still provide updated guidance mindful that the appeal has not yet been heard. ' Mr Hughes said. See: Governance News 20/11/2019 at p21] 

[Sources: ASIC media release 10/12/2019; Regulatory Guide 209; Report 643 Response to submissions] 

Response to the release of the guidance

• The Australian Financial Complaints Authority (AFCA) issued a statement confirming that its approach to responsible lending will be 'fully aligned to ASIC's guidance'.  AFCA CEO and Chief Ombudsman David Locke said AFCA believes the guidance will provide greater clarity to financial firms in meeting their obligations and will result in fairer outcomes for consumers.  He added that AFCA also welcomes ASIC’s clarification that its responsible lending guidance does not apply to providers of credit to small businesses.  'The guidance makes it explicitly clear that the National Consumer Credit Protection Act does not apply to small business lending' Mr Locke said. 

• The Australian Banking Association (ABA) has welcomed the release of the updated guidance as 'an important milestone in clarifying responsible lending obligations for banks'.  Australian Banking Association Anna Bligh CEO said that the updated RG 209 would provide clarity to banks on ASIC's views on what responsible lending obligations require before offering credit to customers.  'This is an important document for the industry to guide each bank's approach to responsible lending which we will now study closely to assess any impacts it may have on borrowing for customers' Ms Bligh said.  Ms Bligh added that the industry 'is pleased to see ASIC has maintained a principles based approach to lending, which as an industry we have called for, and to ensure banks are able to fulfil their obligations without the process becoming too restrictive for customers.  The industry also welcomes ASIC providing greater clarity in some areas, such as where it is difficult to determine income from certain customers, such as small business owners and gig economy workers' 

• The Consumer Action Law Centre (CALC) also welcomed the release of the guidance, with CALC CEO Gerard Brody saying that it 'underscored the importance of lenders following the guidance as intended, rather than trying to get away with doing the bare minimum'.   
• Financial Rights Legal Centre CEO, Karen Cox added that the guidance '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.' 

• The revised guidance will accelerate 'switching'? The AFR reports that Lendi has welcomed the guidance on the basis that it 'will remove a big barrier to switching'.  The guidance clarifies that where a lender is able to verify that a customer has a history of paying on time, full verification may not be necessary.  As such, under the change, Lendi Founder and Managing Director of home loan platform Lendi, David Hyman said that 'the concept of 'mortgage prisoners' –where borrowers are unable to leave a lender because they don't meet altered eligibility requirements – may be eliminated'.  He described this as a 'huge win' for customers. 

• Uncertainty remains?  The Australian comments that given the outcome of ASIC's appeal in the 'wagyu and shiraz case' is yet to be determined, ultimately 'a cloud of uncertainty' remains.

[Note: The 'Wagyu and Shiraz' case is a reference to the decision in Australian Securities and Investments Commission v Westpac Banking Corporation (Liability Trial) [2019] FCA 1244 in which the Federal Court dismissed ASIC's responsible lending test case against Westpac.  On 10 September, the Australian Securities and Investments Commission announced that it has filed an appeal. See: Governance News 11/09/2019.]