Earlier this week, the Australian Securities and Investments Commission (ASIC) published submissions from its first round of consultation regarding its proposal to update its responsible lending guidelines (RG 209).
In February, ASIC stated that it considered it “timely” to review and update its guidance (in place since 2010) in light of its regulatory and enforcement work since 2011, changes in technology, and the release of the banking royal commission’s final report.
ASIC added that its review of RG 209 will consider whether the guidance “remains effective” and will seek to identify changes and additions to the guidance that “may help holders of an Australian credit licence to understand ASIC’s expectations for complying with the responsible lending obligations”.
In its submission to ASIC, Westpac – which is currently engaged in a Federal Court dispute with the regulator over it use of the Household Expenditure Measure (HEM) – has called for greater flexibility in the assessment of a borrower’s living expenses, claiming that responsible lending guidance should take into consideration a borrower’s willingness to adapt to changes in their financial position.
“Adopting a modest lifestyle for a period of time in order to acquire real property has been the means by which many Australians have secured long-term financial security,” Westpac stated.
“Experience shows that many customers are prepared to, and do actually, make lifestyle adjustments after acquiring a home and can then service their home loan obligations without substantial hardship.
“As such, Westpac submits that placing too much emphasis on the customer’s pre-application living expenses when determining suitability, without allowing scope for reasonable lifestyles adjustments (‘belt-tightening’), would have the effect of denying credit to many customers.”
Westpac also encouraged ASIC to “consider the distinction between verification activities and validation review”.
“Specifically, it would be useful to distinguish those elements of a customer’s financial situation that are capable of positive verification (such as income and existing liabilities) from elements that are unable to be positively verified (such as living expenses), where it is only possible for licensees to check the plausibility of what the customer has declared against past expenditure and/or industry benchmarks.”
CBA stands alone on approach to verification
The submissions of ANZ, the Commonwealth Bank of Australia (CBA), NAB and Westpac revealed that the big four are unified in their call for greater clarity concerning expense verification and the “reasonable steps” required when determining a borrower’s suitability for a credit product.
However, CBA is the only big four bank to propose the implementation of a prescription-based approach to guidance on verification requirements, which it said would “level the playing field”.
“CBA is supportive of more prescriptive guidance regarding the steps ASIC considers ‘reasonable’ to enquire about and verify a consumer’s financial situation,” the bank stated.
“Greater clarity and specificity ensure customers experience consistency in steps taken regarding their credit applications, levels the playing field, and reduces ambiguity faced by regulated entities when seeking to meet responsible lending obligations.”
Meanwhile, Westpac has called for “high-level” guidance to ensure that innovation and competition in the credit space are not impeded.
“As we continue to explore ways to provide innovative and specialised service offerings, we support future regulatory guidance to remaining principles based in order to uphold this much needed flexibility,” Westpac stated in its submission.
“In addition, Westpac submits that a principled approach is critical to enabling continued availability of credit and flexibility in the options available for customers. This is important in maintaining a competitive and diverse market of products, enabling broad customer choices.”
ANZ also stated that it supports the current approach, which, it said, “allows licensees to tailor their responsible lending processes in a way that is appropriate to their business model and credit activities and the circumstances of each individual consumer”.
Moreover, NAB stated that it would be supportive of a “minimum standard” for inquiry and verification but that it is also supportive of the concept of “scalability” and “considers that it should be retained”.
“Scalability allows credit providers to tailor systems and processes to achieve appropriate customer outcomes,” NAB stated.
“It also gives credit providers flexibility to innovate with the customer experience, whilst still meeting their responsible lending obligations.”
ASIC will host public hearings in August to further consult on its proposed changes, with stakeholders invited to participate in the hearings to be drawn from the groups or individuals who provided a written submission to ASIC in the first round of consultation.
The hearings will be held in Sydney and Melbourne.
[Related: Westpac backs down on serviceability changes]