Expense benchmarks useful but not sufficient: ASIC

Following two rounds of public consultation, the Australian Securities and Investments Commission (ASIC) has published an updated guidance (RG 209) on the responsible lending obligations that are contained in the National Consumer Credit Protection Act 2019.

The new guidance is designed to provide greater clarity and support to lenders and brokers in meeting their obligations, particularly in light of uncertainty that arose following the banking royal commission.

As anticipated, ASIC has maintained principles-based guidance, which the regulator has said would “support flexibility for licensees”.

The revised regulatory guide contains guidance concerning the manner in which credit providers can use expense benchmarks, including the Household Expenditure Measure, to assess serviceability.

ASIC prefaced its guidance by stressing: “[Credit providers] should be aware that income and expense benchmarks do not provide any information about the individual consumer and do not confirm or verify that the information that has been obtained about the consumer is true.

However, ASIC acknowledged that benchmarks “have a role in the broader verification and assessment processes”.

In its revised guidance, ASIC has stated that comparison of the information obtained about the consumer to a reasonable benchmark can be useful in the following circumstances:

• if a credit provider cannot reasonably confirm some information to test whether the information is plausible because it is within the range that is expected for a person in broadly similar circumstances to the consumer;
• if a consumer does not currently have expenses but will have some after the loan is entered into – to help estimate likely outgoings; and
• if the consumer needs to reduce their current expenditure to afford the credit product – to test whether the type and amount of reductions proposed by the consumer are plausible.

“If [credit providers] use benchmark comparisons in this way, [they] should ensure that the benchmark you use is adequate and appropriate, and that its use is regularly monitored and reviewed,” ASIC added.

The regulator went on to describe the steps that credit providers should take when using expense benchmarks to assess borrower suitability, which include:

• ensuring the benchmark being used is the most up-to-date version available;
• ensuring that the benchmark figure that is being used is a realistic figure, that is adjusted for different income ranges and that is not merely reflective of “low end” spending;
• considering whether it is appropriate to apply a buffer amount that reflects the likelihood that many consumers would be expected to have a higher level of expenses, if the benchmark figure being referred to is more reflective of conservative spending;
• ensuring that they are aware of what expenses are included in the benchmark calculation, make inquiries to ascertain whether the consumer has any kinds of expenses that are not included, and that you have separately taken reasonable steps to verify those expenses; and
• periodically reviewing the expense figures being relied upon across their portfolio.

Moreover, ASIC has outlined that it is “not necessary” for lenders to use a benchmark “as a minimum level of expenditure for an individual consumer”.

“We recognise that some consumers will spend less than a benchmark figure, and that it is reasonable to use a lower amount if [a credit provider] is satisfied that it is a true statement of the consumer’s financial situation and [they] have taken steps to appropriately verify the consumer’s expenditure,” ASIC noted.

With regards to the use of the HEM benchmark in particular, ASIC has noted that not all categories of expenses are accounted for within the measure.  

As a result, the regulator has stressed that, when comparing a borrower’s stated expenses to HEM, lenders should “only use the estimates of spending on the kind of items that are included in the benchmark figure” and “not a wider estimate of their total expenditure”.

ASIC remains entangled in a Federal Court dispute with Westpac regarding alleged breaches of the National Consumer Credit Protections Act, relating to Westpac’s application of the Household Expenditure Measure in its assessment of home loan applications.

In September 2018, Westpac admitted to breaches of responsible lending obligations when issuing home loans to customers and agreed to pay a $35-million civil penalty to resolve Federal Court proceedings under the National Credit Act.

However, the Federal Court was tentative in its approach to the matter.

Justice Perram had sought a friend of the court to consider whether the Westpac case even constituted a breach of the NCCP (reportedly stating that “there is no fact before [him] that any unsuitable loans were made”).

Following his review of the case, Justice Perram judged that a lender “may do what it wants in the assessment process”, noting that other provisions of the NCCP impose penalties if lenders make unsuitable loans as a result of that process.

ASIC has since announced that it would appeal Justice Perram’s decision to the Full Federal Court of Australia to address “uncertainty” caused by the verdict.

[Related: ASIC releases new responsible lending guidance]