Responsible lending conversation ‘overhyped’: ASIC chair

Speaking at the “Meet the Commission” panel session at the ASIC Forum 2019, the seven ASIC commissioners outlined their approach to regulation in the financial services sector and their thoughts on how financial institutions are reacting following the banking royal commission.

During the panel, the commissioners emphasised that while the credit environment had shifted since the royal commission, no actual regulation or regulatory enforcement attitudes have changed.

Deputy chair Karen Chester said: “A lot of folks are suggesting that [commissioner] Hayne raised the benchmark for what we expect of directors and it reminds me of the Monty Python Flying Circus - And Now For Something Completely Different – when it actually ain’t.

“If you look at what the regulations are in the Corporations Law, nothing has changed.”

Similarly, commissioner John Price added: “What Hayne has really highlighted were existing obligations. It seems to be, in some areas, business practice had not been meeting either those existing obligations or community expectations more broadly. So, what you are seeing in some areas are behaviours trying to meet those restated normals that Hayne and APRA’s CBA report set out – and in some cases they are perhaps overshooting the mark.

“So, you are seeing an understandable human reaction, but I don’t think it is driven by any regulatory change. I think it is a human reaction and just people trying to feel their way around understanding what the community expects.”

Chair James Shipton was most emphatic in his assessment, telling delegates that commissioner Price was “completely right around the responsible lending” conversation, but added: “The responsible lending conversation, I think, has been overhyped.

“There is, of course, a huge demand-side element that is factoring into the credit issue here and it is too simplistic – far too simplistic, verging on incorrect – to suggest that it was an ASIC action or a change of law, because of course there hasn’t been a change of law.

“And our guidelines, responsible lending obligations under the legislation, have been intact now for years.”

Mr Shipton later told the forum that the financial services regulator was “attuned” to ensuring that it is not adding unnecessary burden to companies around compliance, but added that “there are clearly deficiencies in the way that the industry have been applying themselves to these challenges”.

He added: “Ultimately, if these issues are not addressed by investing in compliance systems, but investing in solving for these hopefully historical (and not ongoing) problems, then there will be an economic cost to the shareholder of that institution because there will be bigger, more seismic costs, fines, to their organisation. So yes, we are certainly attuned to not overburdening the system, and we are working closer with our colleagues and APRA... but the way I see compliance cost is actually a good business investment into a core function of the financial services firms’ business model.”

Speaking of the suggestion that compliance was an additional cost to business, commissioner Cathie Armour said she thought it was a “crazy notion” that “treating customers fairly is a compliance cost”.

“For goodness’ sake, you are in business to work with your customers, to earn revenue from their success with your success. So, I really think that it is an awful situation we may have [if] businesses [are] thinking that way.

“Our expectation is that the leadership of a business is accountable for absolutely treating their customers fairly. That may mean they need to make an investment in a sound framework that addresses and manages risks that go with their business.

“We do expect that there is an appropriate investment in managing non-financial risks as compliance with the law, and compliance with fairness obligations are often put into that bundle.

She continued: “But that is just good business practice and the notion that somehow it is an added cost… I just find that really sad, actually. I am hoping that the financial institutions that we have in our economy – and actually, many of them tell us [this] – are interested in actually having happy, satisfied customers and successful businesses. And that is the same thing that we are interested in.”

Shipton defends ‘why not litigate’ position

When asked about the regulator’s stance to enforcement, the commissioners revealed that they currently have “a very big focus on close and continuous monitoring (CMM) of the largest organisations” as well as the smaller credit organisations and some of the market intermediaries “and we have much more of an intensive supervisory model that we are developing for those firms as well”.

However, Mr Shipton once again defended the regulator’s renewed focus on litigation, clarifying ASIC’s position on its “Why not litigate?” approach.

Mr Shipton said: “Commissioner Hayne, in his interim report, was saying that the starting point for enforcing compliance is litigation and the proper starting point for the consequences of that contravention is court-based solutions. We responded to those points made with this procedural discipline. And that is really important for us to be aware of, that what we are doing when we talk about enforcement, and ‘Why not litigate?’, we are applying important procedural discipline on ourselves to improve our effectiveness and our strategic thinking at the same time as clearly seeing that the output of enforcement, when combined with other regulatory tools, is to deter wrongdoing, change behaviours for the better, and to denunciate breaches of the law.

“They are really important and I really want to make that point of clarification and give the continuum and the context of where this comes from.”

The previous day (16 May), Mr Shipton told delegates in his opening speech: “Last year, even before the royal commission issued its final report, ASIC adopted a ‘Why not litigate?’ enforcement stance and publicly committed to that posture going forward.

“This is a very different concept to a ‘litigate first’ or a ‘litigate everything’ strategy. 

“‘Why not litigate?’ is our own strategic construct and the aim of this is to deter future misconduct and address community expectations that wrongdoing be punished and publicly denounced through the courts. 

“This means that once ASIC is satisfied breaches of the law are more likely than not and the facts of the case show pursuing the matter would be in the public interest, then we will actively ask ourselves: ‘Why not litigate this matter?’”

“Our enforcement work has a core focus on deterrence, public denunciation and punishment of wrongdoing by way of litigation,” he said.

[Related: Treasurer renews call for ‘free-flowing’ credit]